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Official News

Wednesday, 18 November 2009

RA Prime Minister Tigran Sargsyan’s FY 2010 State Budget Bill Introduction Remarks for National Assembly

The Honorable National Assembly President,

Dear Members of Parliament,

In accordance with Article 90 of the Constitution of the Republic of Armenia, the Government of the Republic of Armenia has submitted to the National Assembly the FY2010 State budget bill. The bill is based on the government program as approved earlier this year by the National Assembly and developed on the basis of the RA national security strategy and sustainable development strategic paper, account taken of the concept note issued by the coalition parties.

First of all, I would like to refer to the government’s anti-crisis actions and those measures implemented together with you. Our anti-crisis program has a clear-cut logic which implies drastic increase in spending on infrastructures, providing better conditions for small and medium-size enterprise, supporting such companies as may have temporary hardships caused by the negative impact of the global economic setting. The aforementioned 3 activity areas stem from our social commitments, assumed by the Government and the National Assembly, based on a 9% growth forecast. That is notwithstanding the economic fall experienced in 2009, we are intent on meeting in full and in a timely manner the high standard of our social commitments.

Hence, let us evoke those steps carried out in the field of infrastructures.

You may remember that the President of the Republic addressed the National Assembly stating those sizeable programs to be carried through joint efforts.

• The first major project was the construction of a new NPP. Efforts are currently underway to that effect. The National Assembly passed a law on NPP and the government announced a tender to select a project manager. “Warley Parsons” won the tender. USD 400,000 will be spent under this project in 2009.

• The second project is the Yerevan Thermal Power Plant under which around AMD 24bn worth of activities have been carried out since the beginning of this year against last year’s 15 billion.

• Under “Hrazdan Unit 5” project investments will be made to the amount of USD 97mn against last year’s 64.8 million dollars.

• AMD 4bn worth of investment will be made by yearend under the power transmission line and distribution network rehabilitation project against last year’s actual performance of 2 billion drams.

• By the end of 2009, 384 km-long roads will have been commissioned in the Republic of Armenia as compared to last year’s 163 km

• As part of the anti-crisis program and a follow-up on the ongoing programs, 30 million euro worth of investment will be made this year in the water supply, water drainage/sewage and irrigation systems. The EBRD will invest Euro 20mn and the World Bank - over USD million. 300 km-long inner network and over 50 pumping stations have been refurbished to date

• Investments under the Irrigation Infrastructures and Water-to-Market activities of the Millenium Challenge Account-Armenia program will have reached the mark of USD 21mn by yearend

• AMD 25bn will have been spent by the end of this year in the disaster zone to build 1760 apartments and 118,000 sq. meter housing estate. To date AMD 403mn-worth of housing purchase certificates were been made available to eligible households. No construction work was carried out in the disaster zone last year, while we had extended AMD 2,184mn worth of HPC to the population

• Design work is off under the North-South corridor project. You may be aware that nearly USD 500mn worth of borrowed funds are available from the Asian Bank, the first tranche of which to the amount of USD 60 million has already been approved

• There has been some delay in the implementation of Iran-Armenia railroad project due to inner political situation in Iran. Nonetheless, we have already established a directorate with specific funds allocated from the State budget so that the project could be kicked off


This means that the share of disaster zone expenditures is significant in FY 2008 public spending portfolio.

The Pan-Armenian Bank was launched in 2009 due to start active operations in 2010. Authoritative international organizations have been entrusted with the design of a business program and the selection of a manager for the Bank.

Small and medium-size enterprise is second key target in our anti-crisis action plan. The following measures have been implemented to that effect:

• AMD 18.5bn out of the proceeds of the Russian loan have been earmarked for lending purposes

• The SME DSC and the government-decreed Universal Credit Organization were given AMD 3.7 and 6.4 billion respectively.

• Channeled through the Central Bank of Armenia, AMD 17bn worth of lending resources are available from the International Bank for Reconstruction and Development

• A cheese exporting company has been established as a pilot project under the public-private sector partnership principle to help nearly 500 domestic cheese producers find sales outlets abroad

• The fiscal burden has been reduced for SME resulting in AMD 16.6bn under-collected revenue as compared to 2008, allowing small and medium-size enterprises spare funds available in the form of savings to raise their immunity against crises

• Together with you, we raised the threshold of VAT from AMD 3mn to AMD 58.3 million. As a result, AMD 11 billion worth of savings were recorded with economic entities. This regime benefits about 32 thousand domestic companies

• In 2009 tax overpayments fell by AMD 20bn, as compared to 2008, leading to considerable alleviation in economic entities’ tax burden. The mandatory accounting requirement was cancelled for those enterprises with up to AMD 100mn turnover. Entities with less than AMD 100mn annual turnover needn’t submit monthly VAT returns any longer. Also, we have simplified the reporting procedure: we have eliminated the former evaluating commissions, economic entities henceforth are allowed to submit electronic reports by means of information technologies

• Mandatory check-ups as carried out by 22 inspection entities were cancelled for those companies with up to 70 million dram annual turnover. In order to assist small and medium-size enterprises, the State has made extra expenses establishing an accounting center which provides inexpensive and standardized services aimed at minimizing the contact area between SME and tax authorities

• FREDA venture fund has been founded to participate in the capital of agricultural enterprises and provide them with borrowed funds

At the same time, steps have been taken to improve the competitive environment in the Republic Armenia. We considerably simplified the process of enterprise registration, waived the requirement of having and reporting on the statutory capital, broker’s desks were established at customs points and customs warehouses.

