Armenian Exporters and outsourcing providers too long had to cope with
25% handicap

2009-03-13 15:21:00

Aram Gareginyan, ArmInfo, 11.03.09

Interview with chief of party of USAID/CAPS (Competitive Armenian
Private Sector) program, Hayley Alexander

How do you estimate the decision of the government to give addressed
help to business? Are the measures applied effective enough? The
assistance rendered by the Government is giving out loans, temporary
buying of stocks and state credit guarantees. Are they all appropriate,
and is there a need of other mechanisms?

Just last week I was invited to a round table with the US Ambassador,
the IMF, the World Bank, the EBRD, and other USAID projects. The topic
was: The impact of the international financial crisis on Armenia. The
general feeling, which I share, is the government’s response has been
reasonably positive, especially with regard to the speed at which the
stimulus program has thus far been implemented. One thing I like about
the financing programs they have undertaken is they are flexible,
everything from equity investment to loans to guaranteed loans,
depending on the situation with the individual companies they are
trying to support. I think this sort of flexibility is appropriate and
ensures government money will be used more effectively than if a
one-size-fits-all program were to be adopted. On the other hand, the
problem with this sort of government financing is the private sector’s
inability to submit viable proposals for consideration. From the
initial request for proposals, I understand approximately 70 proposals
were received and only about a dozen were adequate to be short-listed.
This is the result of basic lack of capacity on the part of companies
to articulate what they want to do and how the financing will benefit
them ` and the country ` in the longer term. As a result, only a small
number of companies have been able to access the government funding,
and many more surely need it. So in the macro sense, the Armenian
government’s stimulus program has thus far failed to reach enough
companies to have a significant impact on the economy as a whole. My
suggestion is for the government to also offer strategic marketing
(planning) and proposal writing assistance to those who need it ` in
advance of submitting a proposal. This sort of help is normally best
subcontracted to local business services providers. The CAPS program,
for instance, regularly contracts with local consulting firms to do
this sort of work. The EBRD BAS (Business Advisory Services) program
does as well.

Another aspect of the government stimulus program is in need of
improvement as well. The government has yet to clearly define and
communicate an overarching, strategic vision for the financial crisis
avoidance effort and whether or not other programs are planned.. As the
situation stands, the measures undertaken appear somewhat out of
context with any broader objectives, which remain unclear.

It is important to note that one of the most positive steps to
stimulate economic health, which the government has taken recently, has
been the floating of the dram to allow its devaluation. The situation
before, with the dram artificially propped up at 305/dollar, was
absolutely untenable. The overvalued dram has been a major impediment
to cost competitiveness for most producer and service provider sectors
in Armenia. It became crystal clear something needed to be done. The
notional stability in valuation could no longer be supported due to the
sudden and dramatic drop in remittances and exports, both of which
should have weakened the domestic currency. The revaluation of the dram
should go a long way to easing the choking effect the overvalued
currency had on exporters and outsourcing providers, who too long had
to cope with a 25% handicap. Certainly information technology, tourism,
pharmaceuticals, engineering services and many others will stand to
benefit greatly from the re-valued dram. Mining will too, though
international nonferrous metals prices will need to rebound as well.

Give your view of the changes in excise duty, which had been raised in
last December and has been again lowered recently. Does Armenia need to
undertake measures with a flavor of protectionism to enhance the sales

of internal production? What reaction does the situation get from
American entrepreneurs?

Protectionist legislation is all too often viewed as the simplest way
to support domestic industries that are struggling to compete.
Unfortunately, these measures rarely succeed in the long term as
trading nations have a nasty habit of responding in kind, which then
cripple exports more broadly. Moreover, these measures tend to be
applied to industries that are not competitive, for whatever reason,
and the artificial protection simply masks the causes and prolongs the
hard choices to improve domestic company competitiveness. In the mean
time, the sheltered industries fall further behind their worldwide
counterparts who, without such protection, have been forced to become
more productive (and effective marketers). If the local producers are
offering needed goods and services, and the dram is now 20% weaker, why
not let them do their best to compete? The best of them will find a way
which in the end will strengthen each sector.

How do you assess the project of 3-year tax exemption for VAT for the
enterprises, which import equipment, on progressive basis (less than 70
mln AMD ` 1 year, 70 ` 300 mln AMD ` 2 years and more than 300 mln ` 3
years)?

I would not say the same for investment incentives as I said for
protectionist measures. In other words, investment incentives and those
measures which increase productive and value-adding capacity in the
country should be supported. These are necessary because the most
successful economies do provide investment incentives, and even more
importantly, they offer these in transparent one-stop vehicles with
clearly elucidated reasons to invest. As the situation is now,
potential investors to the IT industry, for instance, are told the
government considers IT a strategic industry ` and this is touted as a
reason to buy into Armenia. But what does this mean? How will this
proclamation reduce the investors’ costs? How will they find qualified
labor? What does labor typically cost per month? What government
programs are available for those willing to invest in R&D? What happens
if foreign investors become embroiled in a business dispute? These is
the sorts of information foreign investors need to know.

Will the financial crisis affect the process of occupation of Gyumri
technopark? What benefits will the `tenant’ companies have, and are
they effective? Are there corruption risks for Gyumri to be occupied by
large business only, or, perhaps, a risk of forbidding the SMEs to
start business in Gyumri unless they are backed by large enterprises?
Why, up to now, there hasn’t been any announced participation in the
project by private companies, both from Armenia and abroad?

The Gyumri Technopark is a large and complex program. To succeed, it
requires a public-private partnership to develop on a scale that has
not yet often been witnessed in Armenia. Government needs to seed the
program with a measure of state funding to demonstrate commitment and
incentivize interest among investors and participants. However, the
main financial injection must come from the private sector, which may
not see a return on their investment for some time. This is a
particularly difficult moment to seek such investments from companies
but the program needs to keep moving forward. The question is whether
or not this program has a champion with the time and capacity to ensure
forward motion. The lag in announced companies for participation is, as
far as I can see, simply due to the program being at an early stage in
development ` the international economic situation is not helping
matters either.

Regarding who from the private sector will participate, it is natural
that some of the larger companies will be first to express an interest,
because: 1) they have the resources to do so and 2) a core of larger
companies with the ability to engage in R&D projects is a positive
factor. I have heard nothing to indicate there will be any systemic
barriers to small company participation; moreover, the proposed design
focuses on SMEs as the primary users and beneficiaries.

Thank you