Final Tranche of Credit from the Eurasian Fund for Stabilization and Development Disbursed to the Republic of Armenia

07 December 2017

Moscow, December 7, 2017. The Council of the Eurasian Fund for Stabilization and Development (EFSD), an entity managed by the Eurasian Development Bank (EDB), has approved disbursement to the Republic of Armenia of the third tranche of EFSD financial credit in the amount of US$ 100 million, as the Republic of Armenia has met all conditions precedent to such disbursement. The funds were transferred to the account of the Ministry of Finance of the country on December 6, 2017. Including the previous tranches, the country has received the full amount of the US$ 300 million credit extended to support the Reform Program of the Republic of Armenia (the "Program") in 2015-2017.

The key reforms supported by the EFSD Program are designed to boost efficiency of public finance governance, improve investment climate, and liberalize Armenian energy market. Other ongoing reforms implemented within the framework of the Program include dedollarization of the economy, and building up public trust in the national banking system.

This year, Armenia has seen significant budget consolidation. At the end of the first 9 months, state budget deficit amounted to 2.5% of the GDP vs. 4.1% of the GDP for the first 9 months of 2016, the improvement being exclusively attributable to reduction of current expenses. This was to a large extent facilitated by compliance with one of the conditions precedent to disbursement of the third tranche, specifically, the condition imposing a limit on the budget deficit net of external credits to finance special-purpose infrastructure programs, which brought that indicator down to 1% of the GDP vs. 2.4% of the GDP. Anticipated 2017 year-end deficit will be about 3.6% of the GDP vs. 5.5% of the GDP the year before.

Improvement of the fiscal position enabled a considerable deceleration of public debt growth. Over the first 9 months of this year, government debt has increased by 0.4 p.p. to 51.8% of the GDP, compared to an increase of 3.3 p.p. to 47.4% of the GDP over the first 9 months of 2016, and a 7.7 p.p. increase over the entire year of 2016. Pursuant to draft Law on State Budget of the Republic of Armenia for 2018, the state budget deficit should not exceed 2.7% of the GDP.  

Harmonization of the existing regulations with Tax Code requirements has paved the way for a full-scale enactment of the Tax Code as of January 1, 2018.  With EFSD financial assistance, the government of the country has reviewed 95 statutory instruments. According to EFSD estimates, enactment of the Tax Code will yield a cumulative increase of tax revenues by 2 p.p. in 2017-2021. Contributing factors include higher rates for certain taxes, including excises and royalties, fewer tax exemptions, and enhanced tax administration.

The government procurement process has been significantly upgraded to remove conflicts of interest. The new version of Law on Procurement and government resolution On Organization of Procurement formalize the concept of "affiliated persons", prohibit concurrent involvement of such persons in the procurement process, and stipulate mandatory publication of no-conflict-of-interest notices on the official public procurement web site. Another factor which increases efficiency of the public procurement procedure is wider use of electronic tenders. At the end of September 2017, competitive bidding procedures completed in electronic form accounted for 95.2% of all public procurement contracts not containing any state or business secrets (2016: 91.4%; 2015: 83.2%).

Steps have been taken to liberalize the energy market and minimize the risk of market players incurring mutual debts. In July 2017, the Government of Armenia approved a forward plan for liberalization and development of interstate trade in the national energy market until the year of 2020. The plan envisages separation of delivery and distribution functions (enabling arrival of external energy suppliers, including foreign suppliers), authorization of major consumers to enter into direct wholesale purchase contracts with energy producers, and creation of an electric power market operator to regulate activities of all its participants. Measures to improve methods used to project future energy production volumes and tariff changes, and thus enable a more flexible response to fluctuation of generation costs, as implemented under previous tranches, facilitated early repayment of the US$ 50 million debt incurred by the distribution network before energy suppliers in 2014-2015. The sector has had no overdue debts since August 2016, which has greatly improved its investment appeal. In particular, in 2017 Electric Networks of Armenia signed agreements with the Asian Development Bank and the European Bank for Reconstruction and Development for extension of credits (not secured by state guarantees) for a total of US$ 160 million, with the proceeds to be directed towards further modernization of the sector.   

