Armenia Public Expenditure Review the Report by the World Bank 2002

1. Armenia Public Expenditure Reviewthe Report by the World Bank2002

2. Armenia: country background • 3 mln people, $2.5 bn economy • More 6 mn in the Diaspora • IDA post-conflict country • Leading reformer in the CIS • Average growth in 2000-03 – about 8%

3. Core recommendations: • Improve a revenue performance by at least 2% of GDP; • Provide for major improvements in budget accountability; • Ensure an additional reduction in budget deficit relative to the 2001 level and full elimination of quasi-fiscal deficit; • Channel incremental revenues to increase expenditures on basic health and education as well as on old-age pensions; • Accelerate sectoral and civil service reforms to ensure much more efficient use of budget resources, primarily in social sectors and public administration.

4. Innovative Technical Features • Attention to the off-budget and quasi-fiscal issues • Coverage of revenue performance • Incidence analysis of public spending in health and education • Combination of institutional analysis with the analysis of policy outcomes at both macro and sectoral levels • Emphasis on cross-country comparisons

5. The Pace of Fiscal Adjustment

6. Off-budget Grant Assistance, US$ mn

7. Scheme of QF Subsidization The rest of the world Nairit Other Energy system Budget Water Irrigation POPULATION

8. Tax collections in transition economies

9. Expenditure Ratios in Selected Economies • Under-financing of Health and Social Protection/Insurance vs. Education • Very low level of spending on Government Administration • Defense and Real sector – really too high

10. Sources of budget uncertainty: • Non-realistic budgeting • Budget is over-committed • Budget discipline is weak • High dependence on external financing

11. Budget transparency -- Quality of classification, coverage, budget accounting • Switching to the new GFS (2001) budget classification and transition to the new accounting standards • Consistency in presentation between annual budget Laws and budget execution reports • Improvements in reporting on budget arrears, guaranties, on multi-sectoral donor projects, non-cash external grants • Reporting on salaries in the budgetary sector and public employment • Transparency of operations of the Reserve Fund • Making budgetary support for public utilities more transparent • Reduce share of spending classified as “other expenditures” • Establishment of a modern system of financial reporting by state enterprises, including in education and health

12. Features of Policy Dialogue • Joint PER with the Government • Working Group chaired by the 1st Dep Minister of Finance • Local Consultants as a bridge to the senior MOF staff • Direct link to the TA programs of the IMF and DFID • Expanded consultations at the final stage of the report preparation – 8 months of editing

13. Links to the Lending/TA (1) 1. SAC5: several core conditions: • Plan to Improve Budget Management – 15 specific benchmarks • Action Plan on Tax and Customs Administration – 12 specific benchmarks • School Rationalization Program • Hospital Optimization Plan in Yerevan • Advancing Pension Reforms (collections and increase in the benefits)

14. Links to the Lending/TA (2) 2. Education Credit: funding to consolidate reforms – per capita funding, downsizing, attrition (15,000 redundant teachers) 3. IDF Grant: Expanding Treasury Capacity 4. New Stage of the DFID Program: capacity building for the MTEF

15. Specific Outcomes • Making a MTEF an annual exercise • Increase in health Spending:by more than 1/3 in 2002 vs. 2001 • Improvements in budget transparency: share of non-classified budget expenditures – from 1/3 to 12% in 2003 • Increased number of active taxpayers to the Pension Fund by more than 10% • Improved administration of excise taxes