GOAM DELAYS SPENDING IN WAKE OF ECONOMIC CRISIS

C O N F I D E N T I A L SECTION 01 OF 02 YEREVAN 000189 SIPDIS E.O. 12958: DECL: 03/17/2019 TAGS: ECON EFIN ETRD PGOV AM SUBJECT: GOAM DELAYS SPENDING IN WAKE OF ECONOMIC CRISIS Classified By: DCM Joseph Pennington. Reasons 1.4 (b/d) SUMMARY -------------- ¶1. (C) In response to a shortfall in tax collections brought on by the global economic crisis, the GOAM has instructed ministries to defer nearly 10 percent of projected 2009 spending until the fourth quarter of the year. Prime Minister Tigran Sargsian advised ministers that for the time being, the GOAM will effectively operate on a quarterly budgeting process. The GOAM likely has little choice but to use credits from Russia or the World Bank to cover this revenue shortfall. End Summary. MAJOR REVENUE SHORTFALL PROJECTED -------------- ¶2. (C) At a cabinet meeting on March 12, the GOAM decided to defer AMD 93 billion (USD 250 million) in spending, approximately 10 percent of the national budget, to the fourth quarter of 2009. Finance Minister Tigran Davtian predicted that due to the global financial crisis, the GOAM may experience a revenue shortfall of up to AMD 131 billion (USD 350 million) for the year. The GOAM's original 2009 budget had anticipated a 21 percent increase in tax revenues, while January collections were 11 percent below those of January 2008. Prime Minister Tigran Sargsian said that the GOAM will for the time being shift to a quarterly budget planning process. ¶3. (C) The GOAM claims that under these austerity measures, only "non-priority" expenditures will be deferred. Social expenditures, government salaries, pensions and defense spending will allegedly not be affected. This deferral of spending will also not affect major infrastructure projects, including construction of the new nuclear power plant and projects sponsored by the Pan-Armenian Bank. In addition, the GOAM suspended its medium-term budget planning for 2010-12, due to the unpredictability of the current economic situation. ¶4. (C) According to the GOAM announcement , Davtian informed the cabinet that current developments in the world economy do not inspire much optimism, and the GOAM should be ready to face very unpleasant budgetary scenarios. He also reported that the GOAM's decision is a response to the current economic situation and is aimed at making the budget more predictable and at improving the revenue collection process. The Prime Minister backed Davtian's recommendations, and told ministers the GOAM needs to operate in a "regime of strict economy." He urged all ministries to conserve state financial resources, and expressed the hope that in the future the GOAM will be able to avoid major spending cuts. ¶5. (C) Some ministers openly protested against the austerity measures, noting that it simply is not possible to defer funds that pay for ongoing operations until later in the year. ASSUMPTIONS UPTURNED -------------- ¶6. (C) The original 2009 state budget program was predicated on 9.2 percent GDP growth, average inflation of four percent, an exchange rate of 303 Drams per USD (the 2008 average was 305 per USD),and a budget deficit equal to one percent of GDP. The GOAM also projected increased tax revenues due to improved collection and enforcement, which it hoped would increase the tax/GDP ratio from 17 percent in 2008, lowest among CIS countries. All these assumptions have changed: 2009 GDP growth is now projected to be minus 1.5 percent, inflation eight percent, and the current exchange rate is approximately AMD 365 per USD with further devaluation of the AMD still a possibility. The budget deficit is also expected to increase as a percentage of GDP. Presidential Economic Advisor Vahram Nercissiantz told Ambassador that the GOAM still hopes to increase the tax/GDP ratio to 17.4 percent in ¶2009. HOW TO COVER THE BUDGET GAP? -------------- ¶7. (C) It is not clear how the GOAM will have funds in the fourth quarter to cover these deferred expenses. CBA Chairman Arthur Javadian told the Ambassador on March 10 that he had recently refused Prime Minister Tigran Sargsian's request that the CBA provide additional budgetary funds. While analysts expect the GOAM to use some of the USD 500 million expected from Russia to close the budget gap, that money has not yet been approved and various sources had previously identified possible uses ranging from YEREVAN 00000189 002 OF 002 infrastructure spending and SME lending to procurement of military equipment. While the World Bank's four-year USD 525 million credit could also be used for budgetary support, this year's allocation would not be sufficient to cover the gap. The IMF's USD 540 million assistance package is intended to bolster the CBA's reserves, so in principle would not be available if CBA Chairman Javadian has his way (Comment: While the CBA is nominally independent of the GOAM, it is less than independent in practice. Javadian can probably face down the prime minister, but would not be able to say no to the president. End Comment). Asked about potential sources of revenue, Deputy Finance Minister Vardan Aramian told Econoff that the GOAM is confident it will be able to cover its budgetary expenditures in the fourth quarter, but did not specify a revenue source. COMMENT -------------- ¶8. (C) We welcome the fact that the GOAM has at a relatively early stage in the financial crisis recognized the revenue downturn and attempted to reduce or delay government spending in order to close a significant budget gap. However, given the GOAM's annual budget of less than USD 3 billion--about USD 1,000 per capita--there may be little room for reductions, especially with several key areas of the budget deemed off limits. This was to be the year when the GOAM would make a major effort to bolster pitifully low social expenditures, so we are heartened that for the moment those will be retained. Unless the GOAM expects the economy to improve by the fourth quarter -- an unlikely premise -- it is difficult to see how it will restore the deferred spending without making use of the promised money from Russia or the IFIs. End Comment. YOVANOVITCH