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Acronyms AAA AR BTO CAE CAS CEM CIS DAC DFID EBRD ECA ECSSD EDP ERP ESW FSU FIAS GDP GOA IBRD IDA IFAD IFC IFIS IMF JBIC Kfw LIL MDG MTEF NK ODA OECD OED OOF PER PRSP PSD SAC '
SATAC SCADA SIF SME SOE TA USAID WB WTO
Analyhcal and Advisory Services Armenia Railways Back to Office Country Assistance Evaluation Country Assistance Strategy Country Economic Memorandum Commonwealth of Independent States Development Assistance Committee Department for International Development (UK) European Bank for Reconstruction and Development Europe and Central Asia Environmentally and Socially Sustainable Development Enterprise Development Project Earthquake Reconstruction Project Economic Sector Work Former Soviet Union Foreign Investment Advisory Service Gross Domestic Product Government of Armenia International Bank for Reconstruction and Development International Development Agency International Fund for Agricultural Development International Finance Corporation International Financial Institutions International Monetary Fund Japan Bank for International Cooperation Kreditanstalt fiir Wiederaufbau (German Agency for Reconstruction) Learning and Innovation Lending Millennium Development Goal Medium Term Expenditure Framework Nagorno Karabakh Official Development Assistance Organization for Economic Co-operation and Development Operations Evaluation Development Other Official Flows Public Expenditure Review Poverty Reduction Strategy Paper Private Sector Development Structural Adjustment Credit Structural Adjustment Technical Assistance Supervisory Control and Data Acquisition Social Investment Fund Small and Medium Enterprises State Owned Enterprise Technical Assistance United States Agency for International Development World Bank World Trade Organization
~~
Director-General, Operations Evaluation Mr. Gregory K. Ingram Director, Operations Evaluation Department Mr. Ajay Chhibber Senior Manager, Country Evaluation & Regional Relations Mr. R. Kyle Peters Task Manager Mr. Jorge Garcia-Garcia Primary Author Mr. Elliott Hurwitz
Contents
Preface ............................................................................................................................................. i Summary ....................................................................................................................................... iu ... 1 . Purpose and Background . . Descnption .......................................................................................................................... 1
Economic Development ...................................................................................................... 1 Overall Progress and Development Challenges .................................................................. 5
2 . World Bank Assistance to Armenia. 1993-2002 Strategy. Relevance. and Lending ...................................................................................... 7 Analytical and Advisory Services ..................................................................................... 12
Aid Coordination ............................................................................................... : .............. 14 Partnerships ....................................................................................................................... 14
3 . Assessment of Development Impact of Country Assistance Macroeconomic Stability .................................................................................................. 16
Infrastructure and Agriculture .......................................................................................... 17 Poverty Alleviation and Human Development ................................................................. 16
The Public Sector .............................................................................................................. 19 Private Sector Development and Financial Sector Development ..................................... 20 Overall Outcome o f the Country Assistance Program ...................................................... 22 Institutional Development Impact .................................................................................... 23 Sustainability .................................................................................................................... 23
4 . Contributions to Outcomes Borrower Performance ...................................................................................................... 25 Bank Performance ............................................................................................................ 25 Contribution o f Other Partners ......................................................................................... 26 Impact o f Exogenous Factors ........................................................................................... 27
5 . Lessons and Recommendations ............................................................................................ 28
Boxes 2.1 Best Practice. “Growth Challenges and Government Policies in Armenia. ”
February 2002 ................................................................................................................... 13
Figures 1.1
1.2 1.3 2.1
Fiscal Adjustment L e d to a Sharp Drop in Inflation and. combined with Reforms. to a Steady Growth o f GDP ....................................................................................................... 2 Governance Indicators for Armenia. FSU. and Eastern Europe Countries ........................ 3 Balance o f Payments 1993-2003 ........................................................................................ 4 Average Annual Commitments to Armenia. by CAS Period ............................................. 8
Contents (cont.)
Tables 2.1 2.2 2.3 3.1
Lending (Disbursements). in U S $ million. FY93-02. by Sector ........................................ 8
Country Strategy Objectives. and Proposed and Actual Lending ..................................... 10 Armenia. GDP and Agricultural Product .......................................................................... 19
OED Performance Ratings (by number o f projects) ........................................................... 9
Annexes Annex A : Statistical Annexes ..................................................................................................... 29 Annex B : L i s t o f Persons Interviewed ........................................................................................ 45 Annex C : Management Act ion Record ....................................................................................... 49 Annex D : Guide to OED’s Country Assistance Evaluation Methodology ................................. 51
Attachments 1 . 2 .
Comments from the Govemment .................................................................................. 55 Chairperson’s Summary ................................................................................................ 61
Preface
This evaluation provides an independent assessment o f the role o f World Bank assistance to Armenia during the period 1993-2002. The basis for the Country Assistance Evaluation (CAE) consists o f Operations Evaluation Department (OED) project assessments, sectoral reviews, and interviews with past and present Government officials, as wel l as Bank and International Monetary Fund (IMF) staff at headquarters and in Armenia. Project assessment reports have been completed for six completed loans. In addition, a sectoral review o f infrastructure and energy was prepared. An OED mission visited Armenia during March 2003, and also met with staff o f European Bank for Reconstruction and Development (EBRD) in London. OED received comments from the World Bank Governor for Armenia, as wel l as from the Minister o f Finance and Economy, which are in Attachment 1. Additional comments were received from the Central Bank.
This report was prepared by Elliott Hurwitz, consultant to OED. Jorge Garcia- Garcia (OEDCR) was the Task Manager. Poonam Gupta (OEDCR) and Luca Barbone (ECCU2) peer-reviewed the report. Comments from Rene Vandendrits are gratefully acknowledged. Maria Claudia Pachon and Danuta Danilova provided research assistance. Tirsit Dinka and Janice Joshi provided administrative support.
... 111
Summary
1. with many distortions from the command economy. In addition, the country engaged in a conflict with neighboring Azerbaijan over Nagomo Karabakh. The loss o f traditional Soviet markets, severe shortages o f foreign exchange, an enormous increase in imported energy prices, and a sharp reduction in credit a l l combined to produce a drop in GDP o f more than 50 percent between 1990 and 1993. The collapse o f the economy precipitated an unprecedented fiscal crisis and hyperinflation.
2. Fortunately, the reform process started early. In 1991-92, prior to Intemational Financial Institution (IFI) involvement, the government began price liberalization and deregulation, as well as land reform. By 1994 a ceasefire was reached with Azerbaijan and a more comprehensive stabilization and reform program was initiated with support from the intemational community. The reforms comprised pol icy actions on many fronts, including elimination o f wage and price controls, creation o f a liberal trade regime, and privatizations, as wel l as improvements in areas such as the social benefits system, education and energy availability. The process was especially rapid in the early years but slowed as more difficult reforms had to be addressed. Two areas where much st i l l needs to be done are the environment for private sector development and public sector reform.
3. starting in 1994, the economy recovered steadily with the pace accelerating during the past three years. By 2002, GDP had reached 84 percent o f i t s 1990 level and i s likely to have reached more than 90 percent o f that level by 2003. Per capita income i s now close to the threshold for IDA financing. The incidence o f poverty has declined slowly, from 55 percent in 1996-98 to 5 1 percent by 2002, but remains high.
4. assistance, both financial and in the form o f Analytical and Advisory Services (AAA). During 1993-2000, net official development assistance to Armenia averaged annually about 11 percent o f GDP, with the Bank accounting for one quarter. The Bank committed a total o f US$700 mi l l ion during FY93-02, for 29 projects. OED has evaluated 14 o f these projects, and the record is quite good: 12, or 86 percent, were found to have had satisfactory outcomes, exceeding the Europe and Central Asia (ECA) Region and Bank averages. Among the most noteworthy findings were high relevance, substantial institutional development impact, generally excellent linkages between Economic Sector Work (ESW) and lending, and mutually supportive investment and adjustment operations.
5. Over the decade, the Bank's assistance, in tandem with the IMF and other donors, has made a major contribution to the maintenance o f macroeconomic stability, which facilitated the economic recovery and growth. The resulting reduction in poverty has been limited thus far, but the Bank has had a significant impact through its AAA and lending in helping to establish a new social benefit system, well targeted to the poor. The Bank also had a major impact on the increased availability o f energy. In transport and agriculture the Bank's assistance likewise made important contributions-rehabilitation o f the road network and the irrigation system-but mechanisms are s t i l l lacking to ensure adequate funding for transport and irrigation maintenance. The Bank's program had some success in private sector development, especially in the area o f privatization, but
Independence in 199 1 and the dissolution o f the Soviet Union left Armenia saddled
The economy's response was swift. Stabilization was achieved by 1995 and,
Since joining the Bank in 1992, Armenia has been the recipient o f substantial Bank
i v
much remains to be done to improve the business environment, especially in the promotion o f small and medium job-creating enterprises. While laws and regulations affecting the business environment had been established early on, the Bank did not focus o n enforcement and implementation until 2001, thereby sacrificing several years o f potential progress. In public sector reform, the Bank undertook some analytical work, but did not fo l low through consistently. O n balance, considering al l o f the above, OED rates the outcome o f the Bank’s assistance strategy as satisfactory.
6. Many aspects o f the Bank’s assistance program have contributed to the establishment o f a market economy. Furthermore, the Bank has played an important role in areas such as the development o f a regulatory framework, legal and judicial reform, and the creation o f means-tested poverty benefits. The Bank’s overall contribution to institutional development i s rated as substantial.
7. The risks o f regional instability remain high, which adversely affects the investment climate. Continued dependence on international assistance implies that external sustainability i s not assured. High poverty combined with limited budgetary resources could lead to further social tensions. High growth rates may be difficult to sustain: growth has been focused in a few capital-intensive sectors and not yet supported by large-scale entry o f new firms. A number o f factors, however, are working to reduce risks. The benefits o f stabilization are widely recognized. External financial assistance derives f iom diverse sources. Social sector reforms are seen as having bettered the targeting o f scarce resources, and the improvements in the supply o f electricity are a highly visible contribution to the quality o f life. Balancing the risks and the benefits suggests that the sustainability o f the Bank’s assistance program should be considered likely.
The benefits o f Armenia’s development progress are subject to a number o f risks.
8. official assistance and AAA can be quite successful if they are in support o f appropriate policies and institutional reform. But, government commitment to sound economic policies and institutional reforms remain key to successful development outcomes. This evaluation recommends that the future Bank assistance program focus in the fol lowing areas: First, prepare a strategy for an eventual transition to IBRD lending. As support to Armenia gradually shifts to IBRD lending, a potentially smaller program should focus on poverty-related activities, such as the social and rural sectors. Second, continue focusing on the environment for private sector development. Generating job-creating growth to reduce poverty and expanding exports to reduce the large trade deficit are essential to sustaining progress in Armenia. Third, follow through on supportingpublic sector reform. A stronger public sector i s key to improving the climate for private sector development and social services.
The Bank’s assistance program in Armenia demonstrates that comparatively high
Gregory K. Ingram Director-General
Operations Evaluation
1
1. Purpose and Background
1.1 This report evaluates the Wor ld Bank assistance program to Armenia during the period 1993-2002 (“the decade”). The Country Assistance Evaluation (CAE) examines whether: (a) the objectives o f Bank/IDA assistance were relevant; (b) the Bank’s assistance program was effectively designed and consistent with its objectives; and (c) the Bank’s program achieved its objectives and had a substantial impact o n the country’s development during this period. Examining these questions allows the C A E to draw lessons and recommendations for future Bank assistance. In preparing the evaluation OED interviewed present and past Government officials, World Bank staff, staff o f partners involved in Armenia, and members o f c iv i l society; Annex B contains a list o f the people interviewed. Annex D describes the methodological approach.
Description
1.2 29,800 square kilometers and a population o f 3 million. Turkey lies to the west, Georgia to the north, Iran to the south, and Azerbaijan to the east. The borders with Turkey and Azerbaijan are currently closed. The nation has few natural resources and generally mountainous land: i t relies heavily on imports for its food and most crops are grown o n irrigated land. I t s per capita income in 2002 i s estimated at US$790 (Atlas method). In 1988, a devastating earthquake struck Armenia, killing about 25,000 people, leaving homeless another 500,000 and destroying parts o f i t s fuel pipeline and industrial plants.
Armenia i s a small, landlocked country in the south Caucasus with an area o f
Economic Development
1.3 Upon independence in 1991, Armenia was saddled with the distortions typical o f a centrally-planned economy. Prices and wages were set administratively, trade and distribution were conducted by government monopolies, and most enterprises were state- owned. Because activity was mainly directed from Moscow, government and enterprise capacity was quite limited. Armenia was highly industrialized and specialized in high technology sectors such as chemicals, electronics, software, and engineering, whose production was exported to the other Soviet Republics, making Armenia vulnerable to events elsewhere. Human capital was highly-developed, income equitably distributed, and most social indicators (life expectancy, literacy) high; business skills, however, were in short supply.
1.4 between 1990 and 1993, but some important reforms in 199 1 and 1992 prevented a larger decline. The loss o f traditional Soviet markets, severe shortages o f foreign exchange, an increase in imported energy prices to international levels, and a sharp reduction in credit caused a fa l l o f more than 50 percent in GDP between 1990 and 1993, according to official World Bank (WB) data. Armenia was also engaged in a conflict with Azerbaijan over Nagorno Karabakh (NK), an ethnic Armenian enclave inside Azerbaijan, closing some o f Armenia’s trade routes. Softening the impact o f these shocks were important reforms in prices, land, and housing taken in 1991 and 1992, prior to membership in the IF Is . The Government freed the prices o f most commodities between early 1991 and mid
Domestic and external shocks after independence caused a sharp fa l l in output
2
1992, with the exception o f bread and some public services. The Government also transferred property rights on land to farmers,’ deregulated marketing channels for agricultural products, and liberalized retail and producer prices for agricultural goods. Early steps were also taken to privatize most housing.
