Armenian government switches over to manual control of economy

Below is an exclusive interview by RA Prime Minister Tigran Sargsyan to the ARKA News Agency.

Question: Mr. Sargsyan, what are your macroeconomic forecasts for Armenia for this year?

Answer: The economic situation is undergoing radical changes almost every day. In this aspect we can observe “time compression”, and I consider making any forecasts to be a thankless job.

Several months ago the Armenian Government switched over to the so-called “manual control” of economy, and decisions are based on live data, not on forecasts.

A scenario-based approach is the best instrument now. The Government elaborated a number of scenarios and will implement measures based on them. We also switched over to quarterly budget planning, which implies austerity in on-budget expenditures.

Question: What are the primary measures necessary to minimize possible losses from the financial and economic crisis?

Answer: In short, the following three factors are the basis of Government’s anti-crisis program: large-scale infrastructure projects; selective support of the exporters, import-replacing Armenian enterprises using domestic raw materials, which have the largest number of jobs; support of small-to-medium businesses.

Question: May any part of the international funds be directed to the resolution of social problems?

Answer: All the projects to be implemented under the Government’s anti-crisis program will indirectly facilitate the resolution of social problems. New jobs will be created, the enterprises affected by the global economic crisis will receive assistance, etc.. Moreover, the Government has repeatedly stated that social commitments are our top priority.

Question: What can be done for more effective use of the factor of the Armenian Diaspora and for consolidating the Armenian world’s potential for Armenia’s economic development?

Answer: We have for some time been working in the new area of the Armenian world, which has no specific territorial boundaries. Every Armenian, irrespective of the country of residence, must feel at east in the Armenian world. In this area we have created institutions supposed to reveal the all-Armenian potential. I am speaking of the National Competitiveness Council, National Competitiveness Fund, All-Armenian Bank. In this context, the meeting with the Russia-based Armenian businessmen was one of the steps to combine efforts to create an integral all-Armenian world.

All of us must realize that it is only teamwork that can produce a potent synergic effect. The Diaspora has a great intellectual potential, and its application in Armenia may ensure a serious economic breakthrough. My task at the meeting with the Armenian businessmen was to inform them of our view of Armenia’s future, present the Government’s anti-crisis program to them, explain the Government’s approach to numerous problems and present the opportunities for cooperation.

Question: What effect will the Central Bank’s return to the floating rate regime and the devaluation of the national currency have on medium- and long-term pricing in Armenia? Was the return a timely measure?

Answer: Since 1993 Armenia had been implementing a floating rate policy. It was an objective approach proceeding from the fundamental economic conditions. Temporary departure from this policy was necessary to ensure the stability of the financial system amid the global crisis, and that was the right decision.

To cushion the transition from revaluation to devaluation of the national currency we had to milden the shocks both on the professional market sections and for ordinary citizens. Other countries’ experience shows that a period of financial stability is a necessity, otherwise there may be such undesirable consequences as outflow of capital and deposits, lower-quality credits, which, in the long run, costs more both for the state and for the private sector.
 
This complicated issue was discussed at a most high professional level, including experts of the International Monetary Fund (IMF). As a result, our strategy received a high appraisal on the part of the international community.
The exchange rate exerts essential influence on the prices of imported products, but it is only one of the factors influencing pricing in Armenia. Medium- and long-term pricing should be considered as a whole.

Among the key pricing factors are now the economic activity level and demand for products and services, both of which are gradually decreasing as a result of the global crisis thereby exerting pressure on prices. It is to temper the impact of the crisis that our anti-crisis program is supposed to do.

Question: Does the Armenian Government consider the possibility of “a tax holiday” for small and medium-sized enterprises?

Answer: I have mentioned that we have switched over to “manual control” of the economy, which means a package of measures to improve the business environment, especially for small and medium-sized enterprises. In practice this means the following:

- increase in crediting with the assistance of the World Bank, European Bank for Reconstruction and Development (EBRD), Asian Bank, as well as government credits to the amount of 15bln AMD

- 3-year VAT deferral for the import of equipment

- increasing the untaxable base up to 58.3mln AMD against the current 3bln AMD to calculate the VAT

- recognizing the expenses proved by cash-register checks to the amount of 36mln AMD against the current 1mln AMD

- setting fixed taxes for small hotels and restaurants

- abolishing mandatory accounting for small and medium-sized enterprises with a turnover of no more than 100mln AMD

- simplified reporting for small and medium-sized enterprises

- dissolving the commissions receiving enterprises’ fiscal reports  

- abolishing monthly VAT reports for enterprises with a turnover of no more than 100mln AMD against the current 60mln AMD

We have neither right nor are we able to cancel taxation now that the social expenses constitute a lion’s share of the on-budget expenditures.

Question: What economic model should Armenia follow in this changing world?

Answer: At present, amid the global economic crisis, it is most difficult to speak of commitment to any well-known economic model. We are likely to observe new economic model emerge during the coming decade – the world will never be the same as it was before, and it is also most dangerous to discuss anything on the basis of old models.

The calls for combining efforts to oppose the global crisis made by representatives of some countries do not appear to be a success yet.  And we can even see that individual countries are trying to resolve their problems by applying the Keynesian model.

Specifically, the recent evens, such as US President Barack Obama’s removal of the ban on cloning and unique transplantations imposed by his predecessor George W. Bush, remained unnoticed. They are the first swallows of the new world.

It is scientific and technological progress that is a key factor of the changing economic process, and we have no right to ignore this fact. This means that we must first of all develop the innovation component of our national economy.–0