Saturday, 14 March 2009
- Mr. Prime Minister, at the latest cabinet session you stated that today no organization can forecast the future definitely as there are still many uncertainties left at this point of time. Does this mean that your recent months’ predictions fell short of the reality when you went so far as to assert that Armenia’s economy could even become more attractive in the eyes of would-be investors and predicted a 9% economic growth.
- The question has two different layers. The first layer affects the government’s approach to the design of assistance-oriented programs for economic entities. The second one bears on our forecast of macroeconomic indicators. We must have clear-cut approaches and targets. We should likewise have a firm belief in them and communicate such belief to economic operators and the society, as a whole. The lack of trust will prevent us from giving effect to our work-outs. This is true for the economic entities, the entrepreneurs and ordinary citizens. Although indispensable, trust alone is not enough. Success is impossible without confidence. Regarding the forecasts, I am sorry to state that events have taken a pessimistic course. Accordingly, we are reconsidering our predictions about a high-growth development scenario for this year. This means that the indicators are much worse than the ones expected last summer as we drafted the State budget law. Today the worst of scenarios can be seen materialized, and it is impossible to make accurate forecasts merely because the international organizations - the World Bank, the IMF - changed their forecast of the 2009 indicators as many as four times during the last 3 months. This is to say that the global economics is generating such factors as increase uncertainty considerably. And this means that we should be prepared to a number of scenarios. At the same time, you may wonder whether we expected adversities like this. Yes, we did and we came up with a corresponding statement in Parliament on November 12 as we introduced our anti-crisis action plan, which was subsequently approved by the government on December 4.
- I am asking about larger enterprises 99% of which are privatized. Unfortunately, so far either they have not worked at full capacity or have not been operational at all. Did privatization contracts stipulate that the government had the right to buy back these enterprises should the new owners fail to comply with their contractual obligations? If so, why does the government refrain from buying them back?
- Most of State-owned enterprises were privatized in 1990-1995. Romanticism prevailed at that time and we believed that after privatization said enterprises would be supervised by such businessmen as would manage this property much more effectively than the State did. Unfortunately, this was not the case because the new owners were not prepared to work under market conditions. For this very reason, the transition had negative consequences. Privatization contracts took little note of State interests with more attention paid to the interests of private businessmen. Often as lawsuits were filed with the courts, it turned out that the contracts bore no provisions on the protection of State interests. The State lost several the lawsuits merely because privatization contracts had no clauses on the protection of State interests. As a result, we have had some problems. A second objective factor is that these enterprises were chiefly meant to subsist within the unified Soviet system. In the face of those market rules applicable in sovereign countries they proved to be unprofitable. They needed additional investments which we were short of because we lacked in adequately capitalized private equity, ready to work in a market environment. This quite naturally did great harm to the newly privatized entities. Management skills and resources were built up later on, fit for the refurbishment of these enterprises. Today we have quite different situation in the Republic of Armenia: we have developed a public-private sector cooperation concept which implies that the State is set to help the private owners design long-term effectiveness-oriented programs rather than to re-nationalize said enterprises. The State will only be involved where it can be of service, otherwise the private sector will have to run the risk of making investment. This scheme provides a pledge to private ownership that the proposed programs meet the government’s priorities and that the legal framework will not be a hindrance to business in Armenia. This in turn is supposed to encourage entrepreneurs to make profitable investments.
- On the evening of March 3, panic prevailed in the domestic consumer market, which was not the case with that of not-top-priority goods. To what extent is this due to the monopolization of the home consumer market? What can be done to address the situation?