1.5 refugees entered the country as a result o f the ongoing conflict. The border with Azerbaijan was closed, which stopped most supplies o f energy and other goods. The border with Turkey was also closed, and the main routes from Georgia were subject to interdiction by bandits and Georgian separatists. Continuing economic implications also include: negative effects on perceptions o f potential foreign investors; transport costs around 30-50 percent higher than if borders were open; energy costs around 25 percent higher than if borders were open; and high defense costs.’ The country was also still
Despite these early reforms, Armenia’s situation in 1993 was desperate. Many
dealing with the effects o f the 1988 earthquake. For example, as a precaution, the country’s nuclear reactor was shut down, reducing electricity supplies by a third. The 1992/93 winter was one o f the coldest in the century. The lack o f energy supplies shut down industries and cut o f f heating for homes, leading to high rates o f mortality among children and older people. The collapsing economy led to collapsing fiscal revenues, precipitating a fiscal crisis. The budget deficit reached 55 percent o f GDP in 1993, and a reliance on Central Bank financing led to inflation o f 5,000 percent. Humanitarian grain shipments were required to prevent starvation.
1.6 In M a y 1994, a ceasefire agreement was reached with Azerbaijan over NK, and a comprehensive reform program was initiated with support from the intemational community (IMF, World Bank and other donors). A fiscal stabilization program was put in place, through expenditure cuts and an overhaul o f the tax system (see Figure 1.1). Inflation began to decline sharply.
Figure 1.1: Fiscal Adjustment Led to a Sharp Drop in Inflation and ...
=I T 6o 6.000 1
I Inflatio
4,000
n ~~ f
- _ _ _ _ 1991 1992 1993 1994 1995 1996 157 1998 1999 2000 2001 2002 2003p
-1,000 Year - L o Source: Central Banking Deficit, IMF Economic Developments (several issues), Deficit: WE3 2003 Europe and Central Asia Regional Tables.
... combined with Reforms, to a steady growth of GDP
120.0 7 I
20.0 4 i 0.0
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2W1 2W2 2003 Year I’GDP Growth index(1990=100) l/ 1
Source: World Bank Regional Estimates & Central Bank of Armenia for 2003.
’ In 1991, agricultural land was sold to those currently working it. By early 1992, around two-thirds o f the land planted for crops had been transferred to farm workers and managers, and by the end o f that year 90 percent o f al l agricultural land had been fully privatized.
Government Policies in Armenia, 2002, p.87-93; internal OED assessment. “Trade Facilitation in the Caucasus, Final Report,” p.6, World Bank, 2000; Growth Challenges and
3
During 1994-96, the remainder o f the state order system and nearly all remaining price controls were eliminated, privatization accelerated, and trade barriers were removed. Significant improvements were also made in financial sector regulation, payment d i~c ip l i ne ,~ the regulatory regime in the energy sector, and targeting o f social benefits. A new law on intellectual property was passed, and reform o f company, banking, and bankruptcy laws was undertaken. Reforms, plus substantial international financial assistance, led to a resumption o f growth in 1994. However, after 1996, perceptions that reforms had brought about few benefits to the majority o f the people and a stalemate over a peace agreement in NK weakened government willingness to sustain reform progress. The pace o f privatization o f medium and large enterprises slowed, and the enforcement o f the newly established laws and regulations for the private sector was delayed.
1.7 growth declined and exports, transfers, and remittances fell. The assassination o f the
A drought and the 1998 Russian crisis hit the economy hard; agricultural output
Prime Minister, Speaker o f the Parliament, and other officials in 1999 fbrther destabilized the economy. But the appointment of a new Prime Minister and approval of a new Government in mid-2000 helped bring political and economic stability. Fiscal excess was reined in and the
Figure 1.2 - Governance Indicators for M a , Fsv, and Eastern Emyean counhies @ercesltilerankinga“gl199comkies)
! I Rule o f Law
I W W W V
‘ I Gov- Efect lvm
I 1 Fblltlcalstabillty
pace and strength o f reform recovered, especially o n energy, privatization, and the environment for private sector activity. Reforms were accompanied by improvement in the quality o f regulations, in the rule o f law and government effectiveness and the control o f corruption. Recent surveys on governance show that the private sector enjoys a better business climate in Armenia than in other countries o f the Former Soviet Union (FSU); specifically, Armenia ranks above the FSU countries in terms o f rule o f law, government effectiveness, regulatory quality and voice and accountability. I t now requires an average o f 25 days to launch a new business in Armenia (2003), compared to the regional average o f 48 days and 30 days for Organization for Economic Co-operation and Development (OECD) countries. Nevertheless, despite the impressive improvements, Armenia lags considerably behind the Eastern and Central European countries (see Figure 1 .2).4
“Payment discipline” and “energy collections” refer to the degree to which consumers and organizations
Source: Kauffman, Kraay, and Mastruzzi, “Governance Matters 111,” World Bank, 2003; Comparative are current in their payments to energy suppliers.
Data on Doing Business, World Bank, 2003.
4
4
1.8 international assistance have helped the economy to grow and to improve i ts external situation. Over the last ten years Armenia has grown at about 7.0 percent per year; by 2002 GDP per capita reached US$790,90 percent o f the IDA threshold o f US$865 for that year. The balance o f payments and international liquidity have also improved in the last decade, although the current account deficit was s t i l l 7 percent o f GDP in 2002. Workers remittances and transfers from the Armenian diaspora averaging around 9
The management o f fiscal, monetary and exchange rate policy, and high levels o f
percent o f GDP financed about ha l f o f the trade deficit, which i s about 20 percent o f GDP (see Figure 1.3). Off icial development assistance, about 1 1 percent of GDP during 1993-200 1 , helped to finance the current account deficit and to accumulate international reserves that now stand at around 4.3 months o f imports. O f that assistance, multilateral institutions lent 6 percent o f GDP, o f which IBRD/IDA comprises about half. Borrowing
Flgure 1.3: Balance of Payments 1993-2003 60% , 50% 40% 30% ; 20%
0 lo% I
0% -lo% -20% -30%
x
-40% ‘ 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
-Exports m h p o r t s +Trade Balance +Current Account
Source IntemationalFinancialStatlstics IMF and WB RegionEstmtes.
abroad to cover the current account and the public sector deficits, however, led to an increase in the country’s debt from zero in 1990 to slightly below 50 percent o f GDP in 2000. Strong macroeconomic performance and a debt-for-equity swap with Russia helped reduce Armenia’s debt to about 43 percent o f GDP in 2002, the lowest debt/GDP ratio o f any Commonwealth o f Independent States (CIS)-7 country except Azerbaijan.
1.9 consume more than i t s current income, mitigate economic hardships, maintain a higher level o f aggregate demand than would have been otherwise possible, and buy time for economic reforms to bring stability and growth. During 1998-2002 aggregate demand grew at 7.9 percent per year, with exports accounting for 55 percent o f the increase in demand, followed by household consumption and investment; imports also recovered, subtracting around 25 percent f rom the growing demand for domestic output. On the supply side, during 1994-97 the growth in retail trade-which barely existed prior to the transition-accounted for one third o f the expansion o f output, followed by the contributions of transport and communications, construction and agriculture. During 1998-2001 construction led the growth o f output, with 25 percent o f total growth, followed by retail trade, industry and agriculture, with about 20 percent each. Whi le the recovery o f retail trade reflects domestic market conditions, agricultural output and the recovery in the industrial sector has been driven to some extent by the growth in exports o f diamonds, metals and processed foods. However, the rapid growth in output was not reflected in a commensurate growth in the demand for labor. In fact, during 1994-2001, employment fe l l at about 2 percent per year, reflecting the restructuring st i l l taking place
Inflows of external resources (see Annex A, table 3b) allowed Armenia to
5
in the economy, and the limited growth o f “de novo” firms.5 At the same time these trends show the large gains in productivity already achieved and the potential for hr ther gains in productivity and employment that could be obtained from faster growth in the formal sector, especially in small and medium enterprises.
Overall Progress and Development Challenges
1.10 had recovered to around 94 percent o f i t s 1990 level, according to official World Bank data. A s noted, growth in the last few years has been especially rapid. This i s a solid achievement given Armenia’s extemal circumstances, dilapidated infrastructure at the beginning o f the transition, and domestic political events. Nevertheless, continuing risks o f regional instability, reliance on substantial international financial assistance and a large structural trade deficit a l l pose significant challenges to sustaining growth. Moreover, the contributions to growth and employment from agriculture and retail trade are diminishing, which implies that sustaining economic growth wil l require higher growth and employment generation in the industrial sector.
The Armenian economy has experienced positive growth since 1994, and by 2003
1.1 1 have begun to respond to growth. The steep fal l in income, a decline in social transfers, and the inability o f large former state enterprises to pay their wage bi l ls were the proximate factors underlying the significant increase in poverty.6 The incidence o f poverty was estimated at 55 percent in 1996 and 1998.7 Recent 2002 data in the Poverty Reduction Strategy Paper (PRSP) indicate that poverty has declined by four percentage points-but s t i l l remained high at 5 1 percent; extreme poverty has fallen from 27 percent to 2 1 percent. However, nearly al l o f the improvement was among the urban poor, and rural poverty remained high. Income inequality also declined, with an estimated Gini coefficient o f income o f 0.52 in 2001, down from 0.57 in 1998/99. However, despite this improvement, Armenia continues to have the highest income inequality among E C A countries.’ The stock o f human capital has also deteriorated, in part through e m i g r a t i ~ n . ~ Confronting poverty and improving social indicators wil l l ikely remain a key challenge, as fiscal austerity wil l continue to limit the resources available for social sector expenditures, although recent efforts at improving targeting have helped ease the plight o f the poor. Recent estimates by the Europe and Central Asia (ECA) region show that Armenia i s only l ikely to fulfill one Mil lennium Development Goal (MDG) target-
Poverty and income inequality were high throughout the decade, but with a lag
s The Region plans to initiate a study o f labor market dynamics, including analyses by geographical area and by gender.
Jane Falkingham, “CIS-7 Conference: Inequality and Poverty in the CIS,” Lucerne Conference on the CIS-7, January, 2003. ’ Comparison o f 1996 poverty data wi th that collected later in the decade i s difficult due to differences in the definitions and measures utilized.
World Bank PRSP, October 2003; also, other intemal WB studies. The Gini coefficient o f expenditures went from 0.296 in 1991 to 0.486 in 2000; the latter figure-while high-is only slightly above other CIS-7 republics (intemal WB analytxal study). Another measure i s the Gini Coefficient for per capita consumption, which was 0.37 in 1991,0.278 in 2001 and 0.273 in 2002. Th is index suggests some progress in per capita consumption distribution, and i t compares more favorably wi th other CIS countries.
Official figures indicate that the population declined by 21 percent since 1990 to around 3.1 million. Evidence indicates that emigrants have been concentrated in the working-age segments o f the population.
6
maternal mortality-and is not likely to achieve three goals-school enrolment, chi ld mortality and HIV/AIDS and TB incidence."
1.12 market economy. As noted, by 1997, most early-stage reforms had been achieved. Starting in 1997 reform progress slowed, but then accelerated again from 2000 onwards. EBRD transition indicators show that Armenia 's reform progress is at or near the highest level ofany CIS-7 country, but reform progress s t i l l lags the more economically developed economies o f Eastem and Central Europe. Recent reforms to improve the business environment and implement bankruptcy and liquidation proceedings have been positive steps. There has been, however, less progress in restructuring o f large firms, enforcement o f contracts, and availability o f adequate financing for private firms. Also, in the public sector, a lack o f reform has contributed to bureaucratic obstacles and corruption. These obstacles are hindering the formation andor growth o f small and medium-sized firms, which in many transition economies have been found to make a major contribution to employment growth and poverty reduction.
Armenia has made good progress in its transition from a centrally-planned to a
lo See, The Millennium Development Goals in Europe and Central Asia, ECA Region, The World Bank, September 2003, p. 7.
7
2. World Bank Assistance to Armenia, 1993-2002
Strategy, Relevance, and Lending
Strategy
2.1 first loan was o n IBRD terms. Later in 1993, with per capita income estimated at US$380, it was declared eligible for IDA fimding and all subsequent lending has been on IDA terms. In the early years, the Bank operated without a formal strategy; however, the Bank’s initial activities benefited substantially from the diagnosis developed in a 1993 CEM.
Armenia joined the World Bank Group in September 1992, and in early 1993, its
2.2 situation from which the country was emerging. The strategy emphasized: (a) economic stabilization and institution building, (b) poverty alleviation and support for better targeting o f social protection, (c) infrastructure rehabilitation, and (d) structural reforms to complete the transition to a market economy and promote private sector development and growth.’’ By the time o f the country strategy in the late 1990’s the macroeconomic situation had improved significantly. Bank strategy remained roughly as before: (a) consolidation o f macroeconomic stability; (b) fostering rapid private sector development through: hr ther structural reforms; strengthening the financial system and the legal and judicial framework; and alleviation o f key bottlenecks in energy, transport, and water; and (c) support for the social sustainability o f reform and poverty alleviation by strengthening the social safety net and reforming the health and education systems. The April 2001 CAS marked a shift insofar as it reflected greater emphasis on improving the business environment in accordance with the findings o f a Growth Study completed the same year, and also emphasized strengthening the public sector. In effect, the 2001 strategy recognized that simply “getting the essentials right” was not suficient to create conditions conducive to j o b creation and broad-based growth. Specific objectives included: (a) creating jobs through private sector development; (b) improving governance and public sector services; and (c) rebuilding human capital.
The first country strategy embedded in a credit document reflected the turbulent
2.3 country’s development needs. The emphasis placed on infrastructure renewal, and the dismantling o f the remnants o f a centrally planned economy were highly appropriate for the country-especially during the f i rst hal f o f the decade. In the infrastructure area, the strategy appropriately focused on maintenance, preservation and improvement o f existing assets, while limiting investment in new infiastructure. Poverty alleviation was addressed early through analytical work and adjustment lending. Investment and adjustment lending were generally well-synchronized, and in many cases achieved substantial synergy.I2 As the decade progressed, the increased importance accorded to the social sectors was highly relevant. However, two important areas received insufjcient attention until 200 1 :
Overall, the strategies pursued during the decade were substantially relevant to the
” Over most o f the decade, Bank strategy assumed that if basic reforms could be successfully accomplished, and the vast majority o f assets privatized, then a “supply response” would be forthcoming. Later strategies recognized the need for additional measures such as accelerating the restructuring o f large f i , improving the business environment, and strengthening investment promotion.
