The Government of the Republic of Armenia

Honorable National Assembly Chairman,

Dear Colleagues,

The Government of the Republic of Armenia Is presenting to the National Assembly the 2014 State budget bill. As the President of the Republic pointed out, the present bill is outstanding in that it is for the first time we have developed a program budget.

This is a new approach: the government made a legislative initiative to change the budget system, offering you to incorporate these provisions into the law, which of course sets additional obligations before the State agencies.

As this is the first time, we would appreciate if you could not judge us too much, because according to our estimates, it may take at least three years to fully introduce the program budgeting system, which enables qualitative and quantitative criteria to identify such projects as will make the exercise more controlled in terms of results.

I also wish to inform you that in fact this approach requires a large amount of work: the ministries will need a sharp increase in skills and capacity in order to assess the impact of all the regulations and present it to the public before the adoption of the drafts. Even most developed countries face challenges related to the introduction of many problems, because the exercise is quite difficult, and we would like to repeat that it will take us at least three years to build the needed capacity.

Nevertheless, we had rather begin this functionality right now, since the National Assembly debates will help us better understand which stresses and indicators are more important in the agency programs, both in quantitative and qualitative terms.

Growth has been slowing down throughout the 2013 budget performance as compared to the previous year, Of course, we will touch upon this issue in more detail when submitting to you the 2013 budget report, but at the moment there are some trends that I would like to submit to you.

First of all, let us see the reasons behind the stated decline in economic growth? The impact on the performance of the budget consists of two groups: first, the external factors that are constantly influencing our economy. Due to the fact that we have introduced an open economic model in the Republic of Armenia, it is clear that the socioeconomic and political developments in the main partner countries may affect Armenia’s economic indicators. In particular, you may be aware that the World Bank and the International Monetary Fund have predicted lower economic indicators due to a worse-than-expected growth environment in our strategic trade partners for 2013. As a result, the overall background proved negative in 2013. In the meantime, I will dwell on those factors influencing the processes inside the country.

Firstly we should focus on the business environment where we still have unresolved issues, even a backdrop in a number of parameters This is extremely important because private investment is supposed to be the main driver of economic growth, while their share in the GDP has been steadily declining over the past five years which, of course, is a serious concern to us. This means that the improvement of the business environment should be a priority for us.

We cannot be satisfied at the fact that Armenia holds the 40th position among 180 countries in this field for two main reasons: the geopolitical risks that significantly and adversely affect the business environment. Therefore, we must be at least in the top twenty.

The second feature is that the indicators are distributed unevenly. According to some indicators, we are the 5th, 6th and 7th, while others leave us behind the top hundred. These figures are just the ones that affect adversely economic growth in Armenia. It is primarily a question of poor administration, bad terms of trade, inadequate tax burden and contract performance.

At the same time, we are seriously concerned about the state of affairs in construction, based on two factors: Firstly, because the business environment-related indicators show that we still have a high degree of bureaucracy in the field of building permits. Secondly, construction has been falling steadily over the past five years, and this trend has continued in 2013.

The next negative factor which affected the economic growth is the high inflation environment, which is primarily due to the fact that gas and electricity prices climbed up sharply in the Republic of Armenia in 2013. This in turn forced the Central Bank to raise the refinancing rate to 8.5%, which indeed has a restraining effect on the growth.

The next factor is the low level of budget deficit primarily due to the fact that the North-South highway construction project was realized much slower than we had planned, for the simple reason that we gave preference to quality criteria and did not allow construction work to proceed at a higher pace unless we were given additional guarantees in terms of strict conformity to international quality standards. Only after those requirements had been met, we allowed the contractor to start work. Either this factor had a negative impact on economic growth.

At the same time, it should be noted that our diversification-oriented industrial policy proved effective in 2012-2013. In particular, we can see that notwithstanding the adverse settings in the international markets, the growth rate is quite high in industry: we have a 10 % growth in the mining industry.

It is extremely important that the manufacturing industry continues with high growth rates of around 8 % and, in addition, we look forward to higher rates in agriculture as well.

The positive trend in macroeconomic indicators is the current account gap has been decreasing as compared to 2012, down to 10% from last year’s 11.5%. 1.5 %t is a significant improvement, firstly because we have export growth rates that are several times higher than the growth rates of imports and, secondly, we can see that the share of remittances is maintained in 2013. These two factors have brought about the aforementioned improvement in the overall balance of payments.

Dear colleagues, considering those characteristics and trends recorded in 2013, we are now streamlining our priorities in drafting the State budget programs for 2014.

The first feature of the State budget is that we are introducing a budget, which does not provide for a greater tax burden. That is the GDP-taxes ratio is the same as last year. You may remember that our medium-term program and the relevant policy implemented jointly with the international partners envisaged a commitment that the taxes-GDP ratio should be improved at the rate of 0.3 -0.4% every year, primarily through improved administration and reduced black economy, which implies extra revenue collected from “the shade.”