Measures designed to increase the country's investment appeal also include a streamlining of the national legislation and implementation of a series of reforms to enhance ease of doing business. The national Parliament was presented with amendments to Law on Foreign Investments designed to reinforce investor protections by extending exclusive rights safeguarding foreign investors against investment law changes that weaken their positions, giving foreign investors the possibility to directly file for international arbitration prior to completion of court proceedings started in the national judicial system, and fully implementing the most favored nation regime. The set of amendments that the government proposes to make to Law on Free Economic Zones envisages harmonization of the national legislation with applicable EAEU requirements, and clarifies the rights and obligations of the parties subject to lessons learnt in the course of creation and operation of two pilot free economic zones in Armenia. The purpose of draft amendments to Law on Statutory Instruments is to secure broader involvement of the business community and the general public in drafting statutory instruments by legislating mandatory public discussion of all such instruments. Steps have been taken to reduce existing regulatory burden by simplifying business procedures, inter alia, due to easier electronic access to government services, increasing public awareness of regulatory procedures by creating information web sites, and facilitating private sector access to credit resources by establishing a register of movable assets.

The level of financial dollarization has been reduced, and public trust in the national banking system has been increased, as a result of adoption by the Central Bank of Armenia ("CBA") of several statutory instruments and amendments to Law on Deposit Guarantees. The share of foreign currencies in the deposit base has gone down from 71.6% at the end of 2014 to 62.4% at the end of September 2017; during the same period, dollarization of credits has decreased from 66.6% to 62.7%, largely due to CBA policies aimed at increasing accessibility of dram-denominated credits and hiking interest rates on dram-denominated deposits. By the end of September 2017, deposit base was up by 16.7% year-on-year driven by amendments to Law on Deposit Guarantees which increase the amount of guaranteed deposit, simplify the refund procedure, and offer client deposit protection tools to be activated in the event of bank mergers.

The final report on realization of the EFSD financial credit supporting the Program will be prepared and submitted to the Council of the Fund in the first quarter of 2018.

Additional Information:

The Eurasian Fund for Stabilization and Development (EFSD) in the amount of US$ 8.513 billion was established on June 9, 2009, by the governments of the same six countries. The objectives of the EFSD are to assist its member countries in overcoming the consequences of the global financial crisis, ensure their economic and financial stability, and foster integration processes in the region. The EFSD member states authorized the EDB to act as the Fund Manager, and signed a Fund Management Agreement with the Bank.

The Council of the Fund represents the interests of Fund member states in mobilization, placement (investment) and utilization of Fund resources, and in all other matters related to Fund activities.  The Council of the Fund currently includes the following members:

·         Anton Germanovich Siluanov – Chairman of the Council of the Fund, Minister of Finance of the Russian Federation

·         Bakhyt Turlykhanovich Sultanov – Minister of Finance of the Republic of Kazakhstan

·         Adylbek Aleshovich Kasymaliev – Minister of Finance of the Kyrgyz Republic

·         Abdusalom Karim Qurboniyon – Minister of Finance of the Republic of Tajikistan

·         Vardan Saribekovich Aramyan – Minister of Finance of the Republic of Armenia

·         Vladimir Viktorovich Amarin – Minister of Finance of the Republic of Belarus

Eurasian Development Bank (EDB) is an international financial institution founded by Russia and Kazakhstan in January 2006 to promote development of market economies of its member states, and secure their sustainable economic growth and expansion of their mutual trade and economic ties. The charter capital of the EDB is US$ 7 billion. The member states of the Bank are the Republic of Armenia, the Republic of Belarus, the Republic of Kazakhstan, the Kyrgyz Republic, the Russian Federation, and the Republic of Tajikistan.

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