Synergy was excellent in the energy, education, and social protection areas. 12
8
additional measures were needed to support private sector development if broad-based growth with substantial job creation were to take place, and that modernizing the public sector was a priority.
Lending
2.4 Table 2.1, from 1993 to 2002 the
As shown in Figure 2.1 and
Figure 2.1: Average Annual Commitments to Armenia, by CAS Period
100
80 2 3 60 'B 6 40 2 20
0 FY93-94 FY95-97 FY98-00 FY01-02 avg, 93-02
Table 2.1: Lending (Disbursements), in US$ million, FY93-02, by Sector Sector 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Total 1 %
I 300
125.3
71
39.7
32
30
28
32.2
17.8
15
10
Economic Policy (adjustment) 60
Agricultural and Rural Dvt. 43
Transport
Energy and Mining 13.7
Social Protection
Water Supply and Sanitation
Urban Development 28
T A for Economic Policy* 12
Private Sector Development
Education
Health, Nutrition, and Population
42.8%
18.0%
10.2%
5.7%
4.6%
4.3%
4.0%
3.9%
2.5%
2.2%
1.4%
60
16
12
3.8
65
14.5
15
30
5
16.8
15
10
65
34.6
40
21
20
50
33.2
5
11.4
1
Total 12 28 116.7 91.8 31.8 139.5 120.6 60 61.4 39.2 701 1 * The FY93 loan was to establish basic institutions o f government, and the FY2001 loan was Judicial Reform Credit. Source: World Bank.
l3 For example, bankruptcy o r l iquidation o f unviable medium o r large enterprises; more effective enforcement o f laws and regulations; development o f a more favorable environment for the entry and growth o f new firms. l4 In particular, the late 1990's country strategy was deficient in no t addressing these areas.
9
2.5 The portfolio has performed well. For Armenian projects exiting the portfolio from FY93 to FY04, OED has rated 14 projects. Outcome was satisfactory in 12 operations, or 86 percent. As shown in Table 2.2, this exceeds the performance o f the E C A Region (79 percent) and o f the overall Bank portfolio (71 percent), and i s better than al l o f Armenia’s CIS-7 comparators. Armenia’s ratings on Bank and Borrower Performance also exceed the regional and Bank-wide averages. The current Armenia portfolio also shows no projects at r isk (Annex A, table 5b). Table 2.2: OED Performance Ratings
FY93-94
I
(by No. o f Projects) Percent of projects satisfactory, exit years FY 1993-04 Armenia
Bank-wide Azerbaijan Georgia
2.6 With the country engaged in ECA Region an active conflict, FY93-94 lending was l imited to two projects. These pursued macroeconomic Kyrgyz Republic stabilization, infrastructure Moldova
86 79 71 67 79 83 70
rehabilitation, and institution Tajikistan 71 Uzbekisthn 67 Source: OED Website, November 2003.
building. The FY93 Institution Building Loan appropriately focused o n stabilization and capacity building. The FY94 Earthquake Reconstruction Project (ERP) addressed critical needs for reconstruction o f basic infrastructure, housing, community facilities, and commercial structures damaged during the 1988 earthquake. The ERP provided support to the country at a critical time, but l imited geographic scope and design deficiencies reduced i t s impact. In particular, in this operation the Bank should have paid greater attention to social assessment and included TA. In addition to these two projects, the Bank engaged in an extensive dialogue with the Governrnent on macroeconomic stabilization and energy sector reform.
FY95-97
2.7 actual lending. The FY95-FY97 program was well designed, and program execution generally followed the 1995 strategy high case scenario, with two exceptions: less private sector development activity was undertaken than was planned (and needed); and planned social sector and energy sector adjustment operations were not undertaken. l5
The well-designed Rehabilitation Credit (FY95) and SAC I (FY96) were the f i rs t o f five adjustment credits that supported economic management reform; enterprise refondprivate sector development; energy sector restructuring and reform, including improved collections and higher tariffs; financial sector reform; reform o f the social sectors; and revenue mobilization. A planned FSAL-which was also envisioned to include enterprise sector refom-was not implemented, as the reform program in the fmancial sector was advancing well. The one investment project that addressed Private Sector Development (PSD) issues, the Enterprise Development Project (EDP; F Y 9 7 F w h i c h had not been envisioned in the country strategy-provided firms with export marketing advice as wel l as loans, and was also intended to strengthen participating banks. The EDP was not
Table 2.3 shows the objectives o f each country assistance, and the proposed and
l5 However, substantial energy conditionality, and modest social conditionality, were embodied in SAC I.
10
effective at achieving its goals, achieved negligible synergy with the adjustment operations, and OED rated outcome as moderately unsatisfactory. l6
Table 2.3: Country Strategy Objectives, and Proposed and Actual Lending Year Objecrives Proposed Lending Actual Lending
1995 (a) economic stabilization and Rehabilitation Credit Rehabilitation Credit FY95-97 institution building; (b) poverty S A C I S A C I
alleviation and support for better FSAL (finance and enterprise) SATAC I targeting of social protection; (c) Social Sector Adjustment Highway Project infrastructure rehabilitation; and (d) T~~~~~~ Supplemental Highway Project
Energy Sector Adjustment Irrigation Project structural reforms that were expected to lead to a resumption o f Agriculture Project growth led b y expansion o f the private sector.
Social Investment Fund I Enterprise Development Power Maintenance
1997 (a) consolidation o f macroeconomic SAC I1 SAC11 FY98-00 stability; (b) fostering rapid private SATAC I1 S A T A C I I
sector development through: further Agricultural Reform Support SAC I11 structural reforms; strengthening the Inigation and Dam Safety Agricultural Reform Support financial system and the legal and Education Project Irrigation and Dam Safety judicial framework; and alleviation Health Project Title Registration of key bottlenecks in energy, Municipal Development Education Project transport, and water; (c) support for
the sustainability Of Electricity Transmission and Municipal Development and poverty alleviation by strengthening the social safety net and reform o f the health and education systems.
(water) Health Project
Distribution Electricity Transmission and
Facilitation Social Investment Fund I1 Distribution Trade and Transport
Energy Sector Private Sector Development Social Sector Adjustment
2001 (a) creating jobs through private Judicial Reform Judicial Reform FY01-02 sector development; (b) improving SAC IV S A C I V
govemance and public sector Natural Resources Natural Resources Management services; (c) rebuilding human Municipal Water Irrigation Development capital. P S D I I Enterprise Incubator LIL
Foreign Investment and Export Facilitation LIL
2.8 appropriate given the circumstances. The Highway Project (FY96) and a supplement (FY97) aimed to improve the national roads that were the outlets to neighboring countries. W h i l e the highway projects were highly relevant, only about ha l f o f the maintenance envisioned could be completed because road deterioration was much worse than expected. The Irrigation Project (FY95), succeeded in rehabilitating key irrigation schemes to sustain production (see para. 3.9, below), but was less successful in establishing institutions that could sustain operations and maintenance. Finally, the Social Investment Fund (SIF; FY96), not in the country strategy, aimed to rebuild small- scale infrastructure and generate employment using labor-intensive public works; the project achieved most of i ts goals, but failed to provide training for local governments as
The Bank also focused o n infrastructure lending in this period, which was
l6 The EDP was assessed as moderately unsatisfactory mainly because 5 o f the 12 part ic ipat ing banks los t their accreditation, and so benef i ted l i t t le from the project. Also, a l l part ic ipat ing banks were able to u t i l i ze re-flows for up to 10 years, so the credi t funded cont inued unsound lend ing by these weak banks.
11
envisioned, and also encountered problems with the technical quality and sustainability o f sub-projects. However, the SIF increased the poverty focus o f the Bank program by funding household surveys that helped the targeting o f social assistance programs.
FY98-00
2.9 slowed during the country strategy assistance period. A key objective o f the late 1990’s country strategy was to foster rapid private sector growth, and the document envisioned a PSD investment project; however, the planned project was not undertaken. The program that was implemented included SAC I1 (FY98), which pursued Iargely the same path o f reforms as the earlier adjustment projects, but with a greater emphasis on the social sectors, and SATAC 11, which provided complementary technical assistance. SAC III (FY99), with objectives identical to those of SAC I1 (and continued emphasis on the social sectors), replaced a planned Social Sector Adjustment operation. Three Agricultural and Rural Sector projects were undertaken, broadly in line with the country strategy, and were generally successl l at tackling key issues in the sector.
The lending program was not as effective as it could have been, as reform progress
2.10 well as a second Social Investment Fund (FYOO). The Education project was successl l in introducing and promulgating structural reforms, and its outcome was rated highly satisfactory by OED (see para. 3.5). The Health project and the Bank’s support to health sector reform has been more modest in i t s contribution to the efficiency o f the system. While the basic benefits package developed under the project was theoretically sound, it was not wel l suited to the Armenian circumstances o f extremely tight resource constraints.
In the social sectors, the Education and Health projects (FY98) were approved, as
2.1 1 Yerevan and lay a foundation for private sector involvement in managing water resources in Yerevan. These objectives were in l ine with the late 1990’s country strategy and supported SAC I1 conditionality on water sector issues (which continued under later adjustment credits). However, water supply is s t i l l operating intermittently and losses remain high because investment to improve the infrastructure has been slow to materialize. Collection performance, although s t i l l poor, i s improving and has risen from 19 percent in 2000 to 40 percent in 2003. The highly relevant Power Maintenance project, the f i rst energy sector operation, focused on restoring critical generation capacity through rehabilitation and repair o f thermal and hydropower plants, and upgrading the electricity dispatch system. The Electricity Transmission and Distribution project (FY99) also undertook investments to upgrade physical assets; both projects effectively complemented the energy policy measures of the adjustment loans. The planned Trade and Transport Facilitation project was not undertaken, however, a regional initiative was established with Azerbaijan and Georgia to try to stimulate trade.
The Municipal Development Project (FY98) sought to improve water supply in
FYOl-02
2.12 The 2001 CAS called for US$211.4 mi l l ion in lending during FYO1-04, o f which US$96.4 was planned during FYO1-02. Actual lending in FY01-02 was US$100.4 million. SAC IV (FYO1) marked a departure fi-om earlier adjustment credits insofar as it
12
supported reforms to remove long-recognized constraints in the business environment, governance and public sector services, as wel l as supporting continued reforms in the social sectors (see para 3.15). The Judicial Reform project (FYOl), building on the legal framework developed under earlier adjustment credits, began to tackle enforcement (see para. 3.22). W h i l e the CAS planned a second PSD project, instead two Learning and Innovation Lending projects (LILs) were undertaken: Foreign Investment and Export Facilitation, and the Enterprise Incubator.
2.13 Development-scheduled in the recent country strategy-which continued the physical rehabilitation efforts o f earlier credits, and also aimed to strengthen the capacity o f sectoral agencies; and Natural Resources Management and Poverty Reduction, which aimed to strengthen natural resource management where degradation o f natural resources and poverty are a problem. The 2001 CAS included a Municipal Water project, a follow- up to the FY98 Municipal Development project. I t s main objective i s to extend the management contract concept to the rest o f the country, where conditions may be worse than in Yerevan. However, the project has not yet been identified, and i s currently scheduled for FY05.
Two Agricultural and Rural Sector projects were approved: Irrigation
Analytical and Advisory Services
2.14 lending. Throughout the decade, the Bank, in collaboration with the Fund, provided advice and technical assistance in macroeconomic management-a very successful aspect o f the country’s performance.
Overall, Analytical and Advisory Services (AAA) were well-coordinated with
2.15 knowledge o f the country and helped define the agenda for the Rehabilitation Credit. The publication in 2000 o f the FIAS report, “Armenia: Administrative Barriers to Investment,” documented the extent to which petty corruption and arbitrary administrative actions obstructed creation o f an environment conducive to private business, and contributed to the design o f SAC IV (FYO1). In FY02, the Growth Study was completed, which had a significant and beneficial impact on the Bank’s lending to Armenia (see B o x 2.1). If this study as well as the FIAS report had been completed earlier, i t is l ikely that constraints in the business environment would have been recognized and incorporated into the Bank program earlier. It i s worth noting that this i s one o f the l ikely consequences o f the nearly decade-long gap between the f i rst C E M (FY93) and the Growth Study (FY02); this illustrates that preparation o f country assistance strategies and adjustment loans are not adequate substitutes for the independent analytical work necessary to understand macroeconomic and structural issues.
The 1993 CEM, the f i rst formal economic report, laid the basis for the Bank’s
2.16 update, and further informal studies that were part o f the two Social Investment Fund projects (FY96 and FYOO), the Health project (FY98), and in conjunction with poverty- focused conditions o f the adjustment credits. Further, integrated living standards surveys (1998 and 1999) supported by the SATAC, helped target social assistance, and, in conjunction with SAC 11, succeeded in facilitating implementation o f a number o f
Poverty issues were addressed in analyses in 1996 and 1999, a 2002 poverty
13
significant reforms, including: a Law on Social Benefits; an increase in the retirement age; improved procedures to collect and distribute pensions; and introduction o f a means- tested poverty benefit.
Box 2.1 : Best Practice, “Growth Challenges and Government Policies in Armenia,” February 2002”
The Growth Study was completed in FY02 and had a significant impact on the Bank’s adjustment lending to Armenia. The study analyzed the phenomenon o f “limited income benefits from growth,” i.e., why Armenia’s real GDP had r isen steadily from 1994-2000, yet had not resulted in significant improvements in poverty and employment. It found that improvements in wage levels had disproportionately benefited labor in a few relatively well-to-do sectors that employed a small proportion o f total labor. The study found that a poor business climate and weak private sector capabilities were key factors hindering establishment or expansion o f private f i r m .
improve the business climate. I t further recommended strengthening investment promotion, business- government liaison, accelerating the restructuring o f large industrial firms, and supplying SMEs with consulting and advisory services. In large measure as a result o f this analysis, SAC IV and two subsequent LILs (FY02) changed the direction o f the reform program and progress towards improving the business climate i s being made.
The study recommended specific actions-including creation o f a high-level Business Council-to
Note: *Referred to as the “Growth Study” in this report Source: Growth Study, p.18.
