Thursday, 23 July 2009
Dear colleagues,
To begin with, I would like to comment on some performance indicators submitted by the National Statistics Service describing Armenia’s current economic position. These indicators have given rise to much controversy and a good deal of political argument, though we can see that they are obviously lacking in mass media-brokered professional analysis. I want to draw our economists’ and analysts’ attention to this fact by urging them to be more responsive to these indicators and provide so badly needed professional analysis (including critical opinions) on the matter.
Economy fell by 16.35% during the last six months. Thus, there is a change for the worse as seen from a five-month perspective: we suffered a 15.7% economic downturn after the first five months, and could foretell further decrease over the next few months. This is firstly caused by that the fact that in the same period of 2008 we had higher rates of growth, conditioned by the growth in construction, which was unprecedented. For the first time ever, the share of construction in the GDP went beyond the mark of 30%. 70% of construction is carried out in the private sector, which is displaying quite a spectacular financial composition: 30% of project funding is covered by the developers’ own resources, with the remaining 70% borrowed to the future owners of apartments. This means that the expectations of our citizens and investors add in value from a growth perspective. We predicted an even greater economic fall for the coming months. We did not rule out that it might rise to 20% by the end of this year. This was a pessimistic scenario of course, but the report of the National Statistics’ Service gave some positive signals. First of all, last month we scored a 230% growth against the month of May in the sphere of construction. On the one hand, this is conditioned by the seasonal character of construction activities and on the other hand, it is a result of positive expectations and those actions implemented together. In particular, we have given State guarantees to six developers enabling them to attract additional resources from commercial banks. Secondly, the mortgage fund came into operation as declared by the Central Bank of Armenia. The third and most important factor was that our citizens started buying apartments raising thus the share of private investment. Due to these three factors, construction experienced an unprecedented change this month as compared to the month of May.
Industry fell by about 12% in the period under review. Comparing the level of electricity consumption, we can see that this index is quite realistic. Agriculture fell by 2.5% over the past six months against the same period of 2008. Seasonal prevalence had a negative impact here, and we hope that the situation will be redressed in August. The index of retail trade appears to be extremely important in this respect. In spite of the fact that remittances fell sharply during the last six months as compared to the same period of 2008, notwithstanding the recorded 16% economic downturn, retail trade has somewhat increased in the period under review. Let us see the reason behind this discrepancy. First of all, wages rose by 13% both in the private and public sectors in the past six months of this year. Pensions, too, went up by 14% during this period. That is paying capacity increased for several thousands of our citizens, which was reflected on the level of retail trade. It is important.
The second key factor is the application of cash registers allowing a greater exposure of black market retail trade. Indeed, we do realize that shade density in this sphere is still sufficiently high, but the application of cash registers is beginning to yield a positive result as fixed in our macroeconomic parameters. It is extremely important for us to have recorded certain growth in the tertiary sector over the past six months. We can state that the level of the same period of 2008 has been maintained in this sector. Some fall was recorded during five months, while certain growth came to be scored within the following six months. The exports/home trade ratio and the imports/home trade ratio constituted 54% and 72.5% respectively as compared to the last year’s six months. This means we have had 27% less imports and about 45% less exports. What matters is that we had some improvement in the period under review. Note that exports grew by 37% in June as compared to May, and imports increased 45% in the same period.