• The list of those products subject to mandatory certification at the time of border-crossing was shortened from 65 to only 16

• Export formalities were simplified both in respect of paperwork and procedures, in particular for agricultural produce, drugs and pharmaceutical products

• As from November 2009, the ban applicable since 2007 to Russia-bound Armenian exports was waived for fish products, lobsters and cheese. The possibility of export is the key to the development of domestic fisheries. We have joined the GSP + system which will reduce the cost of exports towards the European Union

• In 2009 Orange multinational company appeared on our market which is supposed to promote competition in this field. As of today, Orange has made about USD 90mn worth of investments. New type of wholesale internet services were launched including 3G, 3G +, Wi Max, Tryple play and other services

The aforementioned actions went a long way toward bettering the business environment in 2009 leading to a 7-point improvement for the World Bank’s “Doing Business” standards in Armenia: we were promoted to the 43rd place from 50.

• VAT settlements have been deferred for a period of up to 3 years for imported equipment to a total cost of AMD 300 million and over. During the past 4 months, investment programs were approved to a total cost of about 8 billion drams. An Operative Staff is operational at the Office Government which has already discussed 49 specific projects at an estimated cost of 14.5 billion drams in the sphere of farm product processing, pharmaceuticals, information technologies, light industry etc.

• In addition, credits were made available to those enterprises experiencing temporary hardships in the field of copper and molybdenum processing. “HayRusgasard” received short-term funds equivalent to USD 79 million. 29 billion drams were spent in the energy sector as compared to last year’s 19.8 billions. Organic agriculture is seen as a priority area for agricultural development. Therefore, the Government has been providing credits for pilot projects in this sphere. This process will be continued in 2010.

• AMD 30bn out of the proceeds of the Russian credit went toward the real sector to upgrade and diversify Armenia’s economy. 12 billion drams were made available to the National Mortgage Company as established by the Central Bank of the Republic of Armenia.

• To revive the mortgage market, AMD 3.5bn worth of State guarantees were extended to 4 enterprises. Simultaneously, the Central Bank will be attempting to boost housing demand by means of the National Mortgage Company.

Will the aforementioned measures suffice to cope with the negative impact of the global financial and economic crisis? Not of course. Notwithstanding, one cannot turn a blind eye to the large amount of work done with you.

Now, I would like to refer to our social commitments.

Welfare spending rose by 14% in 2009, compared to 2008. Educational spending rose to AMD 109bn against last year’s 104.5 billion drams. Public health care will get 56.5 billion drams against last year’s 49.4 billion drams.

Capital repairs are underway in 8 central clinics of marzes to provide for higher service quality and increased access to medical services for local population. Large amount of work has been done in other spheres as well. Our ministers will have the possibility of reporting them back to you during this sitting.

The maintenance of macroeconomic stability was a major target because the macroeconomic environment may provide favorable conditions for enterprise development. In our opinion, there is no alternative to our anti-crisis strategy as introduced last November and carried out throughout the year. In the meantime, our actions have been criticized, but we could not see any alternative to this strategy which was hailed by international organizations and experts. As a result, despite the recorded 18.3% economic fall, together with you we were able to ensure macroeconomic stability in the country and realize sufficient savings to defy the threats expected in 2010-2011.

I can hereby report that currently we have enough CBA-generated reserves in the Stabilization Fund.

Macroeconomic stability can be evidenced by the fact that the volume of credits went up by 29% to AMD 365bn in 2009. Between December 2008 and October 2009, there was a 17 % rise in retirement pension-related expenditures, 16.9 % - in employment-related pensions. Welfare spending rose by some 16.1 %. Inflation will be kept within the planned limits.

Structural transformations allowed us to abide by expansionary policies. This means we can avoid making budget cuts, inadmissible amid the ongoing crisis as the State is supposed to carry out expansionary policies in that event. It was a clear-cut anti-crisis strategy. Budget expenditures will stand at about AMD 880bn in 2009.

What are the lessons of 2009?

Firstly, the crisis allowed a more vivid exposure of weak points in our economy: the economy is poorly diversified with badly needed “long money” and institutions running on it. The latter fact in turn is an impediment to diversification.

Secondly, there are economic oligopolies available in the country and, as a result, a low level of competition. This can be evidenced as well by low price elasticity which is a serious challenge to us.