2.17 several ways: it provided a foundation for the FY95 Power Maintenance project, and it also led to the later Electricity Transmission and Distribution project. A broader sectoral review was less useful, since i t s recommendations proved overly broad and the envisioned comprehensive Power Rehabilitation project was not im~1emented.I~ A later report on privatization o f the electricity sectorI8 helped facilitate the continuing dialogue on power privatization and led to the Electricity Transmission and Distribution Project. The 1997 Transport Sector Strategy identified an ambitious agenda for a comprehensive sector reform program; however, none o f the specific pol icy reform recommendations outlined in the report were incorporated into the structural adjustment program.
An intemal Bank study o f power demand and supply options proved useful in
2.18 led to agreement with the government on the Irrigation Rehabilitation project (FY95). Analytical assistance was also provided to the Irrigation Maintenance Organization, which presented a basis for raising the level o f water tariffs and differentiating three geographic zones. This work also led to the Dam Safety project (FYOO) and Irrigation Development project (FYO1). Farm surveys in 1996 and 1997 and sector reports (1997 and 1998) facilitated identification o f the Agricultural Reform Support project (FY98) and the Title Registration project (FY99). Finally, a comprehensive water sector review
Informal analytical reports o n the agricultural sector were completed in 1993 and
In accordance with an intemal energy sector review, the Bank started preparation o f a comprehensive Power Rehabilitation project to address the needs o f both physical rehabilitation o f power generation plants and institutional reform. The project was pre-appraised in 1993 but was not developed fiuther because the government was not comfortable with its ambitious agenda. At the Government’s request the Bank agreed to proceed instead with a step-by-step approach, the f i rst stage o f which was the Power Maintenance project.
World Bank, “Privatizing Power,” Report No. 17018, October 28, 1997.
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was completed that integrates the analysis o f adequate water supply and pricing for various categories o f users with environmental concerns.
2.19 of Education. This study guided the implementation o f more efficient practices in specific pi lot areas under the Education project, and also led to the inclusion o f education conditions in SAC I1 and SAC 111.
A strategy for education reform was completed in conjunction with the Ministry
2.20 completed. Their impact was limited by a lack o f comprehensive follow-up by the Bank (see para 3.13), although other donors benefited from the analysis. The 1997 Public Expenditure Review was not effectively followed up, and did not have a substantial impact. A review o f governance established an agenda, was wel l disseminated, and stimulated considerable attention, but a lack o f immediate follow-up diminished its impact.
In the area o f public sector reform, two analytical reports (1 996 and 2000) were
Partnerships
2.21 Over the decade, the Bank played a key role in mobilizing resources for Armenia. Fol lowing the 1994 ceasefire, the Bank played an important role and i t s participation was an important signal to other donors. During this time, the Bank chaired annual meetings o f a Consultative Group o f donors to Armenia. Looking back at the period 1993-96, many officials interviewed expressed their appreciation for the help o f the Bank in providing resources and in working with other (sometimes reluctant) donors during a time of great turmoil in the country, and when i t had not yet established macroeconomic stability or a record o f structural reform. An innovative approach that the Bank utilized was the mobilization o f the skills and financial resources o f the Armenian diaspora. A series o f teleconferences was held that permitted workers in high-tech industries in Armenia to tap into the knowledge and experience o f those living in the United States, Europe, and Russia. This was combined with a matching fund, established under S F I, that enabled diaspora Armenians to make resources available directly to the social sector. The IFC financed a M a y 2001 Investor Conference for Armenia in N e w York; however, its efficacy in inducing new investment has not been assessed.
Aid Coordination
2.22 worked with the govemment to enhance its capacity in th is area, and in 1994 the government established an office in the Ministry o f Economy that played a significant role in donor coordination. However, starting around 1997 the power o f th is office was diminished. Since then the government has played less o f a role, and donors themselves have taken primary responsibility for coordination (see also para 2.27).”
n e efectiveness of aid coordination was mixed. Early in the decade, the Bank
2.23 the Bank focused o n rehabilitation o f primary and secondary canals, while the
Donor coordination worked well, for example, in the agricultural sector, where
In response, the Government notes that since 1997, “positive qualitative progress has been registered [by the government] with regard to the coordination o f donor support.”
15
International Fund for Agricultural Development (FAD) worked on developing institutions for management and on-farm irrigation at the tertiary level. Coordination also worked we l l in the energy sector, where bilateral donors provided grant assistance to buy hardware that complemented Bank pol icy advice and conditionality as wel l as Bank lending to rehabilitate infrastructure. The Electricity Transmission and Distribution project was co-financed by USAID (system metering) and complemented by two parallel projects financed by JBIC (SCADA, substations, residential meters) and KfW (transmission sub-stations), which together exceed the amount o f the Bank credit. Both the Highway and the Transport projects were implemented in close coordination with the activities o f the Armenia diaspora L incy Foundation, which provided US$73 mi l l ion for road rehabilitation between 1998 and 2002.20
2.24 among I F I s in advising the government on macroeconomic policy, and also provided technical assistance on tax, fiscal, and financial sector issues. The Bank and Fund maintained a close working relationship throughout the decade, collaborating o n conditionality, inter alia, regarding fiscal, energy, and poverty alleviation issues. Recent coordination on the PRSP (published October 20,2003) has also been good.
The Bank’s cooperation with the IMF was excellent. The IMF took the lead role
2.25 generation was closely coordinated with the Bank’s energy conditionality and the Power Maintenance Project (although the plant was never completed due to cost overruns and a lack of local funding). Another loan facilitated the privatization o f the Yerevan Brandy Company and complemented Bank’s efforts on privatization. (More detail o n the EBRD’s contribution i s provided below in para. 4.10).
Bank coordination with EBRD was also good. EBRD lending for the Hrasdan
2.26 However, numerous individuals interviewed2’ observed that after 1997-when the power o f the aid coordination office in the Ministry o f Economy was diminished-aid coordination was inconsistent. Bilateral and multilateral donors began to pursue their own agendas-ften with l i t t le consultation with the government or with each other. For example, one donor reportedly pursued several agricultural initiatives that were essentially “supply-driven” and had little to do with reforms being pursued in that area by the Bank or others. Yet, th is same donor was reported as coordinating closely with the Bank and other donors in the social sectors. The PRSP offers an opportunity for the government to play a greater role in donor coordination.
2o According to the Lincy Foundation, from around 1996 to 2002 it committed US$172 mi l l ion to the following projects: US$73 mi l l ion for the rehabilitation o f 275 miles o f highways, bridges and tunnels; US$2 1 million for an SME credit line; US$45 mil l ion for construction and repair o f 4,000 housing units in the earthquake zone; US$18 mi l l ion for renovation o f 40 cultural institutions; and US$15 mi l l ion for the renovation o f Yerevan’s 12 main streets. *’ These observations were made by g o v e m e n t officials as well as by staff o f several donors.
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3. Assessment o f Development Impact o f Country Assistance
3.1 Previous sections addressed the framework o f the Bank’s assistance program to Armenia, and showed that the overall relevance o f the Bank’s program was substantial over the decade, the program itself was generally well-designed, and the ratings o f individual projects were favorable. These ratings indicate that, in general, project objectives were relevant and achieved, but they provide l i t t le information o n the overall impact o f the Bank’s assistance. To assess the latter, i t is necessary to go beyond individual project ratings, examine the country’s progress in key areas, and assess the extent to which the Bank contributed to these outcomes. This section i s organized according to the main objectives o f the Bank’s strategies during the decade: macroeconomic stability; poverty alleviation and human development; agriculture and infrastructure; the public sector; and private sector development.
Macroeconomic Stability
3.2 During the chaotic years following independence, with hyperinflation, a substantial decline in GDP, and a severe shortage o f government resources, Armenian policymakers recognized that stabilization was critical. The Bank, with i t s partners,22 provided consistent advice and analytical assistance, as well as financial support o n concessionary terms. Considered overall, the country’s performance in managing macroeconomic pol icy and in implementing many structural reforms was strong throughout the decade, with the Bank making a significant contribution.
Poverty Alleviation and Human Development
3.3 huge dislocations and fal l in GDP following independence (see para 1.1 1). The Bank maintained a significant poverty focus throughout the decade through analytic work and conditionality under the adjustment projects (see para 2.16). The linkage between the analytical work on poverty and the lending program was a positive feature o f the Armenia program. In particular, a single, targeted poverty benefit was initiated, replacing a complex system o f chi ld allowances and other benefits that were provided to poor and non-poor alike. Highly subsidized rates (for favored groups) for electricity, transport, and communal services were substantially eliminated, and replaced with cash transfers to a more narrowly defined group of highly vulnerable beneficiaries-a significant improvement. Starting in 2001, there was a greater focus (on the part o f both the Bank and the government) on reducing obstacles to private business, which i s expected to expand employment opportunities. The most recent data show a modest decline in the
Poverty Alleviation: As described earlier, poverty increased dramatically with the
22 The Bank collaborated very closely wi th the Fund, which took the lead role in this area.
17
overall level o f poverty and a significant decline in absolute poverty. Armenia made progress in this area during the decade, and the contribution o f the Bank was important.23
3.4 Education: After independence, funding for education virtually collapsed. During the 1980s, allocations to education (from Moscow) were around US$500-600 per student per year, while in 1992 the cash-strapped government allocated US$24, and in 1997, US$30. Staffing norms required an excessive number o f teachers as wel l as non- teaching staff. The condition o f school buildings was poor, and resources were inefficiently allocated across schools. A 1996 assessment found that only 30 percent o f students were able to buy al l o f their necessary textbooks.
3.5 extensive. Pi lot reforms (e.g., devolution o f budget management, revised system management norms) were initiated which have now been extended to nearly the entire country, and these reforms have increased the efficiency o f the educational system. Basic analyses o f the system and an innovative scheme for financing textbooks were implemented; very good synergy was achieved between the adjustment and investment operations. Armenia’s expenditures on education have been low compared to CIS-7 countries, but have risen in the last few years in part supported by SAC 111. Education expenditures were 2.2 percent o f GDP in 1997, rising to 2.8 percent o f GDP by 2001. Along with the increase in resources going to education, adjustment lending also supported a substantial shift in resources within the sector from kindergartens and supplemental programs (music, arts, sports) to general education (grades 1-8). Household surveys indicate that enrolment in grades 1 to 8 was virtually universal throughout the decade.24 Overall, during the decade progress in education was substantial, and the Bank made an important contribution. However, data o n achievement are limited and the Region estimates that Armenia wil l not meet the MDG for education.
The reform program pursued by adjustment lending and an investment credit was
Infrastructure and Agriculture
3.6 areas only 4 hours a day; the frequency o f the electricity supplied varied, which sometimes damaged electrical equipment; and natural gas supplies were interrupted by periodic closure o f supply pipelines. Theft o f electricity was estimated to be as high as 30 percent. The reform program included restructuring the energy sector, tar i f f increases, establishment o f a regulatory regime, improved collection o f electricity bills, substantial reduction o f cross-subsidization, and privatization o f the electricity distribution companies (achieved in November 2002). The price o f electricity, traditionally very l o w in the Soviet Union, was gradually raised. From an average rate o f 0.2 U S centskwh in 1993, the price was progressively raised to the current rate o f 4.9 U S centskwh. Many reform measures were difficult or unpopular, especially tar i f f increases and the sale of the
Energy: In 1993, the energy situation was dire: electricity was provided to many
23 I t i s important in this regard to distinguish between the country’s progress in reducing poverty, wh ich was modest, and the outcome o f the Bank’s assistance strategy with regard to poverty, wh ich was substantial. 24 As noted by the Government, other data show lower enrollment rates and some show a decline (see Annex A, table 2a).
18
distribution companies. However, these actions were supported by the adjustment loans, and-in some cases after a delay-were implemented. By 2002, theft had been reduced to around 10 percent and collections were around 90 percent o f billings, despite the increased tariffs. Also, the negative effects o f tariff increases on the poor were mitigated by the increase in family benefits targeted at poor families. Supply interruptions had virtually ceased. While progress has been substantial, further progress i s required to sustain growth, as much infrastructure remains obsolete, and tar i f fs are not yet adequate to finance the replacement o f capital equipment. Analytical work in energy facilitated the dialogue with the Government and also laid a foundation for lending (see para. 2.17). Substantial synergy was achieved also between investment and adjustment lending. Progress in the energy sector helped the country improve its fiscal and quasi-fiscal performance (Annex A, table 2b). In sum, Armenia’s achievements in energy were significant, and the Bank program played a key role in advancing reforms.
3.7 neglect o f maintenance and capital expenditure for 6-8 years. In addition, some assets had been damaged in the earthquake or the conflict with Azerbaijan. Copper and aluminum cables were stolen for their scrap value. Aside from a handful o f donor-financed projects in the transport, water supply, and urban sectors-the country was literally “existing by consuming its capital stock.” Bank activity was relevant, well-designed, well-coordinated with other donors, and had a positive impact on the country’s development. The strategy o f focusing on maintenance and the preservation and improvement o f existing assets, while limiting investment in new infrastructure, was highly appropriate. While Bank-funded road and bridge rehabilitation was less extensive than initially envisioned, the availability o f L incy Foundation Funds (US$73 mi l l ion from 1998 to 2002) permitted coverage o f the remaining parts o f the M a i n Road network, as well as rehabilitation o f important segments o f the Secondary Roads network. Also, institutional development was substantial; the Armenia Roads Directorate was transformed into a streamlined and efficient unit, and competitive procurement became standard. However, until recently, no mechanism was created to provide adequate fimds for road maintenance, despite efforts by the Bank to address this issue. Agreements under SAC V, currently under implementation, lay out a mechanism to address this issue.
Infiastructure: In the mid-l990s, Armenia’s dire fiscal situation had resulted in a
3.8 losses in the railway and water sectors. The Transport project, in addition to road maintenance, also provided assistance to Armenia Railways (AR). AR originally operated an 800 km network, but after closing several lines it now operates the 350 km main line from Yerevan to Tbi l isi and several commuter lines. AR has significantly improved i t s commercial and financial performance, with 2002 freight traffic 32 percent higher than 2001; in 2002 the unit was profitable for the first time. In the water supply area, conditionality included increased collections, financial restructuring o f drinking water companies, tar i f f increases, and adoption o f a new Water Code. All o f these were achieved, although the new tar i f f levels are below what i s needed to cover variable costs, and collections reached only 40 percent in 2002 (see also para 2.1 1). Privatization o f the water supply company (not a credit condition) was considered infeasible, and therefore a foreign operator was hired under a management contract. Whi le institutional progress has been achieved in the water sector, performance improvements have been modest.
