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It’s Arithmetic – even in Armenia!

Souleymane Coulibaly's picture

At a time when all decision-makers around the world can think about is the state of their country’s economy, debt, spending and fiscal stability, one phrase attempts to sum it all up: it’s arithmetic.

In Armenia, it is all about arithmetic too.

Despite the volatility of Armenia’s economy in the twenty years since the country gained independence, effective government reforms led to double-digit growth rates from 2001 to 2007. That ended with the global financial crisis in 2008.

The following year, Armenia’s GDP shrank by 14 percent. In weathering that storm, Armenia incurred a high fiscal deficit and heavy levels of public debt. The country now needs fiscal consolidation as a matter of priority, but that must not come at the cost of sustained economic growth.

Simply put, the temptation to reduce public expenditure should be resisted. Armenia already spends less on health, education, public wages and infrastructure than similar income-level countries like Georgia and FYR Macedonia. Further cuts could hurt growth, weaken the country’s human and physical capital, and undermine its fiscal sustainability. At the same time, though, the government should pursue a sensible program of reform to make its current public expenditure more efficient.

The most fruitful reforms lie in the tax system. Tax collection rates are low, and need to increase. Greater effort should be made to tackle the informal economy, where people or businesses work without reporting part or all of their income, while corruption in tax collection must be reduced. Additional reforms should address the excise sector, mining, and excessive tax privileges. If properly done, revenues could increase by between 2.3 and 5.8 percent of GDP.

That’s good arithmetic, right?

Check out the latest Armenia Public Expenditure Review here.