What is the rationale behind this political decision, which implies non-increased administrative pressure? Firstly, because the growth in the tax burden was high enough in 2013 and this has had a negative impact on the business environment. Secondly, we are set to henceforth focus on the risk-based methods instead of tightening the administration tools in order to reduce the number of checks and identify the risky areas.

I think that these political decisions will lead to reduced tax pressure in 2014, as a whole, as compared to 2013.

In this regard, the revenue index is planned at 1,134 billion drams, expenditures – at 1,244 billion drams, with the deficit making about AMD 110 billion. In terms of the budget deficit, I would like to inform you that in spite of a pretty low budget deficit, it cannot be ruled out that we may have a greater State budget deficit, if we manage better performances under our international programs, since we think that the expansionary fiscal policy in 2014 can stimulate economic growth.

The next feature of the draft State budget is the changes in wages. We have discussed this issue long enough and made a commitment to introduce a uniform scale. We have been working on the document, and for the first time in the history of our State, we will have comparable wages for all State structures.

At the same time, we should note that the Government of the Republic of Armenia is introducing a policy of continued rise in salaries in both the public and private sectors. You may remember that our program provided that the minimum wage had to be taken to 70 thousand drams from 35 thousand. We have been consistent in this regard.

Another feature of the State budget is the government’s new social policy. This policy in recent years has undergone fundamental changes, and the government’s program contains in itself the main focus of our social policy.

From now, the social policy will be aimed addressing the root causes of social problems rather than combating the consequences. As you mat remember, our program mentioned two fundamental causes behind poverty in the Republic of Armenia: employment and education.

Most poor families cannot provide proper education to their young members. The policy we have embraced will be continued into next year, consisting in that the lack of financial resources should not be an impediment for children from vulnerable households to get proper education, whether higher, secondary, special education or training. The new State budget implies a dramatic increase in education funding.

The next change in our social policy is the introduction of an integrated social service system. 18 more welfare centers will be up in 2014 to provide such services. The point of this policy is that we are giving up the formal approach in rendering social assistance. The assistance will be targeted and tailored to the needs of vulnerable households and distributed according to preferences - benefits, education, healthcare and legal advice. All of these issues will be the focus of the integrated social centers, and the services offered will be more efficacious.

The third area is this pension policy, subject to qualitative changes. The changes we have initiated enabled us to implement a more efficient system.

Today, we can report 12 billion drams in annual savings for the simple reason that the old system had numerous shortcomings. For example, pensions used to go to such persons who were not entitled to get one, or there were people getting pensions from more than one location, or otherwise, pensions were disbursed in the name of dead people. The introduction of new mechanisms has largely improved the efficiency of Armenia’s pension system.

The new approach as proposed for 2014 applies to unemployment benefits. The study of the experience of recent years has shown that we have a highly inefficient system. 94 percent of the funds allocated did not reach the beneficiaries, i.e. those looking for a job. Only 6 percent of eligible beneficiaries were covered. I think this system is ineffective for our country.

We have studied the international experience: there are many countries that do not have such a system, especially as regards the poor countries: international experts believe that this system cannot be effective. Under the old system, you only had to produce two references at the corresponding welfare center to get an unemployment benefit, namely that a person has one year of service record and that he has been fired from his latest job. Your social status was out of question, making that thousands of people were just getting extra funds that did not help us resolve the social problems, on the one hand, and create new jobs, on the other hand.

We suggest funneling funds toward the creation of new jobs under new social programs, offering additional services to vulnerable families, including their job security, allocating social benefits and payments to those people available on the list of vulnerable groups. Our study has revealed that benefits in the amount of 18 thousand drams were administered to individuals from well-off families who did not use any job search programs.

The new program has a completely new philosophy. We have already implemented a number of pilot programs. In particular, the Minister of Labor and Social Affairs has made a public statement on the implementation of a new program in Armavir Marz, which made it possible to provide jobs to people looking for employment and make extra payments.

Dozens of similar projects will be implemented in 2014 in pursuit of two objectives: firstly, to identify job-seekers and, secondly, to provide them with substantive financial and other type of assistance. This will prevent public funds from being pulverized so that they may serve the real purpose.

The next direction is to increase pensions. As of January 1, 2014, pensions will be raised in the Republic of Armenia. Here, too, there is a change: the growth rate in low pensions will be greater than in high pensions, with no rise at all in pensions 93,000 drams and over. As a result, starting this January 1, some 32,000 people will step over the poverty threshold by merely getting higher pensions.

I wish to note that the change in social policy has already been yielding positive results in 2013as we can see that the dynamics of unemployment tends to decline. The rate of poverty, too, is tending downwards. The government’s new socially-oriented State budget will significantly contribute to the implementation of this policy in 2014.