Progress was also achieved in improving efficiency and reducing quasi-fiscal
19
3.9 sector included the poor condition o f the irrigation system and state ownership o f agro-processing enterprises. Agricultural reform started early (para 1.4); the Bank’s support to the reform program-analytical work and six investment credits-was generally we l l conceived and successfully executed, but with some shortfalls. The integrity o f a major portion o f the irrigation system was restored, water losses were reduced, Water User Consumer Cooperatives were established on a pi lot basis, and the capacity o f the Ministry o f Agriculture to manage the system was enhanced. Land markets and the use o f land as collateral expanded, with the number o f land transactions doubling from 2000 to 2002. However, the long-run sustainability o f the irrigation system is ~ n c e r t a i n . ~ ~
Agriculture: At the start o f the decade, the key issues in the agricultural
3.10 performance. The Bank’s index o f agricultural reform shows Armenia with a score o f 7.4 in 2001 , higher than any other CIS country (indicating the most extensive reform); the average for the CIS-7 was 5.9, and for al l 12 CIS countries it was 5.2. And agricultural production and exports have been strong relative to other sectors. In the early 1 9 9 0 ~ ~ as GDP f e l l precipitously, the agricultural sector performed wel l (Table 3.1).26 In recent years, exports o f processed foods such as tomato paste, cognac, and processed fruits have increased substantially, aided by the privatization o f ago-processing enterprises.
Agricultural sector reforms have been quite successful as reflected in the sector’s
Table 3.1: Armenia, GDP and Agricultural Product
Agricultural Product, percent o f total GDP, at 1996 prices 21.1 37.0 36.1 34.8 32.2 33.8 33.2 30.6 31.2 28.8
1990 1994 1995 1996 1997 1998 1999 2000 2001 2002
Agricultural Product, percent o f 1990 100.0 86.9 90.4 92.2 88.0 99.4 100.7 98.3 109.8 114.7 Source: National Statistical Service.
The Public Sector
3.1 1 After independence, public sector capacity was very weak. Many state employees-at a l l levels-were politically-appointedy and the pay and status o f public workers was low. Wages in the public sector ranged from US$22-29 per month from 1998-2001, compared to US$4&60 per month in the private sector. This resulted in the inefficient delivery o f public services, erosion o f morale, and the widespread practice o f seeking informal fees for services. The weak public sector hindered development in several ways. First, the l o w pay and status o f public employees increased the propensity for employees to seek bribes (thereby placing severe constraints o n private firms). Second, low-quality staff and weak financial management did not assure that expenditures would be used efficiently and in line with Government priorities. The FY02
25 The Irrigation Development Project, now in implementation, i s supporting the formation o f federations o f Water Users Consensus Cooperatives to achieve economies o f scale in O&M costs that w i l l enhance sustainability. 26 However, labor productivity in the agricultural sector fell, as many individuals relocated to farms mainly because o f the lack o f work in urban areas.
20
Growth Study found that 48 percent o f entrepreneurs considered the government as either mildly or very unhelpful to business, and 85 percent considered government as mostly to very inefficient (although as described in para. 3.15, the 2002 BEEPS survey indicate broad improvement in these areas). Finally, inadequate regulatory expertise hindered progress in several sectors.
3.12 credits which bolstered Government capacity to implement reforms; aid in privatization, financial sector development, and customs and tax administration was modestly successful. And from 1999 to 2002, the Bank and i t s partners27 worked to strengthen fiscal management. Analytical work in this area was o f high quality, but was not translated into reforms or Bank support. The late 1990’s country strategy did not give adequate attention to this area, and, as a consequence, an important opportunity to support improvements in public sector reforms was missed. A planned Public Expenditure Management Note (FY99) was not completed, and no lending was undertaken in this crucial area.
Early in the decade, the Bank provided technical assistance through several
3.13 public sector reform. The Bank responded by initiating a review o f governance and sponsoring a widely-attended workshop in Yerevan in 2000. While G O A interest was strong, the Bank did not follow through and develop an agreed strategy in this area; disagreements within the team over whether to proceed with a stand-alone adjustment credit, or to subsume elements within the SACS supplemented by a TA and investment credit, were the primary reasons for the lack o f follow-up. Eventually, the latter course was chosen, but the Bank’s support was delayed and less than comprehensive.28 The FYOl CAS recognized the importance o f this issue, and strengthening governance and public sector reform became one o f the three main objectives. Eventually, SAC N took up elements o f the policy agenda. A Public Sector Modernization Credit is under preparation, as the TA and investment component, but this has been delayed because o f government reluctance to borrow for TA. I t s preparation is now proceeding, and it i s l ikely to advance reform when i t is approved. The lack o f emphasis on public sector reform in the late 1990’s country strategy was a key omission in the Bank’s program. The delay in focusing on public sector issues and following-up Bank analytical work had a negative effect on the Bank’s assistance program and Armenia’s development.
In 1998-2000, the Government o f Armenia (GOA) took a much greater interest in
Private Sector Development and Financial Sector Development
3.14 significant progress in dismantling the controls imposed by a centrally planned economy and in creating an enabling environment. Major achievements were made in: enterprise privatization, restructuring, or liquidation; financial sector reform; and reduction o f SOE
*’ The Bank worked with the IMF, USAID, and DFID o n strengthening treasury functions, establishing a MTEF, and debt management. 28 Information based o n interviews o f government officials and Bank staff. With the Bank largely inactive, other donors provided assistance in this area, but no t o n a comprehensive basis. Fo r example, DFID supported development o f a new Civil Service law, passed in 2001 with a considerable expenditure of pol i t ical capital on the part o f the government.
Private Sector Development: By the middle o f the decade, Armenia had made
21
budget subsidies. However, while the program contributed to private sector development, i t fell short in addressing key barriers that constrained broad-based growth and job creation. During the decade, the Bank implemented only one investment project in the PSD area (see para 2.7), which had an unsatisfactory outcome, and while the late 1990’s country strategy emphasized the need to improve the environment for the private sector, the critical bottlenecks o f enforcing the legal and regulatory framework and removing bureaucratic and administrative obstacles to private sector development were not addressed, even though the existence o f such problems was recognized by Bank staff working on Armenia.
3.15 AAA, and subsequent lending, with strong support from Government. A Business Council was established, reporting to the Prime Minister, which provides input from business to Government. Available evidence shows that progress is being made in this area. Interviews with private f irms, consultants, and others indicate that definite improvement can be seen, with more progress in Yerevan than in other parts o f the country. Survey data also show improvement. The percent o f firms paying bribes frequently declined from 40 percent in 1999 to 14 percent in 2002, with the average bribe as a percent o f annual revenue declining from 4.2 percent to 0.9 percent.29 For both o f these measures, Armenia’s absolute level o f performance for 2002 i s the best o f any CIS country.
Improving the business environment was a principal emphasis o f the 2001 CAS,
3.16 The progress realized in 2001 -03 could probably have been achieved earlier if the Bank had emphasized private sector development sooner. The Bank missed an important opportunity to begin work on the business environment in 1996, when management realized that work o n more complex and difficult reforms-including an improved business environment-needed to be undertaken, but did not make appropriate adjustments to the assistance program. Individuals interviewed in conjunction with this C A E were unanimous in agreeing that an earlier Bank focus o n this area would likely have resulted in faster progress, and that today’s business environment would be more congenial to private business.
3.17 Armenia reached as many as 80 in 1994, with many weak and poorly capitalized. In conjunction with the IMF and the Bank, the Government enacted new legislation, introduced more effective financial regulation, and significant strengthened bank regulation, which resulted in the closing o f many weaker banks. Adoption o f the Basle convention’s capital adequacy requirements stimulated a gradual recapitalization o f surviving banks, while a loan provisioning program helped reduce bad loans in bank portfolios. The proportion o f non-performing loans began to decline in 1998, and from December 2000 to December 2002, fel l Wher from 25.5 percent o f total loans to 4.9 per~ent .~ ’ The restructuring o f the sector also hastened bank privatization, which has been completed. Foreign bank ownership was permitted starting in 1995, and there are presently 5 branches o f foreign-owned banks (about 40 percent o f statutory capital is held
Financial Sector Development: Following independence, the number o f banks in
29 World Bank and EBRD, Business Environment and Enterprise Performance Study, 2002. 30 IMF, “Republic o f Armenia, Letter o f Intent,” March 7, 2003, p. 17, and Economist Intelligence Unit, November 2002.
22
by foreign investors). Between 2001 and 2003, the authority o f the Central Bank over insolvent banks was strengthened, enabling it to intervene weaker banks. By 1998, there were 38 banks overall, and the current number is 22-all privately owned-with two banks under the temporary administration o f the Central Bank. Privatization o f state- owned banks was supported under four adjustment credits, and technical assistance provided under the SATAC strengthened bank supervision (in conjunction with the Fund). A positive contribution was made by SAC I1 in requiring that banks adhere to International Accounting Standards (1 998).
3.18 sector, but have nonetheless been extensive. There is an active, though narrow, market for T-bills, and a functional, though thinly traded stock market, which is regulated by the Securities and Exchange Commission.
Regulatory reforms in the securities markets have lagged behind the banking
3.19 The Bank’s reform program in the financial sector was generally wel l conceived and successfully executed. However, despite the sector’s progress, it remains somewhat fragile, and has contributed l i t t le to Armenia’s growth. This i s because, firstly, creditor rights are weak. Secondly, the size and scale o f the informal sector discourages saving that could f low into the formal system, and limits the number o f bankable investment propositions available for bank financing; as a consequence, the formal banking system plays a small role in the intermediation o f savings.31 Finally, most small and medium-sized companies have very limited access to resources from the formal sector, mainly because they lack sufficient collateral, and need improvement in business management practices.
Overall Outcome of the Country Assistance Program
3.20 has made a major contribution to the maintenance o f macroeconomic stability, which facilitated economic recovery and growth. While the resulting reduction in poverty has been limited, thus far, the Bank has had a significant impact through i t s AAA and lending in helping to establish a new social benefit system, wel l targeted to the poor. The Bank also had an impact on improvements in the efficiency o f the education sector and on the increased availability o f energy. In transport and agriculture the Bank’s assistance likewise made important contributions-rehabilitation o f the road network and o f the imgation system-but major problems were left unresolved: a mechanism to ensure maintenance spending in transport, the availability o f credit in agriculture. The Bank’s program had some success in private sector development, especially in privatization, but moved too slowly to support certain aspects o f the business environment, especially the promotion o f small and medium job-creating enterprises. The Bank’s strategy to help strengthen public sector efficiency has been ineffective, although recently the program in th is area is improving. On balance, considering al l o f the above, OED rates the outcome o f the Bank‘s assistance strategy as satisfactory.
Over the decade, the Bank‘s assistance, in tandem with the IMF and other donors,
~
3 1 Broad money as a proportion o f GDP increased from 8 percent in 1995 to 13 percent in 2001-still a low level, and approximately the average for the CIS-7 countries. IMF, “Armenia: the Road to Sustained Rapid Growth-Cross Country Evidence,” M a y 1,2003.
23
Institutional Development Impact
3.21 A significant number o f achievements have been made in institutional development as a result o f the Bank’s program. Importantly, many aspects o f the Bank’s assistance program have contributed to the establishment o f a market economy. The energy sector was completely restructured during the decade, capped by the sale o f the electricity distribution company in November 2002, and the performance o f the sector improved dramatically. Along with a new Energy Law passed in 1997, and development o f a regulatory framework, this progress contributed substantially to the country’s institutional development.
3.22 enforcement should have been undertaken earlier. Some o f the new laws enacted during the period included an array o f laws governing commercial transactions (collateral, banking, companies, bankruptcy), telecommunications, and c iv i l and procedural codes. Laws and regulations governing the financial sector were significantly strengthened during the decade. Adoption o f internationally recognized capital adequacy requirements and other measures resulted in the closing o f weak banks and the recapitalization o f surviving banks. All banks are now private, and there i s a significant presence o f foreign banks.
Legal and judicial reform was significant, as well, although efforts to strengthen
3.23 which has increased the efficiency with which the country utilizes i t s resources in this area, Similar changes were made in the pension area. And the establishment o f the means-tested poverty benefit constituted a major improvement in the efficiency o f targeting poverty alleviation efforts.
Institutional and structural improvements were also made in the education sector,
3.24 The institutional development impact o f the program was hindered by the failure to take stronger and earlier efforts to establish a more congenial environment for private enterprise and to reform the public sector. Nevertheless, recent actions in the area o f private sector development are addressing earlier deficiencies in this area. Considered overall, the Bank’s contribution to institutional development impact was substantial.
Sustainability
3.25 economic situation, has made substantial progress across a wide range o f areas, and i s continuing to make reform progress.
In the decade examined by this CAE, Armenia started from a devastating
3.26 number o f risks. While the risks o f regional instability remain high and Armenia i s s t i l l perceived as a risky investment venue, regional initiatives such as that discussed in para 2.1 1 have the potential to facilitate integration and reduce uncertainties to some extent. A large trade deficit and a dependence on international assistance inflows imply that external sustainability i s not assured. High, but declining, poverty and inequality and limited budgetary resources to improve social services could lead to further social tensions.
Nevertheless, the benefits o f Armenia’s development progress are subject to a
24
3.27 There i s a hrther risk that recent high levels o f GDP growth may not be sustainable. Growth in the industrial sector has been narrowly focused, in a few capital- intensive sectors, and the impetus to growth from services and agriculture has not yet been supported by large-scale restructuring or entry o f new private firms. With the completion o f most o f the “catching up’’ following the sharp decline o f the early 1990s, in order to sustain a level o f real GDP growth o f 6 percent per annum, gross domestic investment would have to increase by at least 2.5 percentage points o f GDP compared to its average over the last eight years. This, in turn, suggests the necessity that sound macroeconomic policies and strong progress in structural reforms be continued in order to establish a favorable climate for private i n ~ e s t m e n t . ~ ~
3.28 macroeconomic stabilization are widely recognized by pol icy makers and the population. Social sector reforms are widely seen as having better targeted scarce resources. The sustainability o f energy sector reforms i s bolstered by the tangible improvement in the supply o f electricity to households, a highly visible quality-of-life issue. Armenia’s action in joining the WTO in February 2003 provides assurance that reforms in tax and trade policy will endure. And the substantial reduction in the quasi-fiscal deficit-for example, the deficits o f large state owned enterprises and drinking water companies-should provide policy-makers with strong incentives to maintain this regime. Also, to the extent that external financial assistance has facilitated growth, that assistance i s from diverse sources, and i s not l ikely to diminish substantially over the short-to-medium term (Annex A, table 3b). Armenia’s debt sustainability has improved in the last few years, due to strong macroeconomic performance and a debt-equity swap with Russia (see Annex A, table 3b). Finally, the country’s continuing involvement with the Bank and the Fund will also act to stimulate further reform progress.