Now let us get down to economic policy. Has our macroeconomic policy justified itself? During the past five years, we abode by stringent fiscal-monetary and lending policies, considered to be the right course in theory. In case of a double-digit economic growth both fiscal and monetary policies must be restrictive so that the economy is not overheated. And, on the contrary, expansive fiscal and monetary policies are recommended during the periods of economic recession. What does this mean? This means that the State should increase the charges and even if has no financial assets as own incomes for increase in these charges should involve additional financial assets with external and home markets, that we together with you carry out this year and we have is unprecedented expansive fiscal policy. The Central Bank started to carry out such policy after March when we returned to the floating rate, and the Central Bank was compelled to raise the refinancing rate by 1 percentage point, stating that we had reached a stage of lower inflation. The Central Bank started reducing the rate of refinancing as part of a planned transition to expansive policy. This implies the both fiscal and monetary policies provide incentives for economic growth with a clear-cut anti-recessionary bias. In this respect, there was no need in talking about spending cutbacks. Experts from both the International Monetary Fund and the World Bank agree with us in that the level of public spending should be maintained because it puts a check on recession. We carried out a redistribution of expenditure items insofar as the law permitted. Moreover, we got a carte blanche from the National Assembly in the form of legislative amendment stating that the budget deficit can reach up to 7.5% of the GDP. This means that the National Assembly authorized us to attract additional funds in the form of external and internal debts and we used this opportunity by getting additional resources: from the IMF - about USD 150 million for this year, USD 150 million for the year 2010, from the World Bank – USD 60 million as direct financing of the treasury and some 80 million dollars - from the Asian Bank. These authoritative international institutions hold that our expansive policy is justified and should be continued in 2010 in order we are anti-cyclic and capable of stimulating economic growth, taking advantage of the lack of inflationary pressures.
I want to touch upon extremely important parameters describing tax and customs administrations. The State Revenue Committee has the hardest task of winding up tax and customs pressure during economic recession and, in this respect, it needs our backing. For this purpose, all concerned government members have been told to provide support to the SRC within the limits of their competence. The backing must be objective, and all enterprises under your supervision should be instructed to meet their fiscal liabilities in full and in a timely manner. Moral encouragement, too, is extremely important. We have reformed the State Revenue Committee seriously and fundamentally, we have inflicted sharp criticism by openly speaking about the existing shortfalls. The electoral program of the President of Republic stipulated clearly that we should reveal our problems and should speak about them openly. Such open-minded dialog and criticism have already yielded tangible results as evidenced by our analyses. I wish to bring to your attention an extremely important parameter. Earlier this year we legislatively expanded tax privileges for small and medium-size businesses. We have 32 thousand entities below the threshold of AMD 58 million VAT with over 20 thousand businesses eligible for fixed taxing. They all availed themselves of this opportunity, due to which we collected AMD 25 billion less this year. Therefore, it should be taken account of during the assessment of economic performance.
The second crucial factor is that we made serious progress in the field of overpayment refunds. For the six months of 2008, AMD 10 billion was paid back to taxpayers while we had twice as much export than this year. During the six months of this year, we have refunded 8.5 billion drams which is unprecedented. The total amount of refunds, including the volume of non-cash refunds, exceeded the mark of 20 billion drams in the period under review. And, quite naturally, considering the tax obligations/GDP ratio, analysts must take into account these two major factors. As a result, we have allowed extra liquidity for small and medium-size enterprises and economic entities in general. Despite these tax privileges, we can state that for the six months of 2009 we have had at least 0.5% improvement in tax administration. It is an extremely important and key parameter for the GDP as our medium-term yearly target was only 0.4%. With 17% actual revenue/GDP ratio achieved last year, we envisaged 0.4% annual growth and this scenario assumed that we should have a minimum of 8% of economic growth. It is clear that having a 16% economic fall, it would be too difficult to increase the revenue/GDP by 0.5-0.6%. Nevertheless, the State Revenue Committee did so, and I must state that this is a qualitative change in the sphere of revenue collection.
We are well aware that the density of black economy is still high enough. Although it should be appreciated that the aforementioned reforms are carried out in time economic recession, and it is our unique way. I want to draw the analysts’ attention to a circumstance which calls for extra comments. The share of profit tax in total revenue was 11.9 last year. We have already had a 16% profit tax/total revenue ratio for the first six months of this year. This seems to be unusual against the background of economic recession. But the situation has changed, and the ratio has increased first of all due to greater black economy exposure. Our analyses show that the bulk of shadow economy rests in the home market. All macroeconomic analyses show that in the customs sphere collected revenue/imports ratio is 20%. It is the allowable maximum. This means that we have little potential for revenue increase. The internal market – first of all, our major entities - provide the bulk of revenue potential. And the fact that the SRC was able to raise the share of profit tax in overall revenue testifies that it is only possible by means of reduced black turnover I reckon that the questions raised and the submitted indicators should arouse the interest of our experts and their analyses. We expect that professional analyses will appear in mass media. And, we would also appreciate having some critical analysis, which is extremely important to us.
