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Official News

Wednesday, 12 November 2008

ROA Prime Minister Tigran Sargsyan's Speech in the National Assembly Introducing the 2009 Draft State Budget


Honorable Chairman of the National Assembly, 


 Dear Members of Parliament,


         According to Article 90 of the Constitution of the Republic of Armenia, the Government of the Republic of Armenia submitted the 2009 Draft State Budget to the National Assembly. The Government Program approved by the National Assembly in the current year and developed on the basis of provisions of the ROA National Security Strategy and the Poverty Reduction Strategy Paper, as well as the key provisions of electoral programs of the ROA President and the parties forming the coalition and the political coalition agreement, served as points of reference for the draft.


           I have already had an opportunity of presenting the main logic and rationale behind the proposed budget and addressing the four key factors for overcoming the financial crisis. Today, I would like to focus on some fundamental provisions of our economic policy that stand out against the background of the global financial and economic crisis.


           THE GLOBAL ECONOMIC AND FINANCIAL CRISIS


           The global financial crisis manifested itself through a sharp deterioration in financial assets, a decrease in liquid assets and in the level of capitalization of financial institutions, and a complete lack of confidence. Bankruptcies of hundreds of large companies and disruptions to financial markets in developed countries have led to significant changes in the behavior of market participants.


          For the first time the economy of the United States, the key global player, saw a net inflow in investments indicating the end of the dollar expansion. This has in turn deepened the crisis in almost all developed financial markets leaving the developing countries without short-term financial resources.


           Financial bubbles formed in the mortgage market and powered by an imperfect and artificially sophisticated financial system burst exposing the significant discrepancy between the financial and real sectors. The financial sector forced making relevant adjustments in the real (corporate) sector through the securities market. This became the powder-keg that blew up the real sector. In the meantime, it revealed imperfect governance, regulation and control in the global financial and economic systems.


           We are still witnessing short-term actions and interventions aimed at putting out the fire. Today the G-7, G-8, G-20, the International Monetary Fund, the World Bank and other global actors are discussing in different formats the question of setting up new governance institutions and arrangements in line with the new world under formation.


           What are the first lessons of the global crisis?


           - Strict supervision and availability of universal risk identification tools in the financial sector;


     - Adherence to transparency rules, including ensuring transparency in and public oversight of the large enterprise activities;


     - Sanctions commensurate with potential risks;


     - Developing a uniform methodology for risk identification in the real and financial sectors;


     - Need for consolidation of supervisory authorities;


     - Developing new principles for coordinating the monetary and fiscal policies;


     - Inadmissibility of undermining the macroeconomic stability;


     - And more importantly, ensuring social cohesion and building confidence.


           Thus, the global financial crisis has led to a:


      a) large-scale outflow of short-term financial resources;


     b) investment project cutbacks and deferrals in developing countries;


     c) loss of confidence among market participants.


     The global economic crisis has led to a:


       a) reduction of global GDP growth rates;


     b) cutback in jobs and rising unemployment;


     c) decrease in the prices of raw materials and some products in global markets.


           The measures implemented jointly with the CBA allowed us withstanding the first wave of the global financial crisis. Now our task is to withstand the new waves of the global economic crisis.


           RISKS


      The global economic crisis engenders the following key risks for the Republic of Armenia:


      - a decline and deferral in private direct investments


     - shrinking of remittances


     - temporary freezing of the mining industry until a rise in the prices of raw materials;


     - deferral of some investment projects and reduced investments in the construction sector.


           As a result, the following might occur:


     - decline in the volumes of consumption,


     - deterioration in the balance of payments;


     - negative expectations among creditors.


           International practice suggests that a new phenomenon occurs under these circumstances, i.e. the market participants' desire to overcome the temporary difficulties on their own leads to increased scope for the shadow economy and corruption risks.


           Clearly, all the listed risks are directly associated with the ROA National Security Strategy.


           In this situation the Government efforts will be focused on:


     - ensuring macroeconomic stability;


     - ensuring stability in the financial sector;


     - identifying and introducing additional incentives with a view to achieving the projected economic growth targets, which will:


     - expand the consumption,


 - boost the domestic industry,


- increase exports sharply,


- improve the balance of payments.


     


     HOW CAN THESE OBJECTIVES BE ACHIEVED?


     


     The global financial and economic crisis is like a special self-regulatory mechanism and also a way of bridging the existing huge gap between the developed and developing countries. With the difficulties it creates, it also provides an extensively wide scope for developing countries and reveals their competitive advantages.