A number o f factors, however, are working to reduce risks. The benefits o f
3.29 implies that sustainability-or the resilience to risk o f the benefits o f the Bank’s assistance program-is considered as likely.
Balancing the risks with the benefits achieved to date in the assistance program
32 Growth Study, p. 20-23, and Appendix; IMF, “Armenia: the Road to Sustained Rapid Growth-Cross Country Evidence,” May 1,2003.
25
4. Contributions to Outcomes
Borrower Performance
4.1 The Armenian Government deserves credit for its achievements in the past decade. Actions taken to implement structural reforms, establish a stable macroeconomic environment, and thereby create a foundation for growth were crucial to the positive outcomes discussed in this evaluation. Early actions, prior to Bank membership, o n price liberalization and in the agricultural sector, were also important in supporting stabilization, growth, and employment. Energy sector reforms were politically difficult, especially tariff increases for electricity, but were largely successfbl and critical for growth. Progress in agriculture and infrastructure was also substantial. These successes laid the foundation for GDP growth during the decade. Other areas o f successfbl government performance include education and poverty alleviation, where the introduction o f a means-tested poverty benefit improved benefits’ targeting.
4.2 the government did not take sufficient action to sell or liquidate large money-losing industrial enterprises, reduce regulatory barriers, and take other measures that could foster private sector growth until 2001. I t should be noted that the Bank’s program largely did not emphasize these areas until 2001, and since then the government’s response has been quite positive. Regarding strengthening the public sector, starting in 1998 the government expressed considerable interest, but the Bank was not able to fo l low through and develop an agreed strategy.
However, reforms slowed after 1997. And, as noted throughout this evaluation,
4.3 country has had 10 Prime Ministers). This has contributed to uncertainty and instability, but there has remained a generally positive-if sometimes variable-commitment to pol icy reform that has served Armenia well. The October 1999, assassination o f the Prime Minister, Speaker o f the Parliament, and other leading officials added to the i n ~ t a b i l i t y . ~ ~
Armenia has had a high level o f turnover o f pol icy officials (since 199 1 , the
Bank Performance
4.4 relevant, with only a few exceptions. Lending instruments were wel l formulated, and adjustment and investment operations were coordinated and mutually supporting. E S W was overall o f good quality, linked to the lending program, and disseminated. The Bank took a risk by fielding missions and identifying its f i rs t projects even while the conflict with Azerbaijan was ongoing. This paid o f f when, after the termination o f hostilities in 1994, Armenian officials turned their attention to the rapid implementation o f reforms. While the provision o f financial resources was important, interviews with current and past officials, citizens, and others indicate that the Bank played an equally important role
Overall, the Bank has performed well in Armenia. The Bank’s strategy was
33 The political aftermath o f the assassinations led to a considerable deterioration in fiscal and investment performance, however macroeconomic policy was managed very appropriately, and growth resumed by mid-2000.
26
as a source o f knowledge. The Bank exhibited professional quality when i t produced the 1993 CEM, which provided a roadmap for reform, as well as other analytical work in the energy and agricultural sectors. Bank staff also provided substantial informal advice to the Government. Key areas included macroeconomic management, financial and debt management, a roadmap for structural reforms, and priorities for infrastructure investment. Although part o f this transfer occurred through pol icy dialogue and ESW, a large share also took place through project design and implementation.
4.5 The sequence o f an init ial institution building loan, followed by an infrastructure credit, an adjustment credit, and then investment in energy and irrigation was successful. The continuity o f Bank staff was also excellent, especially in the energy, macroeconomic, and agricultural areas. A s the decade progressed, the Bank made significant contributions to policies in the energy and the social sectors, as wel l as maintaining a substantial poverty focus. A s noted earlier, officials give the Bank credit for being the country’s most influential donor, for pushing it to implement reforms rapidly, and for catalyzing donor fimds from other sources.
4.6 support pol icy reform, supplemented by infrastructure investment in transport, and a social investment fund. However, it was at this point-around 1997-as the stalemate over Nagorno Karabakh continued (a peace treaty has never been signed), that reform progress became more difficult and implementation o f agreed reforms dominated the agenda. Also, a hiatus in country economic work prevented the recognition o f key constraints to economic growth and the development o f a new reform agenda. As a result, the 1997 strategy did not recognize the need to push the agenda in new directions. This situation continued until 2001, when the Growth Study and the CAS identified a new path, which the Government warmly embraced. I t should be noted that throughout the period o f this CAE, the steadily improving macroeconomic performance reflected well on the performance o f both the Bank and the Borrower.
As progress became evident, the Bank provided additional adjustment funding to
Contribution of Other Partners
4.7 Armenia has been the beneficiary o f considerable support f rom the donor community, and the contribution o f other partners was substantial. The IMF has made a substantial positive contribution to the outcome o f the assistance program, especially in macroeconomic policy, tax administration, and the financial sector. The Fund provided a total o f US$257 mi l l ion in funding from 1994 to 2002 (see Annex A, table 3e). From 1994 through 1998, the Fund’s net disbursements averaged US$36 m i l l i on per year, about US$12 per capita. As might be expected, annual disbursements during 1999-2002 declined to US$17.5 mi l l ion per year, but with repayments averaging US$14.8 m i l l i on annually, annual net disbursements during that period amounted to only US$2.8 million.
4.8 per year (1994-2002). U S A I D provided assistance in the financial, energy, enterprise, agriculture, and housing sectors, and also supported democratization and privatization. Bank coordination with U S A I D was mixed; in the energy area, U S A I D supported conservation and provided electric meters, which complemented Bank pol icy efforts.
USAID was the largest bilateral donor, with aid averaging around US$65 mi l l ion
27
USAJD also completed draft legislation in a number o f areas, which supported Bank programs. However, collaboration in other sectors-for example, in the agricultural and financial sector-was less effective.
4.9 presents a lack o f suitable investment opportunities. Over the decade, IFC made two investments, totaling US$5.9 million.34 In addition to investment, IFC also provided technical assistance in a number o f areas, including a corporate governance project (1999-2000), and sponsored a FIAS study (2000) o f administrative barriers to investment and an Investors Conference (2001).
IFC investment has been quite limited, mainly due to i t s view that Armenia
4.10 EBRD made nine investments in Armenia during the decade, providing a total o f US$22.7 mi l l ion in equity and US$114.2 mi l l ion in debt. EBRD regards the “transition impact” of its efforts in Armenia as “moderate,” with most projects generally successfil, but several large projects less successfil (e.g., construction o f Yerevan Air Cargo Terminal, US$24.5 million, and Hrasdan Thermal Power Plant, US$61.8 million).
4.1 1 As noted earlier, the Bank worked closely with the L incy Foundation in highway rehabilitation, and less closely in other areas. From 1996 to 2002, L incy provided a total of around US$172 mi l l ion in support to the country: street and highway rehabilitation (US$88 million), an SME credit l ine (US$21 million), housing (US$45 million), and renovation o f cultural institutions (US$18 million).
Impact o f Exogenous Factors
4.12 regional instability is perceived as very high, which has deterred foreign investment. Second, the lack o f a peace agreement with Azerbaijan has hindered growth. Armenia’s borders with Azerbaijan and Turkey are virtually closed to trade, and there is evidence which suggests that the conclusion o f an agreement and removal o f these barriers would have a substantial positive impact on exports and overall economic p e r f o ~ m a n c e . ~ ~ Finally, support from the Armenian diaspora-the transfer o f both fbnds and knowledge-has had a positive effect.
The impact o f exogenous factors has been mixed during the CAE period. First,
34 This can be contrasted with 11 investments totaling US$83 million in Georgia over the same time period. 35 “Growth Study,” op.cit., p. 88-89.
28
5. Lessons and Recommendations
5.1 official assistance and AAA in support o f appropriate policies and institutional reform can be successful. Government commitment to sound economic policies and institutional reform is key to successful development outcomes. The linkages between the Bank’s AAA and its lending program and between the adjustment and investment lending stand out as an important feature o f the satisfactory outcome o f the Armenia assistance program. The first C E M provided an analytical foundation for the early rehabilitation loan and SAC 1, and the Growth Study refocused adjustment lending on creating an appropriate climate for private sector development (see para. 2.15). Analytical work o n poverty was instrumental in improving the targeting o f social benefits (see paras. 2.16, 3.3). Energy and education provide good examples o f synergy between adjustment and investment lending. In energy, physical rehabilitation was supported by investment lending, while institutional and policy reform was supported by adjustment loans (see para. 3.6). Achieving improvements in the business climate requires enforcement o f laws and regulations, in addition to putting in place a legal and regulatory framework. Privatization, even in the infrastructure sectors, can work well, but only when combined with appropriate regulation and supervision, tariff reform, and enforcement o f a payments culture.
The Bank’s assistance program in Armenia demonstrates that comparatively high
5.2 following areas:
This evaluation recommends that the future Bank assistance program focus in the
Prepare a strategy for an eventual transition to IBRD lending. During the decade, Armenia received comparatively high amounts o f development assistance o n concessionary terms. The country is approaching the IDA threshold, yet creditworthiness remains an issue. The upcoming country strategy should review Armenia’s creditworthiness, map out a strategy for a transition, and identify the potential implications o f the use o f JBRD resources. One implication i s that the Bank would undertake fewer operations, and lend less money. The key focus o f such a program could be on poverty-related activities, e.g., the social sectors, the rural sector, and meeting MDGs.
Continue focusing on the environment for private sector development. Generating job-creating growth to reduce poverty and expanding exports to reduce the large trade deficit are essential to reducing risks and sustaining progress in Armenia. The Bank should focus i t s adjustment lending o n continuing to improve the climate for enterprises, especially small and medium enterprises; enforcing existing laws and regulations such as bankruptcy procedures; implementing measures to make the judicial system more efficient; and opening all sectors o f the economy to competition.
Follow through on supportingpublic sector reform. A stronger public sector is key to improving the climate for private sector development and efficient delivery o f social services. The unfinished agenda o f the institutional and governance review (2000) provides an appropriate starting point. Helping the formulation o f an anti-corruption strategy, reforming customs and tax policy, and improving public administration are priori ty areas.
29
Annex A: Statistical Annexes
Table 1 : Armenia at a Glance
Table2 : Table 2a. Armenia - K e y Economic and Social Indicators, 1990-2000 Table 2b. Armenia’s Fiscal Adjustment, 1995-2002 Table 2c. Total Govemment Tax Revenues in Transition Economies, Percent o f GDP (excluding budget grants and non-tax revenues) Table 2d. Social Expenditures in CIS-7 Countries (Expenditures as a percent o f GDP)
Table 3 : Armenia - Development Assistance and Wor ld Bank Lending Table 3a. Total Receipts Ne t (ODA, OOF and Private), 1990-2001 Table 3b. Armenia - Flows o f Extemal Assistance, and Debt Sustainability Table 3c. Armenia - L i s t o f IBRD/IDA Approved Projects, 1990-2004 Table 3d. IBRD & IDA Total Net Aid Per Capita in U S D (1990-2000) Table 3e. Armenia - Transactions with the International Monetary Fund, 1994-2002 (Total in US$)
Table 4 : Armenia - L i s t o f Selected Economic and Sector Work, 1993-2003
Table 5 : Ratings for Armenia Table 5a. K e y Ratings, FY93-04 Table 5b. Projects at Risk
Table 6 : Armenia - Wor ld Bank’s Senior Management
Table 7 : Armenia - Mi l lennium Development Goals
Table 8 : Transition Progress Ratings in Central and Eastern Europe and the CIS, 1993-2001 Table 8a. Performance Table 8b. Armenia - Structural and Institutional Indicators
31
Table 1: Armenia at a Glance
Annex A
8/20/03
POVERTY and SOCIAL
2002 Population. mid-year (millions) GNI per capita (Atlas methcd, US$) GNI (Atlas methcd, US$ billions)
Average annual growth, 199862
Population (%) Labor force (%J
Most recent estimate (latest year available, 199042)
Poverty (% of population below national poverty line) Urban population (% of tdalpopulation) Life expectancy at birth (years) infant mortality (per 1,000 live births) Child malnutrition (% of children under 5) Access to an improved water source (% ofpopulation) Illiteracy (% ofpopulation age 75+J Gross primary enrollment (% of schod-age population)
Male Female
KEY ECONOMIC RATIOS and LONG-TERM TRENDS 1982
GDP (US$ billionsl Gross domestic investmentlGDP Exports of goods and servicedGDP Gross domestic savingdGDP Gross national savingdGDP
Current account balanceiGDP Interest payments/GDP Total debffGDP Total debt service/exports Present value of deWGDP Present value of debffexports
1982-92 199242 (average annual growth) GDP .. 5.4 GDP per capita .. 6.8 Exports of goods and Services .. -4.0
Armenia
3.1 790 2.4
-1.1 1.1
48 67 75 34 3
1 99 99 99
1992
1.1 1.6
39.8 -19.8
2001
9.6 10.4 22.9
Europe 8 Central
Asia
476 2,160 1,030
0.1 0.4
63 69 25
91 3
102 103 101
2001
2.1 18.6 25.6 -1.7 9.5
-9.5 0.8
46.7 7.4
30.9 88.8
2002
12.9 13.5 27.3
Lower- middle- income
2,411 1,390 3,352
1 .o 1.2
49 69 30 11 81 13
111 111 110
2002
2.4 19.8 29.2 3.2
14.2
5.8 1 .o
48.5 9.0
2002-00
6.3 -0.7 15.6
Life expectancy
T i
;NI
.I.
