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Armenia and the IMF

Armenia and the IMF. Three objectives. Role of the IMF in Armenia Recent Economic Developments – why we are so positive about Armenia at the moment What are the IMF’s current concerns and policy issues Tax policy Tax administration Customs reform Financial sector development.

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Armenia and the IMF

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  1. Armenia and the IMF

  2. Three objectives • Role of the IMF in Armenia • Recent Economic Developments – why we are so positive about Armenia at the moment • What are the IMF’s current concerns and policy issues • Tax policy • Tax administration • Customs reform • Financial sector development

  3. Since Independence, the IMF has been involved at each stage of Armenia’s economic development

  4. Recent macroeconomic performance is very strong………. • Economic growth accelerated – 6 percent in 2000 to 13.9 percent in 2005. • Exports double between 2001-2003. • Inflation under 3 percent. • Strong fiscal consolidation, but with a weak tax base • External debt ratios declining rapidly

  5. Growth in double digits for five years……

  6. Inflation is under control…….

  7. External sector is improving….

  8. Current account deficit is narrowing……

  9. Tight fiscal policy……

  10. ….but tax collection is weak

  11. External debt ratios improving……

  12. Poverty indicators are declining

  13. December 2005 – IMF Board “"Armenia's economy continues to perform strongly. Prudent fiscal and monetary policies, strong external inflows, and ongoing structural reforms have contributed to double-digit growth, low inflation, and declining poverty in 2005. The outlook is for continued robust growth in 2006.”

  14. New PRGF – Four focus areas • Tax policy • Tax administration • Customs reform • Financial sector development

  15. Tax policy - problems • Core of the tax system is well designed: VAT, profit tax and Income tax • However, administration is weak. Therefore, authorities rely on 18 presumptive taxes • Simplified tax an evasion vehicle

  16. Tax policy - solutions • Limit access to the simplified tax • Reduce the number of presumptive taxes (possibly in 2007) • Unified tax code.

  17. Tax administration - problems • STS is organizationally weak • Large tax payers unit is ineffective • IT infrastructure is outdated. • Selection of tax audits is rather arbitrary • Opportunities for corruption

  18. Tax administration - solutions • Introduce risk selection for audits • Better transparency – list of the largest 300 tax payers • Strengthen large tax payers unit • Upgrade IT • Strengthen penalties for evasion

  19. Customs - problems • Governance – too much “contact” between customs officers and importers. • Trade barriers • Too much reliance on customs as a revenue raising agency • Widespread use of transactions prices – contrary to the WTO. • Large number of VAT exemptions at the border

  20. Customs - Solutions • Direct trader input • Strengthen the revenue raising capacity of STS. • Eliminate VAT exemptions

  21. Financial sector - problems • Limited role in the payments system • Loans as a percent of GDP is low • Interest rate spreads are high • Fragmented banking system

  22. Financial sector - solutions • Bank supervision strengthened • Better collateral laws • New corporate governance procedures • Deposit insurance

  23. Concluding remarks….. • 30 months left of this program. • Hopefully, this is an exit program from our low income facilities. • Continued long term relationship with Armenia – technical assistance, policy advice and surveillance.

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