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  • Money transfers provoked Dutch disease in Armenia

    news.am, Armenia
    Jan 6 2010


    Money transfers provoked Dutch disease in Armenia

    17:01 / 01/05/2010Below is an interview with RA Deputy Minister of
    Finance Vardan Aramyan

    NEWS.am: According to international financial agencies, Armenia was
    among to the countries that were most seriously affected by the global
    economic crisis. Can we conclude that during the pre-crisis period the
    Armenian Government failed to accurately calculate its steps, and its
    initial actions did not produce the desired results?

    V. Aramyan: It is usually much easier to voice opinions ' including
    critical ones ' of the past than to make forecasts for the future. But
    we could approach the issue considering the lessons we have drawn. The
    latest developments have shown that our economy was not so flexible
    nor was it capable of resisting external shocks. What we have now is
    the previous years' heritage.

    Before the pre-crisis period the Armenian economy was indirectly
    infected with the Dutch disease, which, in its classical form, was
    obvious in the Russian economy, Armenia's major partner and main
    source of money transfers. The Dutch disease is typical of the
    countries exporting raw materials. They do not have any labor
    productivity problems ` they export raw materials and receive huge
    funds, which are later accumulated in the construction and services
    sectors. As a result, theses sectors start developing, with prices
    there rising. Instead, the exporting sectors are ousted from the
    economy, with a lower price rise recorded there than in the
    non-exporting sectors. The result is that all the resources (both
    financial and human) flow into the non-exporting sector, which is much
    more vulnerable to external shocks, as productivity growth is normally
    limited there.

    Armenia has no oil or gas reserves, but it received huge funds as
    money transfers, mainly from Russia, which indirectly provoked Dutch
    disease in the Armenian economy. Businessmen saw that the construction
    and services sectors were highly profitable. Instead of thinking of
    manufacturing export products, they rushed to the construction and
    services sectors and made them engines of our economy.

    What is the right policy? Both theory and international experience
    show that symptoms of the Dutch disease are signals for improving
    administration and taxation of the highly productive non-exporting
    sector. Also, while most of the budget tax revenues are saved, the
    rest are directed to the development of economic infrastructures. That
    would be indirect assistance to the exporting sector and enhance
    economic efficiency. That is, an active business cycle policy would be
    launched.

    I can say that the tax policy was not properly implemented during the
    previous years. Now aggressive reforms in this field must be one of
    the Armenian Government's tasks, and the Armenian Premier has
    repeatedly stated the fact. Specifically, tax and customs
    administration must be improved at a higher rate. That is the funds
    formed by money transfers were finally accumulated in the
    non-exporting sector, which was prospering. The Government must find
    and develop mechanisms of proper taxation and direct part of the extra
    tax revenues to infrastructure development, which, as I have said,
    would enhance economic efficiency.

    We cannot say that the tax policy was entirely wrong, but the reforms
    must have been slow. The lessons of the past show the need for the
    Government to implement a more aggressive policy of economic reforms.
    The Armenian market must become a diversified one.

    NEWS.am: If the construction industry is not so efficient and proved
    to be one of the causes of economic decline, why did the Government
    provide a considerable part of the Russian stabilization loan to the
    construction companies?

    V. Aramyan: I would like to note that a fire in a flat may be caused
    by an appliance out of order. The priority task is to put out the
    fire. Then the appliance can be repaired. This principle was
    incorporated in our short-term anti-crisis program. We also assisted
    both the construction and the services sectors by issuing mortgage
    loans by means of a newly established lending agency.

    In fact, the Government did not allocate funds from the Russian
    stabilization loan to developers. Some companies were completing their
    construction projects. But, lacking circulating assets, they were
    unable to complete the projects. Banks did not want to provide
    funding, or issued credits at very high interest rates. The Government
    provided guarantees to several construction companies, which enabled
    them to receive credits at relatively low interest rates. Thus all the
    three sides gained: the banks, because they utilized their funds; the
    companies, because they resumed construction and created jobs; the
    Government, because it ensured GDP growth and relieved social tension,
    as it is citizens that are owners of the housing.