Access to improved water source
-Armenia - Lowermiddle-income group
Economic ratios'
Trade
T
1.
Indebtedness
Armenia Lower-middle-income arouD
-
STRUCTURE of the ECONOMY
(% of GDP) Agriculture Industry
Services
Private consumption General government consumption Imports of goods and services
Manufacturing
(average annual growth) Agriculture Industry
Services
Private consumption General government consumption Gross domestic investment Imports of goods and services
Manufacturing
1982
1982-92
1992 2001
31.0 27.7 39.4 34.2 33.1 22.4 29.6 38.1
101.3 91.0 18.5 10.7 61.3 45.9
199242 2001
2.7 11.6 4.2 6.8 3.7 3.8 4.4 9.3
3.3 15.2 -0.3 3.3 7.7 24.8
-2.9 2.1
2002
25.9 33.2 21.6 40.9
86.3 10.5 45.8
2002
4.4 24.2 14.2 9.7
-7.9 8.6
17.7 8.2
Growth of investment and GDP (%)
0
20
10
-10 I -GDI *GDP I
Growth of exports and imports ( O h ) I 30
20
10
0
-10
Note: 2002 data are preliminary estimates. * The diamonds show four key indicators in the country (in bold) compared with its income-group average. If data are missing, the diamond will
be incomplete.
Annex A (continued) 32
Armenia
PRICES and GOVERNMENT FINANCE
Domestic prices (% change) Consumer prices implicit GDP deflator
Government finance ( X of GDP, includes current grants) Current revenue Current budget balance Overall surplusideficit
TRADE
(US$ millions) Total exports (fob)
Goid, jewelry, and other precious stones Machinery and mechanical equipment Manufactures
Total imports (cif) Food Fuel and energy Capital goods
Export price index (1995=100) Import price index (1995=100J Terms of trade (1995-100)
BALANCE of PAYMENTS
(US$ millions) Exports of goods and services Imports of goods and services Resource balance
Net income Net current transfers
Current account balance
Financing items (net) Changes in net reserves
Memo: Reserves including gold (US$ millionsl Conversion rate (DEC, local/US$)
EXTERNAL DEBT and RESOURCE FLOWS
(US$ millions) Total debt outstanding and disbursed
IBRD IDA
Total debt seivice IBRD IDA
Composition of net resource flows Official grants Official creditors Private creditors Foreign direct investment Pottfoiio equity
World Bank program Commitments Disbursements Principal repayments Net flows Interest payments Net transfers
1982
1982
1982
1982
1992
728.7 568.8
4.0 -7.7 -7.7
1992
220
334
60
1992
230 364
-1 35
-39
0.3
1992
2001
3.1 4.0
16.3 0.3
-4.3
2001
342 123 28 89
877 21 1 187 62
2001
540 978
-438
64 174
-201
21 7 -1 6
334 555.1
2001
989 7
428
55 1 3
42 59
0 70 0
75 55
0 55 3
51
2002
1.1 2.3
16.7 0.5
-2.6
2002
507 259 21
991 200
2002
700 1,117 -417
88 169
-160
234 -73
360 573.4
2002
1,149 8
530
74 1 4
0 63 -4 0 0
9 66
0 66
4 62
I Inflation (x) I 25 20
15 10
5 0 5
I 111 GDPdeflator - 0 ' C P i I
Export and import levels (US$ mill.)
96 97 98 99 w 01
Exports mlmports
Current account balance to GDP (%) 1 0
5
-10
-15
-20
-25
1 Composition of 2002 debt (US$ mill.)
c 195
A - IBRD B - IDA D - Other multilateral F - Private C - IMF
E - Bilateial
G - Short-terr
Development Economics 8/20/03
33 Annex A (continued)
: ' 4 c ' ! - 3 " -
: : : e - % =
, g
: m : : : : * - u O r ( & f 0
: : : : " ? P d o o r r-
5 3 % .-
a b
Annex A (continued) 34
1997
-4.70%
-5.40%
-10.10%
budget, cash
1998 1999 2000 2001 2002
-3.70% -5.20% -4.80% -4.20% -2.60%
-6.90% -2.60% -2.50% -1.00% 3.30%
-10.50% -7.80% -7.30% -5.20% 0.70%
B. Quasi-fiscal Balance (budget arrears + deficit o f the energy sector) -2.40% -4.70%
C. Public sector balance, accrual
percent o f GDP (budgeted and off-budget, =A+B), -1 1.30%
Table 2c. Total Government Tax Revenues in Transition Economies, Percent of GDP (excluding budget grants and non-tax revenues)
1996 1997 1998 1999 2000 2001
-13.00%
Armenia, excluding SIF* Georgia Kyrgyz Republic Kazakhstan Azerbaijan Moldova Albania Lithuania Russia Macedonia Ukraine Estonia Latvia Slovak Republic Bulgaria Croatia
10.8 13.3 14.4 17.3 15.5 14.8 10.7 12.7 12.8 13.8 14.2 18 17.3 16.7 18.4 15.9 15.3 15.4 11.4 12.2 16.2 16 20 19.7 17.6 19.1 19.5 18.2 20.8 20.5 27.4 29.9 28.3 21.8 22.3 23 18.3 16.6 20.3 21.3 22.4 22.5 29.6 32.6 32.6 32.1 30.2 28.5 22.5 33 28.6 28.8 31.3 30.9 35.7 34.7 33.2 34.2 35.2 38.5 36.7 38 36 33.4 35.6 32.8 37.7 39.2 36.9 35.5 35.6 38.3 37.4 39.9 43.9 40.8 37 38.7 45.3 42.8 40.5 41.6 39.2 34.4 35.9 35.1 37.7 40.3 41.3 NJA 48..9 47.6 50.8 47.7 45.2 38.2
Source: PER, May, 2003, p. 14, and Armenia Country Department. *The Govemment notes that including revenues o f the SIF and local community budgets would add around 4 percentage points to 2001 revenue.
Table 2d. Social Expenditures in the CIS-7 Countries (Expenditure as a percent o f GDP)
Other social CIS Education Health Pensions protection
1995 1999 1995 1999 1995 1999 1995 1999 Armenia 2.6 2.3 1.8 1.9 3 3.8 1.9 2.2 Azerbaijan 4.5 4.2 2.1 1.1 1.8 4.2 3.2 2.7 Georgia 1.2 2.6 0.7 1.1 1.5 2.6 -- 1.3 Kirghizia 6.5 3.9 3.7 2.3 7.4 5.6 0.9 0.7 Moldova 7.5 4.2 4.9 2.4 6.8 5.6 1.8 0.9 Tajikistan 3.3 2.1 2.1 1 2.5 1.8 1.1 0.1 Uzbekistan 7.4 7.8 3.6 3 5.2 10.5 3.4 3 Average estimate 5.8 5.9 3.1 2.3 4.7 7.7 2.6 2.4
35
IBRD&IDA Share of Multilateral Assistance, YO
Annex A (continued)
- - - 0% 6% 59% 50% 57% 35% 49% 60% 67% 43 %
Table 3. Armenia: Development Assistance and World Bank Lending
0% 3% 38% 30% 41% 22% 27% 26% 25Yj 24%/ t - - Share of Total
ssistance, % I I I I *ODA: Official Development Assistance - Grants or loans to countries and territories on Part 1 o f the DAC List o f A id Recipients (developing countries) that are: 1 - Undertaken by the Official Sector; 2 - Have promotion o f economic development and welfare as their main objective; 3 - A r e granted at concessional financial terms (the loan has a grant element o f at least 25%). *Other Official Flows (OOF) - Transactions by the official sector with countries on the List o f A id Recipients that do not meet the conditions for Official Development Assistance or Official A id eligibility, either because they are not primarily aimed at development, or because they have a grant element o f less than 25 per cent. **DAC: Development Assistance Committee. The committee o f the OECD which deals with development cooperation matters. Source: OECD database 2003.
Annex A (continued) 36
Category Tota l
Tables 3b: Flows of External Assistance, and Debt Sustainability
percent of GDP 19.9
International Financial Support, 1993-2001, Percent of GDP
Bilateral 4.6
Mult i lateral
oiw IBRDiIDA
6.1
2.6
Remittances
Other (e.g., L incy)
8
1.2
2001 2002
Armenia 179 185
Georgia 333 308
Ky rgyz Rep. 474 433
Moldova 320 3 07
Tajikistan 476 343
2003
158
275
383
286
3 24
37 Annex A (continued)
-
Sector Board IBRD/l Latest Latest ",":zit Project Date, Rev Stalus Closing Outcome Sustninability Inst Dev Proj ID Proj Name DAAmt D O I P Rnting
Table 3c: Armenia - List of IBRI)/IDA Amroved Projects; 1990-2004
35805 Municipal Dev. 30 S S M Active 413012005
35806 Ag. Reform Support 1998 Rural Sector 15 S S M Active 613012004
44829 Transport 2000 Transport 40 S S S Active 1213112004
10 S S S Active 1213012003
022 Irrigation Dev. 2002 Rural Sector 25 S S S Active 313112007
1999 Rural Sector 8 S S M Active 12/31/2003
838 Judicial Reform 11 S S S Active 12/31/2004
847 Nat Resource Mgmt. 2002 Rural Sector 8 S S M Active 713112008
057952 SIF2 2000 Social Protection 20 S S S Active 12/31/2005
064879 Irrigation Dam Safety 1999 Rural Sector 27 S HS M Active 313112005
075758 SAC5 40 S S M Active 6/30/2004
08277 Irrigation Rehab. 1995 Rural Sector
Public Sector 08278 Institution Building 1993 12 S S N Closed 1113011997 $ !~~:~~~
17 S S M Closed 07/01/2002 u ~ ~ ~ ~ ~ ~ v Unlikely Modest
Reconstruction
1998 Education 15 S HS M Closed 1013112002 sa::k!ily Likely Substantia
1996 Transport 16 S S S Closed 12/31/2000 sa?kliry Likely Substantia
1996 Social Protection 12 S S S Closed 12/31/2000 E:!;::::; Non-evaluable Modest
1996 Economic Policy
51026 SATAC2 1998 Economic Policy 5 S S M Closed 12/31/2002 Satisfactory Likely Substanti
51 118 Highway Supplement 1997 Transport 15 # # # Closed #
51171 SAC3 65 S S M Closed 0613012001 ~~~;~~~~~ Likely Substanti
65189 SAC4
Source: Business Warehouse database as of October 29,2003
Annex A (continued) 38
Table 3d: IBRD & I D A Total Net Aid Per Capita, in USD (1990-2000)
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
Armenia 1.7 24.4 24.5 20.4 11.3 17.2 14.2
Azerbaijan 3.9 4.6 7.1 2.6 7.6 3.4
Georgia 0.2 15.7 14.1 11.8 9.7 14.5 3.4
Kyrgyz 5 7.9 17.7 13.1 14.1 13.8 4.4 10.6 Republic
Moldova 9.4 6.5 16.3 7.2
Tajikistan 5.1 3.7 6.2 5.8 3.7
Uzbekistan
Table 3e: Armenia - Transactions with the International Monetary Fund, 1994-2002 (Total, in US$)
Year
2002
200 1
2000
1999
1998
1997
1996
1995
1994
Total
Disbursements
27,540,000
13,770,000
28,8 13,725
52,050,600
23,236,875
46,473,750
41,826,375
23,236,875
256,948,200
Repayments
19,392,188
10,083,938
16,483,359
13,186,688
581,766
59,727,938
Net
8,187,813
3,706,063
-16,483,359
15,668,888
5 1,544,434
23,270,625
46,541,250
41,887,125
23,270,625
197,593,463 Note: Calculated at SDR=US$I ,379. *External current account including transfers.
39 Annex A (continued)
Table 4: Armenia - List of Selected Economic and Sector W o r k , 1993-2003
Jo- 1.
2.
3 .
4.
5.
6.
7.
8.
9.
LO.
11.
L2.
13.
14.
15.
16.
17.
18.
19.
20.
Iocument Title Date Report No Document Type
Armenia - Public expenditure review Vol. 1 o f 1 (English)
Armenia - Chi ld welfare note
Armenia - Poverty update
Growth challenges and govemment policies in Armenia
Armenia - Country assistance strategy public information notice
Armenia - Growth challenges and govemment policies
Armenia - Growth challenges and govemment policies, Vol. 2
Armenia - Country assistance strategy document
Armenia - Improving social assistance in Armenia
Public expenditures in Armenia : strategic spending for creditworthiness and growth
Armenia - Privatizing power
Armenia - Transport sector review
Armenia - Transport sector review, Vol. 2
Armenia - Transport sector review, Vol. 3
Armenia - Confronting poverty issues
Armenia - The challenge o f reform in the agricultural sector
Armenia - Agriculture and food sector review
Armenia - Agriculture and food sector review, Vol. 2
Armenia - Country economic memorandum
Armenia - Country economic memorandum, Vol. 2
412812003 24434
121912002 2449 1
12/9/2002 24339
212812002 23786
211 112002 PIN64
1 113012001 22854
1113012001 22854
412512001 221 1 1
61811999 19385
1111 1/1997 16213
10128/1997 1701 8
513011997 16625
513011997 16625
513011997 16625
611011996 15693
513111995 14521
2/6/1995 13034
21611995 13034
3/24/1993 11214
312411993 11274
Economic Report
Sector Report
Economic Report
Wor ld Bank Country Study CAS Public Information Note
Sector Report
Sector Report
Country Assistance Strategy
Sector Report
Economic Report
Sector Report
Sector Report
Sector Report
Sector Report
Sector Report
Wor ld Bank Country Study
Sector Report
Sector Report
Economic Report
EconomicReport
S?rce: World Bank Imagebank as o f October 29,2003.
Annex A (continued) 40
Table 5: Ratings for Armenia
Table 5a: Key Ratings, FY93-04 Inst Dev
Total Outcome Impact Total Outcome Inst Dev Evaluated % Sat Sustainability % Subst Evaluated %Sat Sustainability Impact
Country (No) (No) %Likely (No) (No) ($MI ($) %Likely ($) % Subst ($) Armenia 14 86 85 64 417 82 89 72
Azerbaijan 3 67 50 0 149 48 44 0
Kyrgyz Republic 12 83 58 42 363 95 48 39
Georgia 14 79 92 57 415 57 84 41
Moldova 10 70 50 20 316 78 46 18
Tajikistan 7 71 57 29 145 63 82 42
Uzbekistan 4 67 33 0 246 35 9 0
ECA 402 79 73 50 31,230 72 75 49 World Bank 2,712 71 57 39 208,314 77 66 43 Source: World Bank Business Warehouse as o f November 13,2003.