As a result, the tax burden turns out to be distributed disproportionately among economic entities in the Republic of Armenia.

Thirdly, motivational mechanisms are insufficient or lacking in the system of governance.

Fourthly, we have fundamental financing problems in the educational and health care systems. The President of Republic has set the task of reforming drastically the financial mechanisms in both sectors during 2010.

And, finally, the current pace of economic reform is slow.

You may understand that the government’s action plan will be based on these very lessons to address the above-stated problems.

Successful execution of the FY 2010 State budget depends on how realistic these parameters are.

At the joint session of the commissions I noted that that any crisis stands out in that it can blow up all acknowledged rules and regulations, and no model of economic forecast can work under these conditions. This urges us to work under pressure. We all could see economic forecasts change from month to month all the way through 2009. Changing economic development trends in Russia were crucial to us. It seems to be quite natural that the government of the Republic of Armenia is working under pressure, too, and has to make corrections every month based on the controversial impact of the global crisis. Debates are still high over the forecasts of 2010, yet estimates keep changing every minute. At the joint session of the commissions I stated that that the introduced bill proceeds from an estimated 1.2% growth forecast.

At the same time, I reported that the government had already made some changes in the submitted draft budget. In particular, we had completed the talks with the Millenium Challenge Corporation and were obliged to add about 24 billion dram extra spending in the budget. We have the European Union’s approval of about Euro 100mn worth of financial assistance aimed at sustaining macroeconomic stability in 2010. Neither of these funds was included in our budget estimate. The expenditure side of the budget will be increased by abound 18 billion drams inclusive of VAT refunds making that the FY 2010 budget will be comparable with the one we had last year.

Now let us speak about the next important change. Taking into account the past 3 months’ positive trends in our economy and the growth indicators stated over the last 3 months, the President of the Republic ordered improving the revenue-GDP ratio in 2010. Accordingly, the revenue side of the presented bill will likewise be increased by nearly 17 billion drams. As a result, this year’s budget bill will contain AMD 50bn more resources than that of 2008. The budgetary gap is estimated at 6% that is the deficit will decrease by 1-1.5 % as compared to 2008. This in turn makes us believe that the share of foreign indebtedness will be less than in 2008.

I think these amendments meet the proposals and recommendations voiced during the debates over the budget bill. Of those questions raised by National Assembly members, we shall be able to address the following.

First, next year the Ministry of Defense and the Nagorno-Karabakh Republic will get more appropriations than in 2009. Together with, we shall increase capital investment for school building purposes. Specific funds will be envisaged for the refund of former SU Savings Bank deposits as stipulated by the National Assembly Speaker.

In their statements, the MPs voiced concern about the use of extra-budgetary funds. We share this concern of yours and are prepared to make joint efforts to enhance transparency in these matters, ensure adequate reporting and monitoring. We are also ready to give up some of those items by working together on such legislative amendments as may move them into the State budget.

I wish to touch on one important question. What worries most our citizens? Our studies and sociological surveys have shown that our citizens are concerned about social justice more than about the problem of pensions and salaries, unemployment or creation of new jobs, inflation and not even the issue of the Nagorno-Karabakh or recognition of genocide. Everyone must be equal before law irrespective of his or her official position or wealth. This question will be kept in the center of our attention. First of all, this question concerns large businesses which ought to make a point of working transparently and meeting the fiscal liabilities. We are obliged to make this process more transparent. In order to address these issues, we shall be submitting you 2 important legislative initiatives.

The first one is that 500 high-ranking Armenian officials will have to publicly present statements on their incomes and property, including the property of closely related persons. A single electronic register will be launched in Armenia and be available to all citizens.

The second initiative seeks to ensure transparency in the proceedings of larger businesses based on risk assessment criteria. It foresees the use of mandatory audits as an important step on the way to restoring and increasing the public’s trust in major business. I have to regretfully state that we fell short of this task in 2009 and that you were right to criticize us in this respect.

I want to single out the following reform areas in the educational and health care sectors.

First of all, they include the application of new financing mechanisms. My colleagues will outline the logic behind these reforms. Secondly, we have been circulating a new concept of control system improvements implying accurate specification of ministers’ duties, separation of the political aspect of ministerial functions and professional working processes within the ministries, separation of the duties of ministries and agencies, as well those bodies carrying out inspection functions. These changes will specify the responsibility of all these parts of control system.

Another major action is the shaping of an insurance framework. A corresponding bill, as well as the concept of pension reform is being discussed with National Assembly standing commissions. You may understand that these reforms will take some time to come true. They call for extensive efforts.

Dear colleagues, summing up my remarks, I would like to express conviction that out team is the only one in the country to succeed in addressing those challenges and tasks, as well as the goals set by the President of the Republic. Also, I do believe that together with you, we shall be able to carry out the FY 2010 budget program in full.

Thank you.
 

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