Implications of the World’s Financial Crisis for Armenia’s Economy

Implications of the World’s Financial Crisis for Armenia’s Economy

Policy Forum Armenia Occasional Report 02/08

Executive Summary

It has become clear by now that the ongoing financial crisis will have
a deep and prolonged impact on a wide range of economies. This is also
likely to be true for a peripheral economy like Armenia’s, regardless
of how isolated its relevant sectors are from the rest of the world.
While in-depth research on the causes and consequences of the crisis is
still in the pipeline and will become available as more facts are
uncovered, economists around the world agree that there is ample
evidence of a serious crisis in the making. A number of large economies
have already come under strain and applied for emergency funding from
the International Monetary Fund.

In this context, Armenia’s economy is likely to be significantly
affected. Recent developments in emerging markets suggest that the
crisis-related deterioration of the economic outlook is likely to occur
abruptly with little signs of early warning, making it important to
have pre-emptive policy response in place before things get worse.
Against this background, the report discusses the main channels through
which Armenia’s economy is likely to be affected as a result of the
adverse global conditions and offers a set of specific policy
recommendations summarized below that may help mitigate the impact of
the ongoing global crisis on Armenia’s economy.


Addressing Capacity Issue

* Establish a Crisis Prevention Team as a high-level policy advisory
body reporting directly to the Prime Minister. It should consist of
economists and financial sector professionals with strong reputation
and experience in dealing with crisis countries and include Diaspora
and possibly non-Armenian professionals.

Fiscal Policy Response

* As signs of the crisis become more pronounced, undertake a review of
the current budget envelope and reduce expenditures on items of
secondary importance (excluding social spending) and waste during
public procurement. Recourses that will have been freed in such a
way’as well as any new external financing that could be secured for
this purpose’should be used to provide exporter support and social
assistance as part of the fiscal stimulus package.

* As a counter measure to possible shrinkage of the traditional tax
base, broaden the tax base by ensuring that no privileged large company
remains outside of the tax authorities’ radar screens.

* Launch a guarantee facility to ensure uninterrupted trade financing,
particularly for critical commodities.

Monetary and Exchange Rate Policy Response

* Allow for much greater flexibility of the exchange rate by reducing
to a minimum the Central Bank’s interventions (i.e., sales of foreign
exchange) on the foreign currency market.

* Gradually reduce policy interest rate and reserve requirements, and
ease access to the Central Bank’s credit and liquidity facilities,
while carefully monitoring inflation developments. Prepare to adopt
higher rates of credit expansion specifically targeting producers,
especially exporters.

Structural Policy Response

* Create a lending facility for Small and Medium Enterprises (SMEs) to
provide targeted and easy-to-access loans to viable SMEs in need of
emergency financing.

* Take measures to reduce the monopoly price-setting powers of key
import companies.

* Undertake a review of barriers for business operations and make
credible steps to eliminate some of those barriers in the near term.

* Enhance/expand the social safety net by: (1) undertaking a review of
the poverty guidelines, and (2) targeting the next layer (i.e.,
currently on the margin) of socially vulnerable strata of population,
and (3) making credible steps toward eliminating corruption from the
existing system.

* Review and enhance existing unemployment insurance and provide
assistance to employees that have lost jobs due to crisis-related
closures and downsizings.