- The changes which occurred on March 3 aroused anxiety and panic among the population. It is characteristic not only to Armenia. In any country, even in the developed ones, basic commodities may disappear from the shops within an hour. All this is due to the expectation of negative consequences. We were prepared to minimize the risks. As a result, the consumer market situation settled down after a couple of days. In the financial market, panic was overcome even earlier. The shaping of an anti-monopoly environment is high on the government’s agenda. There are both objective and subjective reasons behind it. Why price elasticity is so low in Armenia which makes that prices are slow to respond to downward trends and quick to follow upward trends? The best way to tackle this problem is to create a competitive atmosphere in the country. To this end, the government is going to enact a set of measures aimed at reforming the system of tax administration, creating equal economic and legal conditions for everybody. I feel that every one shares this position. We must succeed in operating drastic changes in the system of tax administration within the next 2 years in order to find a fundamental solution to this problem. The small size of our economic system, underdeveloped communications are among the objective factors behind the problem. Unfortunately, with its specific cargo delivery problems, Georgia remains the only way for Armenia’s imports and exports. We have repeatedly called our Georgian partners’ attention to this issue as it is much cheaper and easier for the Armenian carriers to take cargoes to Georgian ports Poti and Batumi than to further deliver them from these ports to Armenia.. Here, we face serious bottlenecks for small and medium-size business. Larger businesses can afford making the needed expenses which is later on translated into a competitive edge on the domestic market. It seems to be obvious that the role of the State Commission for Protection of Economic Competition must be enhanced. This is stipulated in the government’s anti-crisis program. We are open to discuss any proposal that will give more powers to the commission in fighting against this evil.
- Nobody doubts that the Government is overloaded now. A question may arise, namely why not to differ the implementation of such programs as affect the interests of small traders, taxi drivers, shoemakers, individual carpet makers: in a word, why not to leave alone those layers which make a living on their own and do not ask jobs from the Government? Which is the rationale? Do you want to address all the problems at once?
- There is a thesis stating that economic reforms are best carried out during a growth period. And, on the contrary, it is much more difficult to implement them amidst economic decline when there are social tensions. Although, as global experience shows, radical changes and reforms are best realized when they seem to be most needed. Decision-makers are often compelled to take such unpopular course as there is no alternative. Otherwise, they will face a collapse. Of course, it would be much better if fiscal reform (a painful process which affects the behavior of tax administrators and entrepreneurs) was carried out in time of growth. Today we are obliged to carry them out lest we should fall short of revenue collection targets. If we fail to ensure the needed level of budget receipts, we will be unable to make expenditures. In this case, the GDP growth will be undermined and the economic system will find itself in a worse status. Quite naturally, we are allowing for the economic environment and the implications of the ongoing global crisis in pushing ahead with the reforms. The proposed changes are meant to help us cope with the hardships. Which behavior should we embrace under such circumstances? Our targets are very clear: Our tax reform is aimed at providing equal taxing conditions for larger businesses: all enterprises must work openly and transparently, with their financial statements having to be accessible to the general public. The bulk of the tax burden should be borne by major entrepreneurs. The second key principle is that these reforms must lead to a more favorable administrative environment for small and medium-size businesses, which we have already realized. Several laws have been passed to ease the tax burden for small and medium-size enterprise. I would like to mention the raising of the VAT threshold from the existing 3 million drams to 58 million. This is a considerable advantage in fiscal terms. A second principle is amending the way small and medium-size business representatives communicate with tax administrators. For the first time in history, we gave up the practice of tax commissions and enabled our entrepreneurs to submit financial returns either online or by means of special letter-boxes. We provided improved conditions for the unbranded hotels which used to work in the field of profit tax by moving them into the area of flat taxing. Other sectors, too, benefited from legislative tax threshold reductions like this. Moreover, we authorized direct financing from the State budget to establish an accounting center attending small and medium-size enterprises. This allowed them access to low-cost accounting services for fiscal purposes. On the other hand, we operated an unprecedented change in the legislative field by compelling those businesses with more than AMD 500 MN annual turnover to undergo foreign arms-length audits and publish the findings of such audits. This will enable the public-at-large to see whether major businesses meet their fiscal liabilities in full or in part. I feel all of these measures will help us cope with today’s emergency situation. The question of cash registers is troubling everybody. There is an impression that they are targeting small and medium-size enterprises. I wish to tell our citizens that this is not the case at all. The application of cash registers is first of all directed against the major business, since market administrators are the ones to install cash registers. Using laws, we protect the interests of those people engaged in trade fairs. We prevent market owners from raising outlet fees at their own discretion. the As a result of application of cash registers, tax collection rose 7-8 times in January 2009, as compared with December 2008. Now imagine the level of black economy we had! The application of cash registers is likewise in the best interests of domestic consumers. Consumers are protected once they have the coupon certifying an act of purchase. Last year we passed a law protecting consumers’ interests. With this coupon, any consumer may return the purchased good as shopkeepers are obliged to take them back. Should the latter breach this clause, any consumer may turn to the financial arbitrator who is supposed to protect their interests. In a word, we are introducing new institutes which are hard to master but I am convinced that they will bring about good results. As early as today we have significant achievements in the field of revenue collection.
