Running on All Cylinders?: IMF says Armenian economy needs new engine

Is it time to replace the engine of the Armenian economy? The International Monetary Fund (IMF) believes it is. The Armenian government, meanwhile, says it just needs a tune up.

On July 26, the Armenian International Policy Research Group (AIPRG) in cooperation with the IMF organized a panel discussion on the subject of “Armenia’s Economic Policy: The Road Ahead”. IMF Resident Representative in Armenia Guillermo Tolosa compared the Armenian economy to a motorcar that was rolling freely in 1998-2008 until it encountered storm gusts and ran off the road.

The Government and the Central Bank, with the help of the IMF, got Armenia out of the ditch, but the engine suffered damage that now needs attention.

“The new policy should also address [the need for] a new engine, in this case microeconomic policy,” said the IMF representative.

According to the IMF expert, the overhaul would require: an environment where businesses thrive, attract more workers, pay higher wages, where a good business climate is created, where there is a high-quality internet access, streamlined bureaucracy and tax payments, there is no abuse of power, there are clear social programs with guaranteed expenditures.

In response (and continuing the motorcar metaphor), Armenian Economy Minister Nerses Yeritsyan noted that when there are problems with the engine, the question to discuss is whether it should be replaced or repaired. He said that the Soviet Zhiguli car (known more as Lada abroad) breaks down on U.S. roads as frequently as a Mercedes breaks down on Armenian roads.

Thus, a metaphorical dispute about ways of the country’s economic development was continued in Armenia. International financial organizations, which supported the economy during the critical period, insist that Armenia should accomplish a complete transition to market economy in which there are no monopolies and oligopolies, there is fair competition and black market is minimized. In comparing itself to a Lada, the Armenian government admits that the economy moves along the post-Soviet way, and it is beyond its ability to carry out the proposed reforms. Thus, the government admits impotence or unwillingness to deal with monopolies, force big business to pay taxes, stimulate small businesses and promote exports.

According to Yeritsyan, it is states with knowledge-based economies that will be competitive in the 21st century. The minister thinks the priorities of the Armenian economy are the development of exports, innovation, promotion of business, ensuring the emergence of enterprises based on high technology, and only in the end, almost imperceptibly a structural reform of the economy. But it is this requirement of reform that international organizations advance as the principal one.

The IMF had extended more than $800 million in credit to Armenia for the implementation of anti-crisis measures. Armenia’s foreign debt as March 31, 2010 amounted to about $2.98 billion, which was an increase by 66.6 percent over the size of the external state debt reported for the same period in 2009. The amount of Armenia’s foreign debt saw a sharp increase due to international loans, including those received from the IMF ($823 million), the World Bank ($545 million) and Russia ($500 million).