IMF Analysis Of Armenian Economy Sees Continuing Tax Policy Improvements

by Ulrika Lomas, Tax-News.com, Brussels

21 November 2008

The International Monetary Fund on Thursday published the conclusions of its recently completed Article IV consultation with Armenia.

Whilst observing that so far, the country's economic performance has remained strong, with the Republic expected to see another year of double-digit growth, the IMF warned that "the threat of a severe global economic downturn could undermine growth prospects".

The IMF praised the Armenian authorities for their "prudent" fiscal policy, revealing that tax collection has been "well above" expectations, driven by a surge in value added tax (VAT) revenue partly associated with high import growth.

Together with expenditure under execution, this resulted in a lower-than budgeted overall deficit in 2007 and an overall budget close to balance through July 2008.

In a statement, the IMF revealed that:

"Directors welcomed the authorities' intention to withdraw fiscal stimulus during 2008-09 in order to address current imbalances. Going forward, fiscal policy should balance the need for a countercyclical stance with the spending requirements for poverty-reducing and infrastructure spending."

"Directors therefore welcomed the authorities' strong efforts to strengthen revenues by addressing weaknesses in tax policy and administration."

"The envisaged tax reform will also bring important benefits in terms of containing the shadow economy and discouraging tax evasion; reducing significantly the cost of doing business, particularly in the export sector; contributing to levelling the playing field; and, ultimately, promoting private sector development. Directors commended the plans to strengthen the medium-term expenditure framework and debt management policy."

The review further observed that Armenia's financial sector infrastructure, regulation, and supervision have improved significantly, and financial soundness indicators do not yet indicate significant vulnerabilities.

In a review undertaken in October 2007, the IMF observed that a number of changes needed to take place within the country's tax system. These included:

• Making serious efforts to modernize tax administration, while increasing efficiency, transparency, and fairness in tax collection;
• Looking for ways to reduce monopolistic practices in the import business, with a view to increasing the pass-through of exchange rate changes to domestic prices; and
• Allowing current tax exemptions to expire, while not introducing new exemptions or tax amnesties.

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