- Mr. Prime Minister, during a press conference former CBA head Bagrat Asatryan stated that the receipt side of the State budget had not been fulfilled as yet which meant that tax authorities would use any tools to make up for the gap, with the chief focus to be placed on small and medium-size enterprise. Can you assure that this will not be the case?
- Our goals are stated above. First, equal market conditions must be shaped for major business and special regulations enacted for small and medium-size enterprise. Second, revenue collection at any cost is inadmissible and we are not going to do so. We will abide by the following principle: our target is clearly stipulated in the program, namely to ensure that the revenue/GDP ratio is 17.4%. We must collect as much revenue as generated by the economy. Revenue collection will be conditioned by this parameter rather than by the assumption that we will have high economic growth in 2009. Therefore, we are not going to collect taxes at any cost.
- However, until recently you kept denouncing in public the need for dram depreciation. I would quote former foreign minister Vardan Oskanyan saying that it was a great blow to the government. The government thereby lost its resource of public trust which may prove harmful in a situation of emergency.
- First of all, I cannot agree with you in that we kept denouncing the possibility of dram depreciation. Unfortunately, statements are often quoted out of context bringing grist to our critics’ mill. We have been stating the same thing since 1994. The question is whether people have caught the point or not. We pursue a policy of floating rate which means that the market dictates the level of exchange rate based on supply/demand ratio. This in the first place and the government has never given up this principle.
- Pardon, then how would you comment the March 3 statement of the CBA about the return to the policy of floating rate?
- The CBA has been accurate in its statements over the past few months with the latter consisting in the following: we have not and will never give up the policy of floating rate. The Republic of Armenia has no alternative. Simply, for a while preference was given to financial stability, and the CBA head kept sending off clear indications to the public that the policy of financial stability was a provisional one. I would like you to take note of this fundamental principle which has been the keynote of all the statements made by the CBA.
- Mr. Prime Minister, banks are going bankrupt or close down all over the world, in he meantime, we wish to launch a new bank, namely the All-Armenian Bank.
- The National Assembly has already enacted a law on the All-Armenian Bank. Now, the CBA is taking steps to that effect so as the AAB can proceed to the accomplishment of its functions in full. I believe that this will create new serious opportunities for the AAB to materialize its assets. The AAB will be based on the principle of public-private sector cooperation. This project features on the National Competitiveness Council agenda. We have discussed the strategy of this bank during the meetings held with private sector representatives in Tsakhkadzor. I feel that the budget resources which the State will assign to the Bank will finance such programs as may help us overcome the adverse consequences of the global economic downturn because these programs are supposed to aim the creation of new jobs, the building of export capacity and the mobilization of the all-Armenian potential as a new specific tool. From this perspective, I would rather say that the law came just in time and the availability of such an economic tool will allow us to implement new interesting projects.
- Are there any estimates about the program cost?
- Which program?
- The program of anti-crisis action.