I would also like to report that the redistribution of funds in the 2014 State budget will be in favor of the welfare budget. That is, if we look from the perspective of the GDP ratio, can see net increase in the funding of the following 3 areas: education, healthcare and social services

The seventh feature of the State budget is the industrial policy, which first of all suggests that we should continue with our export-oriented industrial policy, which, as I have already mentioned, is yielding positive results. On the one hand, we can see that the growth rate of exports is quite high and, on the other hand, the economy is being diversified. The question here is what new tools may be used in 2014 to promote exports and economic diversification.
Firstly, it is the industrial fund that receives additional funding from where we carry out our obligations in relation to the private sector on the basis of the principle of cooperation between the State and the private sector by signing a memorandum and assuming mutual obligations. This trend will be continued in 2014. After allocating the needed funds from the State budget earlier this year, we are now drafting the export insurance company’s documents for Central Bank’s consideration.

This company will carry out its activities in 2014, with a view to encouraging such local enterprises, especially small and medium-sized ones as will table export-oriented programs. Resources will be available to them at lower interest rates than before. The third tool is the venture fund.

This year we have allocated funds under the public-private sector cooperation principle to build up a venture capital fund, which will also contribute to the development of the economy. I want to note here that the first venture capital fund will specialize in information technology and investment financing. Here, too, we should note that the IT sector is becoming a driving force for the economy, as we are boasting high growth rates in 2013. This trend will continue into 2014.

The next tool is the liberalization of air services. You may be aware that at the latest Cabinet sitting, we approved a corresponding program developed by McKinsey & Co. You may also know that the National Competitiveness Foundation had asked the company to develop a complex program involving the world’s best experts in this field. According to McKinsey’s estimates, the strategy of air space liberalization will bring about growth of GDP, tourism development, rise in passenger traffic and lower prices.

We believe that the introduction of this tool will enable us to improve the economic overall environment. A key feature awaiting us in 2014 is the political decision of joining the Customs Union, which means that together we will be discuss dozens of laws, international treaties in order to bring our legislation into conformity with the legislation of the Customs Union. We need to create such an environment that will stimulate our economic entities. Together with you, we will have to do a large amount of work and hold substantive debates on the matter.

I want to read out some figures about the changes in the social sector ratios. As noted above, the 2014 State budget’s key feature is that the redistribution of funds and additional revenues will be in favor of the social sphere. In particular, the social sector’s share in the GDP will be raised from 10.7 % to 12%. This is a significant change, as the share of educational spending will be up to 2.59 % from 2.38 %, healthcare - to 1.71 % from 1.59%, social protection to 6 73% from 7.63 %..

At the same time, I want to note that the scheduled rise in salaries and pensions will start on January 1. Wages in fighting agencies will be up nearly 10 percent as of January 1, while the salaries of civil servants will be raised from July 1.

Another feature in the social sphere is that we are going to raise the lump sum benefits for those households with 3 or 4 children. Today they stand at 430 thousand drams and will be up to 1,000,000 and 1,500,000 drams respectively. In particular, the amount of cash payment will be up to 500 thousand drams from 430,000 drams.

A parent capital has been established to be used in the following manner: first, purchase of apartments, since easy access to affordable housing for young families is the key to successful implementation of the birth-boosting program. In this respect, we are going to introduce fundamental changes in 2014. This will also apply to the social sphere: young families will be assisted with the purchase of housing.

These amounts may be used to repay mortgages, settle interest under mortgage programs, as well as get health insurance policies and finance any educational program applicable to their families.

Another feature of the 2014 State budget relates to public health. Overall, I must state some deterioration in the index of corruption perception, which is a great concern to the government and society. This means we need a change in the financial mechanisms to significantly reduce corruption risks. Corruption needs countering in the aforementioned two areas. In particular, we suggest introducing a new insurance mechanism in healthcare, over which I made a statement in the National Assembly, when asked by Ms. Sargsyan about the inefficiency of those mechanisms used by insurance companies.

In 2013, we tried a new approach: we gave up the public health insurance policy-related services offered by insurance companies to law enforcement agencies. Instead, we are currently using the Agency of the Ministry of Health. As a result, we managed significant savings, which, of course, can be used to improve the quality of health services. We are going to change the terms of insurance for public servants in 2014.

Another program feature is that we will significantly increase the amounts allocated to technical and vocational education. 52% more funding will be available to enforce the principle that children from disadvantaged families should receive free education in those institutions. A dramatic increase is due in the amounts allocated to children from poor families studying at higher educational institutions so that they could make tuition payments.

The student loan facility will be introduced in 2014. The ongoing program of savings bank deposits will be continued as well. The emphasis will change here: the target group will be those individuals or their peers who became disabled during the defense of the homeland. There are some 4600 such citizens on record in the Republic of Armenia.

You know that we have started working with freedom-fighters’ organizations, with four working groups established to date. These activities will be coordinated by the Minister of Defense, with the primary objective being to correct the registers of those citizens eligible for State support and public welfare programs.

Dear colleagues, my last emphasis relates to construction sector programs as they are crucial to economic growth. Here we will introduce new programs that will deal with young families, public servants with a view to ensuring that they get additional resources for housing purposes.

Dear colleagues, wrapping up my speech, I would like to note that the implementation of these programs implies close collaboration with the National Assembly, discussion of numerous regulations, adoption of new laws and introduction of new programs. We expect that joint efforts will help us effectively implement the State budget bill for 2014.

Thank you.