Since the last two decades, Armenia has steadfastly pursued economic and social reforms to build a sophisticated market economy and address poverty. Two key challenges were to direct the fruits of steady growth towards fighting poverty and improving the quality of governance and public services. Also essential was sharpening economic competitiveness by deepening second-generation reforms—such as utility regulation, expanding financial intermediation, and improving the investment climate. The most recent challenge has been to alleviate the impact of the international recession and minimize its effects on poverty.
To address these challenges IDA has financed a series of five structural adjustment credits, four poverty reduction support credits, and a recent development policy credit since the mid-1990s. IDA’s focus was on: (i) improving governance in the financial sector; (ii) enhancing business competitiveness; (iii) stimulating farm incomes, and (iv) decentralizing education and health services to improve their quality and focus on the most vulnerable. Key policy reforms were complemented by investment projects directed at building schools and clinics, rural roads and irrigation canals, highways, and small-scale infrastructure in communities.
Most recently, IDA has helped design and finance a strong counter-cyclical response to the global economic crisis.
During the past decade, Armenia has grown spectacularly—by an annual average of more than 10 percent—and poverty rates have plunged. More than half the population was below the poverty line a decade ago. Today less than a quarter of the population is poor.
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Macroeconomy improved. Growth was supported by low fiscal deficits (ranging around 2 percent of GDP) and plunging external debt and inflation remained low. This created the fiscal and debt space for a pronounced counter-cyclical boost when the need arose in 2009.
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Fiscal-management capacity improved. Budget management improved with strict adherence to a medium-term expenditure and tax framework. A four-year poverty reduction strategy supported a shift in priorities for social spending.
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Tax base expanded. The tax base was broadened and the tax-to-GDP ratio rose. Similarly, financial intermediation grew rapidly, banks were well capitalized and little exposed to external funding risks, and supervision and capital markets developed impressively. The revenue-to-GDP ratio rose by 3 percent since 2004 to reach 17 percent in 2009?.
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Business landscape improved. With sharply lower telecommunication costs, improved utilities regulation and privatization, removal of all arrears in payments and cost-recovery tariffs for services, businesses were better served. Three mobile phone companies compete now in place of a monopolistic company three years ago.
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Property rights improved. Property rights were improved through establishing a framework for secured transactions and reforms in corporate governance. Progress was made in improvements in the business environment, although critical governance problems remain in revenue collecting agencies and competition in importing and distribution for key products.
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Real spending in education, health, and social spending rose sharply. This increase of more than 15 percent annually especially benefited the poor. The quality and usefulness of health and education services rose markedly. The targeted social benefit package was recognized for its effectiveness.
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Effect of crisis mitigated. When the global economic crisis and retraction in international trade and capital flows imposed a severe cost on Armenia’s economy—with plummeting GNP, a collapse in fiscal revenues, and a rise in poverty, IDA designed and financed a strong counter-cyclical response, which featured emergency job creation, credits for rural roads and irrigation, and expanded credit for small and medium businesses. Current policies aim at mitigating social vulnerability amidst the global downturn and sharpening Armenia’s competitiveness to bolster the foundations for renewed growth.
IDA provided US$88.5 million in a series of four poverty reduction credits. It also attracted parallel financing from the Dutch Government of about US$10 million.
IDA mobilized technical assistance from Japan of about US$4 million and spent US$2.3 million of its own to provide project preparation and technical assistance. Furthermore, IDA transferred know-how and expertise to the country in economic and social management.
With these credits, the government and IDA initiated a process of donor collaboration to bring focus and coherence to donor assistance in Armenia. These collaborators included the UK’s Department for International Development, the US Agency for International Development, the Dutch Government, agencies of the German Government, and the UN.
IDA has embarked on a series of three further development policy credits, the first of which was approved by the World Bank’s Board of Executive Directors in July 2009. These credits support deepened reforms in the areas identified by the poverty reduction credits, such as governance and competitiveness, identify new areas such as reforms in the mining fiscal and environment regimes, and provide funds for budgetary spending. These reforms should help the country to engage competitively in a recovering world economy.
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