- We have developed a number of scenarios for the year 2009, assuming for example that we will have a 0% GDP growth, a 1.5% fall, a 4.5% decrease or a 4.5% growth and so on. And, of course, we have made forecasts allowing for these macroeconomic indices. Our programs will be built on the actual scenario. Quite naturally, should the pace of economic decline prove too high, we will have to step up spending and vice versa. At this point we have an arrangement with the World Bank about a USD 525 million loan for a period of 4 years. We have reached specific agreements with the IMF, the Asian Bank and the EBRD. This indeed will help smooth the impact of the global crisis. The more private investments are involved, the easier it will be to get over the crisis. Diversified financial inflows are expected from remittances to private investments, therefore it would be wrong to speak about a single index.
- I wish to take up to the criticism which seems to be addressed not only to the government, but also to you personally. For instance, rumors were going around about your resignation. To your mind, who is behind these rumors and what is sought thereby?
- Who has a stake? I think my wife and my children first of all. And if in earnest, this is a political tool which is often used as a means of political struggle. I take it easy. Life is life!
- Mr. Prime Minister I would like to refer to some statistical figures. Comparing last January indicators with those of January 2008, we can see that economic performance is far from being what can be called brilliant. Receipts are below 12% of the target. The volume of produced manufactured goods fell by 6.5%, exports are down 44%. Brief, if things go on like this, we will come to the limit by the end of year. How far do you think this will go and what are we in for?
- Everybody wonders how long this will last? Unfortunately, the assumption that the crisis was going to reach the peak by the end of 2008 as followed by some economic revival in 2009 proved to be unrealistic, and we can witness now that as a matter of fact things have taken a more pessimistic course. Even today there is much controversy about when the crisis will reach the peak at last and the global economy, the economics of the United States will resume triggering growth all over the world inclusive of Russia? This will have a positive impact on Armenia’s economy. According to some estimates, economic recovery is due to come later this year and the situation will improve in 2010. As far as Armenia is concerned, I think improvement will come when the committed financial assistance will reach the real sector. I mean the implementation of those programs designed in cooperation with the World Bank and the Asian Bank. They comprise road building, agricultural, welfare, small and medium-size enterprise lending activities. Part of the Russian loan will go the funding of small and medium-size enterprises. You may be aware that the first tranche to the sum of USD 85 million has already been signed. Parliament is due to approve this agreement during its forthcoming 4-day sitting, after which we will get the mentioned first tranche from the World Bank. 50 million dollars will be used for crediting small and medium-size enterprises, with the balance having to be spent on road building, social and agricultural projects.
- At the latest cabinet session you declared about the curbing of State apparatus spending. The need for doing so was much spoken about by your opponents from the National Congress, in particular.
- Of course, we carefully discuss all those suggestions coming from outside, including from the opposition. Some of these proposals meet our approaches and have already been incorporated in our anti-crisis action plan. The proposal on reducing administrative outlays was a reasonable one and we endorsed it in order to assume part of the burden.
- Electricity, water and gas tariffs are going up as of April 1. This will generate new problems. According to the good-old Armenian tradition, some commodities are sure to increase in price. I wonder which way the government is going to prevent the expected price hike. Some experts propose to use as a subsidy part of ($100MN) the Russian government’s USD 500 million stabilization credit in order to check the tide of social tensions.
- To mitigate social tensions, first of all, we must fulfill our commitments – wages, welfare benefits, pensions - in full and in a timely manner. In the second place, we must back the implementation of such programs as are able to generate new jobs. Ten projects of this kind have been approved by the operative headquarters and the State has already earmarked funds for their implementation. Small and medium-size business is the third priority area which gives people the possibility of coping with today’s economic hardships. There is an additional activity, namely the public works for which we have allocated funds from the treasury. This will enable temporarily unemployed people to make a living by doing odd jobs.
- It is internationally acknowledged that protectionism is an evil. Nevertheless, we can see that almost any country tries to protect its national companies and producers. How would you comment on this phenomenon? Does the Government have enough will to continue what has already come to be appreciated by our society?