    NEWS.am: Is economic recovery possible in Armenia, can the pre-crisis
    level be reached during a medium term?

    V. Aramyan: I am sure that our economy will recover and the previous
    years' indicators will be reached. First, our economy depends on
    global and regional developments, which are signaling stabilization
    and progress. The economic decline in Armenia reached the bottom in
    2009. We forecast 1.2% economic growth for next year in the context of
    1.5% economic growth planned in Russia ` our economy is closely
    dependent on the Russian market. The International Monetary Fund
    (IMF), HSBC Group, and the Asian Development Bank (ADB) made
    optimistic forecasts for the region as well.

    NEWS.am: How does the Government plan to restore the financial
    balance, considering a sharp decrease in the amount of money
    transfers? Want was the effect of this decrease on the Armenian
    economy?

    V. Aramyan: Money transfers are really of high importance for the
    Armenian economy. They are rather equally distributed among the
    economic sectors thereby reducing social polarization. Transfers
    received in Armenia used to constitute up to 13-14 per cent of GDP
    yearly. The year 2009, however, saw a 30% decrease, which was evidence
    of decrease in the populations' incomes. One of the Government's tasks
    was attracting foreign funds to the economy and thus stimulating the
    demand, which actually depended on money transfers. In this aspect, I
    think, the Armenian Government, assisted by the IMF, Russian
    Government, World Bank, ADB and other donors, managed to make up for
    the decrease in the amount of money transfers. As a result, more
    budgetary funds were injected into the economy that the Government
    collected as taxes. So we should expect 7% budget deficit instead of
    1%.

    NEWS.am: Much less funds come to Armenia now than before. Under the
    circumstances, should the Central Bank of Armenia (CBA) revise its
    monetary policy, particularly, create new mechanisms of crediting
    small-to-medium businesses?

    V. Aramyan: Indeed, the CBA's priority task is price stability, which,
    in the case of Armenia, is a legal provision. This allows the CBA to
    assist the economy. The CBA achieves its aim by means of its monetary
    policy, with the financial market members ` and through them the real
    sector ` benefiting from this. When we say that the CBA should revise
    its monetary policy and render direct assistance to small-to-medium
    businesses, we should take into account that it is not so much
    encouraged, as quite a number of absurd phenomena can be observed on
    the market. Other nations' experience shows that, even as an
    anti-crisis measure, Governments' assistance to small-to-medium
    businesses is much more effective, while the Central Banks help the
    Governments by reducing interest rates. We adopted this experience.
    The CBA should keep its interest rates down for some time more, while
    the Government will be supporting small-to-medium businesses. If the
    CBA launches a policy similar to that of the Government, the two
    policies will come into conflict. I think that the Government and the
    CBA, especially during the crisis, should coordinate their policies.

    NEWS.am: What export promotion measures does the Government plan for 2010?

    V. Aramyan: Businessmen engaged in export receive help today as well.
    They are exempted from customs duties and other taxes. Also, the VAT
    is returned to them. Businessmen importing expensive production
    equipment enjoy a 3-year VAT deferral. Nevertheless, I think that
    improving the economic system, particularly tax and customs
    administration reforms, is one of the best mechanisms now. The
    Armenian Premier has focused his attention on it. The economic
    environment will not improve until the tax and customs policies have
    been reformed. No matter what export promotion mechanisms are
    invented, they will prove to be stillborn if the structural problems
    of the economic system remain unresolved.

    NEWS.am: No increase in wages and pensions is budgeted for 2010. What
    are guarantees against inflation, and will the population retain its
    purchasing power?

    V. Aramyan: First of all, we should not link inflation to purchasing
    power. Our purchasing power depends on price rise. I would like to
    note that one of our anti-crisis measures is full-scale execution of
    all the social expenses. If we expect a 5-5.5 pct price rise this year
    (and we aim at 4±1.5% for next year), we can say that the real social
    expenditures or the purchasing power of this amount will be maintained
    at the pre-crisis level.

    T.P.
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