     


     Under the circumstances, the State will have to play a significantly more pro-active role in economic processes.


     


     Implementation of pan-Armenian projects under the public-private partnership principle, including building of a new nuclear power plant and Iran-Armenia railway, setting up a pan-Armenian bank and investment and mortgage funds as announced by the President of the Republic, will significantly foster economic growth.     


     Diverging real and potential GDPs create deflationary trends that provide favorable conditions for expansionary policies. Given the low price elasticity in Armenia, the role of the ROA State Commission on Protection of Economic Competition will be critical; namely, eliminating the unjustified price discrepancies between the world and domestic markets, preventing abuses of the dominant position in the market, etc. We stand ready to support any initiative by the ROA State Commission on Protection of Economic Competition.     


     In addition to the activities under the draft state budget presented to you, the Government will take additional measures to achieve the objectives above and to mitigate the impact of the global crisis:


     1. The Government will support the existing and emerging enterprises by promoting increased competitiveness and job creation efforts with a view to furthering growth in the real sector. This implies:


     - issuing of state guarantees for attracting additional financial resources;


     - using subsidizing tools;


     - state participation in the equity of those enterprises that meet the criteria set by the Government.


     


     With a view to minimizing the shadow economy and corruption risks, a mandatory audit report requirement will be introduced for large enterprises with more than 500 million in assets or turnover.


     


     2. To promote SME development, the Government will:


     


     - provide access to considerable credit funds with the support from the World Bank, the EBRD and the Asian Bank (the negotiations will be completed in December and around USD 350 million credit resources will be raised to this end).


     - streamline tax administration significantly. In particular, abolish the mandatory accounting requirement for enterprises with less than AMD 100 million in turnover and introduce simplified tax returns.


     


     3. The Government will support the development and preparation of new business plans providing the funds necessary for it. A commission on innovative projects will be set up by the Prime Minister and will announce business project competitions.


    4. The Government will set up free economic zones in our international airport and Gyumri to develop a more business-friendly environment in Armenia. To this end, we will get technical assistance from the United States for the Gyumri project. As far as the Zvartnotz airport is concerned, a conceptual agreement has already been reached with the concessionaire.


   5. The Government will conclude trade agreements with the European Union and the United States to ensure favorable conditions for exporters (agreements have already been reached. The task force is due to leave for the USA for preparing the agreement).


   6. In public procurement, other conditions being equal, preference will be given to Armenian goods and service providers.


  7. Thousands of our crisis-hit compatriots in the CIS countries are seeking opportunities for reliable investments and keeping their savings. It is our duty to guide them and create more favorable conditions for them to place their savings with the Armenian banks. Today Armenia's banking system is a safe haven for keeping savings. It is in line with our aspirations to become a financial center.


     8. Additional joint measures will be taken with the World Bank for putting in place an efficient system for management of State reserves. Under the same program, we plan to achieve a proper level of food and strategic reserves.


     


     All these actions will be implemented under clear-cut rules. These rules will be made public and there will be public oversight of measures taken. The best local and international experts will be involved in these activities.


     


     WHAT ARE SECTORAL PRIORITIES


           The following additional measures will be taken to strengthen the resilience of Armenia's economy:


       - implementing new public-private partnership investment projects in agriculture;


     - providing new incentives for the IT sector development;


     - implementing AMD 77 billion (USD 250 MN) worth of construction activities in the disaster zone and providing extra funding for school-building projects;


     - implementing new road construction projects, including the construction of the Asian Bank-supported Meghri-Batumi highway;


     - implementing new projects of regional importance in the energy sector.


     


     SOCIAL SECTOR PRIORITIES


      It is planned to the following in the social sector:


     1. Meet all social commitments on time and fully;


     2. Broaden the scope of public works extensively;


     3. Develop an affordable housing stock;


     4. Develop a broadly accessible mortgage system;


     5. Implement demographic projects.


           These are the additional measures that we plan to implement. It is worth mentioning that these measures are in line with those carried out in most developing countries. These projects will be implemented with the World Bank and the IMF support. We will soon finalize negotiations with World Bank on attracting USD 800 million in credit funds. We will regularly report to the National Assembly on the progress of these activities and if necessary, will present new legislative initiatives.


         In conclusion, I will point out our principles for 2009:


      - Order and discipline in everything;


     - Transparency and public oversight;


     - Efficient and comprehensive actions.


      Our motto is "From global thinking to specific action."


           Thank you for your attention.


 

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