- The adverse effect of protectionism is written about much. There are too many studies showing that in the long run protectionism affects adversely national economies which may lose competitiveness and so on. So, protection indeed is an evil in the long run. In this respect, we are against protectionism. Our policy has the goal of helping our producers get over those objective difficulties which they are facing at this point of time so as tomorrow as the global economy ushers in a development cycle they will have done away with said provisional hardships. In general, measures like this are best taken to the minimum because they can lead to market deviations. If you back an entity, rival companies will start asking for a similar treatment and, in this case, the State will find itself in a difficult situation. This is why this kind of interventions should bear a temporary character. For instance, recently we have decided that we should assist the Artashat company which buys in agricultural produce for processing purposes and provides for some 50% of Armenia’s total farm produce. If left without assistance, the company will face serious problems. Considering that the current problems are due to objective factors, we feel bound to support the Company. From time to time, either the governments of developed countries do so, for example, with regard to machine-building companies. Instead, they state today that protectionism is bad. In doing so, we declare that this is not an act of protectionism, but rather a provisional measure to help overcome today’s difficulties.
- I feel one such measure is the initiative to amend the customs code. Although the government has called it off from the National Assembly, account taken of what was said above, I can guess that the government has not given up its initiative and, sooner or later, customs duties will be up 10-15% leading to further increase in the price of imported goods.
- Yes, we called back the bill on increased customs duty. This is explained by the fact that the recent 20% depreciation of the national currency implied a strong boost for our manufacturers encouraging them to export their output. In this way, they were offered a competitive edge against the importers. 20% depreciation is a serious incentive at this stage. As to whether we will send the amendment back to the National Assembly or not depends on the future developments in the Republic of Armenia. I think we have made a reasonable decision as it would be inexpedient to foster price increase by means of two different tools at the same time.
- Mr. Prime Minister, you have so far had only one criticizer on the part of the Coalition. I can guess you will have another coalition-based opponent in the face of the ARF which has already expressed vigorous disagreement with your offer to the Turkish side to participate in the construction of a new NPP in Armenia. You have presumably hurt a sore point and this is due to give rise to much controversy in future. Are you prepared to the perspective of having another coalition-based opponent?
- It should be noted that we came to complete consensus over those questions recently debated at the National Assembly. All those questions raised by our partners were given positive responses on our part. There are no divergences whatsoever. Secondly, I think there is some misunderstanding here. You are right to state that the Armenian-Turkish relations represent a delicate issue for our partners, but the point is that no invitation has been sent to the Turkish side concerning their participation in the NPP project. The problem is that part of the stake may be put up for sale at auction or through subscription and, if so, any party interested in the project may acquire a stake. I am convinced that there is great interest in both Turkey and Greece, and I cannot rule out that investors from these countries may subscribe to part of shares. The issue is still under consideration and no final decision has been passed yet as to how much stake is going to be put up for sale.
- One more clarification please: what makes you assume that Turkey may be interested in the project?
- You are well aware that the Armenian Union of Entrepreneurs keeps in touch with Turkish partners and attends the proceedings of the Confederation. There are indications in this respect from those Turkish private sector representatives who work with Armenian entrepreneurs. Power engineering is attractive as we possess serious resources in this area and can become energy exporters. I would make no secret of the fact that we have received some indications to that effect from our neighbors, as well as that the private sector takes interest in similar undertakings.
- I would like to reiterate the appeal you sent to mass media a few months ago concerning the deliver of objective and unbiased information about the financial market. May I ask you not to abide by the sole principle of giving good news and to tell us at least now what awaits us all in future?
- You are even entitled to demand it from me. I am convinced that it is the government’s sacred duty to provide the public with accurate information. Moreover, we should be answerable for disseminating misinformation. I am very exacting myself as regards the publication of statistical data, indices etc.
As far as political statements are concerned, I feel I have already answered your question, and you will agree with me in that we should trust in our programs. Can you imagine a prime minister who has no faith in his own programs?
