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IMF Comments on Armenian Tax, Regulatory System

by Carla Johnson, Investors, London

03 October 2007

The International Monetary Fund on Monday issued a statement following its recent mission to reach understanding on an appropriate policy framework for the remainder of 2007 and 2008 in Armenia.

The mission was conducted in order to discuss the fifth review under the Poverty Reduction and Growth Facility (PRGF) arrangement, and to seek understandings on the 2008 budget.

Those consulted included government officials, Central Bank of Armenia (CBA) staff, business representatives, and the international donor community.

One of the key issues addressed was the need to manage large-scale foreign exchange inflows and to deal with emerging expenditure pressures associated with the planned pension increases and a potential hike in import gas prices in 2009.

Following the conclusion of the mission, the IMF observed that: "Economic performance remains strong, with double-digit growth, low inflation, and a further improvement in tax collection. The outlook for 2008 and beyond remains positive, in view of favorable investment prospects and availability of external grants."

"Import growth continues to outpace export growth, but strong inflows of remittances should dampen the impact of the appreciating dram on the current account deficit. Since foreign exchange inflows are expected to persist, to maintain external competitiveness the authorities need to keep prudent monetary and fiscal policies, and remove structural impediments to economic growth."

The IMF continued: "While the business environment has improved markedly, several recent surveys highlight important remaining challenges, particularly regarding tax administration, access to credit, and domestic competition. Addressing these shortcomings will be crucial to enhance productivity and improve Armenia's competitiveness. The entry of new banks and the acceleration in credit growth are good news in that regard."

Top priorities for future economic improvement are being put in place, and highlight a number of changes which need to take place within the country's tax system. These include:

  • Making serious efforts to modernize tax administration, while increasing efficiency, transparency, and fairness in tax collection. Discretionary means, such as the accumulation of unprocessed VAT refunds and requests for advance tax payments should not be used for achieving revenue targets.
  • 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.
  • Allowing current tax exemptions to expire, while not introducing new exemptions or tax amnesties. International experience has shown that what is crucial to encourage enterprise development is removing existing barriers and bottlenecks in order to create a level playing field and further improve the business environment.

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