1. UCLA Conference in Honor of Professor Armen Alchian May 6, 2006 Growth and Poverty Reduction in Armenia: Achievements and Challenges Enrique Gelbard, International Monetary Fund

2. Outline 1. Background 2. Recent developments 3. Main lessons 4. Challenges to sustain growth

3. Background Motivation Early reforms Removal of subsidies and price controls Privatization of land and enterprises Trade and foreign exchange liberalization (removal of import and export barriers, setting up of simple and low tariff rates, no restrictions on payments for goods and services) Basic tax and banking legislation

4. Recent Developments Remaining imbalances in late 1990s Poverty Weak fiscal position (large deficit and arrears) Corruption in state-owned utilities Banking sector crisis (8 banks in distress intervened by the central bank)

5. Recent Developments The 2001-04 Economic Program Boost growth through tax reforms Simplified and reduced corporate and income taxes Removal of exemptions Enhance tax legislation Disseminate laws and regulation

6. Recent Developments The 2001-04 Economic Program Restore confidence on fiscal management Clear domestic and external arrears Cut non-priority spending Increase public investment

7. Recent Developments The 2001-04 Economic Program Clean up the energy sector Privatization Deregulation New management structure in state companies Cut service to non-paying customers

8. Recent Developments The 2001-04 Economic Program Restructure the banking system Close or rehabilitate problem banks Bank bankruptcy law Stronger provisioning requirements Strengthen banking supervision

9. Recent Developments The 2001-04 Economic Program Improving the business climate Simplified licensing Sharing credit information Shortening time for enforcing court judgments New criminal code

10. Recent Developments Topped CIS countries in all reform dimensions

11. Economic indicators But tax revenues remained low

12. Economic indicators Closing the gap with the Baltics

13. Economic indicators Key factors: fiscal and quasi-fiscal consolidation

14. Economic indicators And prudent debt management

15. Economic indicators Leading to subdued inflation

16. Economic indicators And enabling strong economic growth

17. Economic indicators Poverty and inequality fell by about one-third

18. Main lessons 1.Policy package (well-sequenced reforms and right mix of policies) 2.Commitment to reforms 3.Minimal government intervention (low tax rates, no distortionary subsidies, limited assistance without guarantees) 4.Higher public investment 5.Role of the Diaspora (intermediation of investment, transfers, trade links)

19. Challenges ahead Income per capita still under US$1,000 Growth was ignited making Armenia one of the fastest low-income countries since 2001 But sustaining long-term growth will be challenging

20. Challenges ahead Fiscal framework Banking system Institutions and anti-corruption policies Regional cooperation

21. Challenges ahead Fiscal framework Revamping tax and customs administration primarily through risk-based methods Efficient provision of public services and improvements in basic infrastructure (especially in rural areas) Save for decommissioning of the nuclear power plant and funding the pension system

22. Challenges ahead Banking system Transparent bank ownership Judiciary to enforce creditor rights and collateral recovery

23. Challenges ahead Closed borders Effect large, suggests open borders could increase trade by about 40 percent But this requires resolving disagreements with Turkey and Azerbaijan Improving customs administration will also help in the near term

24. Concluding comments Armenia has made impressive progress in recent years, but the reform agenda needs to be completed and economic institutions should function adequately Key element: a renewed dose of political resolve regarding policy implementation and fighting corruption

25. UCLA Conference in Honor of Professor Armen Alchian May 6, 2006 Growth and Poverty Reduction in Armenia: Achievements and Challenges