Table 5b: Projects at Risk Net
Comm Comm At Country # Proj Amt # Proj At Risk % A t Risk Risk % Commit at Risk
Armenia 14 260.7 0 0 0.0 0
Azerbaijan 14 336.0 0 0 0.0 0
Georgia 16 297.2 1 6 15.0 5
Kyrgyz Republic 14 259.2 1 7 15.0 6
Moldova 10 112.5 0 0 0.0 0
Tajikistan 10 166.5 1 10 20.0 12
Uzbekistan 9 345.5 5 56 206.5 60
ECA 281 13,867.9 22 8 1,263.6 9
World Bank 1,389 93,675.0 226 17 14,351.3 16 Source: Business Warehouse database as o f October 29,2003.
41 Annex A (continued)
Table 6: Armenia-World Bank's Senior Management
Year Vice President Country Director ChieflResident Representative
1993 Wilfried Thalwitz Basil G. Kavalsky Wafik Grais
1994 Wilfi-ied Thalwitz Basi l G. Kavalsky Waf& Grais
1995 Wilfried Thalwitz Basi l G. Kavalsky Wafik Grais
1996 Johannes F. Linn Basil G. Kavalsky Vahram Nercissiantz
1997 Johannes F. Linn Basil G. Kavalsky Vahram Nercissiantz
1998 Johannes F. Linn Judy O'Connor Vahram Nercissiantz
1999 Johannes F. Linn Judy OConnor
2000 Johannes F. Linn Judy O'Connor
Owaise Saadat
Owaise Saadat
2001 Johannes F. Linn Judy O'Connor Owaise Saadat
2002 Johannes F. Linn D-M Dowsett-Coirolo Roger J. Robinson
2003 Johannes F. Linn D-M Dowsett-Coirolo Roger J. Robinson
Source: World Bank Group Directory.
Annex A (continued) 42
Table 7: Armenia - Millennium Development Goals 1990 1995 1999 2000 2015 target = halve 1990 $I a day poverw and malnutrition rates 1. Eradicate extreme poverty and hunger
Population below $1 a day (%) Poverty gap at $1 a day (“h)
7.8 1.7 5.5 Percentage share o f income or consumption held by poorest 20%
Prevalence o f child malnutrition (% o f children under 5) Population below minimum level o f dietary energy consumption (%)
3.3 35
2. Achieve universal primary education Net primary enrollment ratio (% o f relevant age group) Percentage o f cohort reaching grade 5 (%)
3. Promote gender equality Ratio of girls to boys in primary and secondary education (%)
Share o f women employed in the nonagricultural sector (%)
4. Reduce child mortality Under 5 mortality rate (per 1,000) 23.8 19.9 18.4 17.2 Infant mortality rate (per 1,000 live births) 18.6 14.2 15.4 14.6 Immunization, measles (% o f children under 12 months) 93 96 91 5. Improve maternal health Matemal mortality ratio (modeled estimate, per 100,000 live births) Births attended by skilled health staf f (% o f total) 6. Combat HIV/AIDS, malaria and other diseases Prevalence o f HIV, female (% ages 15-24) Contraceptive prevalence rate (% o f women ages 1549) Number o f children orphaned by HIV/AIDS Incidence o f tuberculosis (per 100,000 people)
2015 target = net enrollment to 100
Youth literacy rate (% ages 15-24) 99.5 99.7 99.7 99.7
Ratio o f young literate females to males (% ages 15-24) 99.7 99.8 99.9 99.9
Proportion o f seats held by women in national parliament (%)
2005 target = education ratio to 100
3.7 2015 target = reduce 1990 under 5 mortality by two-thirds
4
2015 target = reduce 1990 maternal mortality by three-jourths 29 96
2015 target = halt, and begin to reverse, AIDS, etc.
58 Tuberculosis cases detected under DOTS (‘h) 7. Ensure environmental sustainability
42 2015 target = various (see notes)
Forest area (‘YO o f total land area) 11 12.4 Nationally protected areas (% o f total land area) 7.4 7.6 GDP per unit o f energy use (PPP $ per k g oi l equivalent) 1.9 4.4 4.9 C 0 2 emissions (metric tons per capita) Access to an improved water source (% o f population) Access to improved sanitation (% o f population)
1 0.9 0.9
Access to secure tenure (% o f population) 8. Develop a Global Partnership for Development 2015 target = various (see notes) Youth unemployment rate (% o f total labor force ages 15-24) Fixed line and mobile telephones (per 1,000 people) Personal computers (per 1,000 people) General indicators Population 3.5 million Gross national income ($) 1.4 billion GNI per capita ($) 370
97.5 Total fertility rate (births per woman) 2.6 L i f e expectancy at birth (years) 71.7
External debt (% of GNI) Investment (% o f GDP) 47.1
156.9
Adult literacy rate (% o f people ages 15 and over)
A id (% o f GNI) 0.1
154.5 2.4
3.8 million 2.7 billion 730 98 1.6 72.3 7.6 12.9 18.4
157.5 5.7
3.8 million 1.9 bi l l ion 490 98.3 1.2 73 11.3 47.5 18.4
156.4 7.1
3.8 million 2.0 billion 520 98.4 1.3 73.6 11.2 46.5 19.2
Trade (% o f GDP) 81.3 86.1 70.6 74.1 Source: World Development Indicators database, Apri l 2002. Note: In some cases the data are for earlier or later years than those stated. Goal 1 targets: Halve, between 1990 and 2015, the proportion of people whose income i s less than one dollar a day. Halve, between 1990 and 2015, the proportion ofpeople who suffer i iom hunger. Goal 2 target: Ensure that, by 2015, children everywhere, boys and girls alike, wil l be able to complete a full course o f primary schooling. Goal 3 target: Eliminate gender disparity in primary and secondary education preferably by 2005 and to all levels o f education no later than 2015 Goal 4 target: Reduce by two-thirds, between 1990 and 2015, the under-five mortality rate. Goal 5 target: Reduce by three-quarters, between 1990 and 2015, the matemal mortality ratio. Goal 6 targets: Have halted by 2015, and begun to reverse, the spread of HNIAIDS. Have halted by 2015, and begun to reverse, the incidence o f malaria and other major diseases. Goal 7 targets: Integrate the principles of sustainable development into country policies and programs and reverse the loss o f environmental resources. Halve, by 2015, the proportion of people without sustainable access to safe drinking water. By 2020, to have achieved a significant improvement in the lives of at least 100 million slum dwellers. Goal 8 targets: Develop further an open, rule-based, predictable, non-discriminatory trading and fmancial system. Address the Special Needs of the Least Developed Countries. Address t h e Special Needs o f landlocked countries and small island developing states. Deal comprehensively with the debt problems o f developing counuies through national and intemational measures in order to make debt sustainable in the long term. In cooperation with developing countries, develop and implement strategies for decent and productive work for youth. In cooperation with pharmaceutical companies, provide access to affordable, essential drugs in developing countries. In cooperation with the private sector, make available the benefits of new technologies, especially information and communications.
43 Annex A (continued)
Country
Table 8: Transition Progress Ratings in Central and Eastern Europe and the CIS, 1993-2001 Table Sa: Performance
Enterprises Markets and trade Financial institutions Infrastructure Banking Secunties
Govemance Price & enterpnse non-bank
financial liberalization exchange policy interest rate liberalization restructuring
Trade & Foreign Competition reform & markets ' Infrastructure
system
Large-scale Small-scale pnvatization pnvatization
institutions ~
I Armenia Azerbaijan Georgia Kyrgyz Republic Moldova Tajikistan Uzbekistan
3+ 4- 2+ 3 4 2 2+ 2 2+ 2 4- 2 3 4- 2 2+ 2- 2- 3+ 4 2 3+ 4+ 2 2+ 2- 2+ 3 4 2 3 4 2 2+ 2 I+ 3 3+ 2 3+ 4+ 2 2+ 2 2+ 2+ 4- 2- 3 3+ 2- 2- 1 ~ I+ 3- 3 2- 1 2 2- 2 2- 2 2-
Table Sb: Armenia - Structural and Institutional Indicators
1993 1994 1995 1996 1997 1998 1999 2000 2001
3.0 3.0 3.0 3.0 3 .O 3 .O 3 .O 3 .O 3 .O 2.0 2.0 3.0 4.0 4.0 4.0 4.0 4.0 4.0
Liberalization EBRD index o f price liberalization EBRD index o f forex and trade liberalization
Privatization EBRD index o f small-scale privatization EBRD index of large-scale privatization
Enterprises EBRD index o f enterprise reform EBRD index o f competition policy
Infrastructure EBRD index o f infrastructure reform
Financial institutions EBRD index o f banking sector reform
2.0 2.3 2.7 3 .O 3.0 3.3 3.3 3.3 3.7 1.0 1.0 2.0 3 .O 3.0 3 .O 3 .O 3 .O 3.0
1.0 1.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 1.0 1.0 1.0 1 .o 1 .O 1 .o 1 .o 1 .o 2.0
1.0 1.3 1.7 1.7 2.0 2.0 2.3 2.3 2.3
1.0 1.0 2.0 2.0 2.3 2.3 2.3 2.3 2.3
Legal environment ! EBRD rating oflegal effectiveness (company law) ~ n.a n.a n.a n.a 3.0 3 .O 2.0 2.0 2.0 EBRD rating o f legal extensiveness (company law) I n.a n.a n.a n.a 3.0 4.0 3.7 3.7 2.7
Note: l=Little or no progress; 2=Some progress; 3=Significant and sustained progress; 4=Comprehensive reform, approaching intemational standards; 4+=standards and performance typical o f advanced industrial economies. Source: EBRD Transition Report, 2002.
45 Annex B
List of Persons Interviewed
Government of Armenia
Vardan Khachatryan Sofia Hovhannesian Minister of Finance and Economy (for Levon AghamianAgric. PIU)
David Hrutyunyan Minister o f Justice
Tigran Khachatryan Deputy Minister o f Finance and Economy
Tigran Davtian Deputy Minister o f Trade and Economic Development
Tatul Hakobyan Deputy Minister o f Health
Karen Sargssian Deputy Minister o f Energy
Ruben Hovhannisyan Director, Implementation Office Electricity Transmission and Distribution Project
Sergey Khachatryan Health PIU
Ruben Hovhannessian Electricity Transmission PIU
Adibek Ghazarian Irrigation PIU
List of Workshop Participants
Mels Hakobian Armenak V. Darbinyan General Director Director Sevan-Hrazdan Cascade Economic Research Institute (Former Minister o f Energy, member o f NA) Economy)
(Former Minister o f Finance and
Eduard Karapetyan, Division Director Ministry o f Transport
Hranush Kharatian Head o f the Ethnology Department S U A
Gagik Arzumanyan Norayr Petrossian Deputy General Director Armenian Copper Program (former Deputy Minister o f Finance)
Karine Harutyunyan Alpha Plus Education PIU
Alik Astvatsatrian Procumrment Offices Commission Energy PIU
(for Andranik Andereassian, Deputy Minister o f Urban Development)
Alex Poghossian
A m e n Khudaverdian Secretary o f Public Sector Reform
Sergy Khachatryan Health PIU
Annex B (continued) 46
Ruben Hovhannessian Electricity Transmission PIU
Adibek Ghazarian Irrigation PKJ
Bagrat Yengibarian Executive Director, Enterprise Incorporated Foundation (Former Director, Foreign Finance Project Management)
Tigran Davtian Deputy Minister o f Trade and Economic Development
Karen Sargssian Deputy Min is ter o f Energy
Sofia Hovhannesian (for Levon Aghamian Agric. PIU)
Gagik Arzumanyan Deputy General Director Armenian Copper Program (former Deputy Minister o f Finance)
Vahram Avanessian Former Minister o f Finance
World BanWIFC
Judy 0’ Connor Country Director
Roger Robinson Country Manager
Armine Khachatryan Advisor to the ED
Peter Nicholas Country Officer
Bagrat Tunyan Public Sector Management Specialist
Alexander Astvatsatryan World Bank, Procurement Officer EnergyMunicipal projects
Gayane Minasyan Operations Officer Environment Section
Susana Hayrapetyan Operations Officer Social Sector
Nerses Karamanukyan International Finance Corporation Head o f Office, Yerevan
Naira Melkumyan Portfolio Manager
Jonathan Walters Country Economist
Lev Freinkman Country Economist
Helen Sutch Country Economist
Vladimir Vucetic Energy Sector Specialist
Helga Mul ler Social Sector Manager
Amit Mukherjee Social Sector Specialist
Mark Lundell Agricultural Sector Specialist
Martin Slough Financial Sector Specialist
Reiner Forster Social Sector Specialist
47 Annex B (continued)
Other Donors
Armen Giulkhasyan Director, Representative Office in Armenia The L incy Foundation
Masoud Keyan Executive Director PA Consulting Group (USAID Contractor)
Paul Dodds Attomey/Advisor to U S A I D
Luis Valdivieso IMF
David Grigorian IMF
James McHugh IMF Resident Representative
Private Sector/NGOs
Hrant B agratyan Vice-president Yerevan Brandy Company
Armand Pinarbasi Grant Thomton Chartered Accountant & Corporate Finance
Levon Barkhudaryan A r m h p e x Bank (Former Minister o f Finance)
Amalia Kostanyan Chairwoman Center for Regional Development Transparency International Armenia
Arevik Saribekyan Director Armenia Anti-Corruption Resource Center Transparency International
Larisa Alverdian Fund Against Violation o f Law (NGO)
49 Annex C
Armenia Country Assistance Evaluation Management Action Record
OED Recommendations
Prepare a strategy for an eventual transition to IBRD lending. During the decade, Armenia received comparatively high amounts o f development assistance on concessionary terms. The country i s approaching the IDA threshold, yet creditworthiness remains an issue. The upcoming country assistance strategy should review Armenia's creditworthiness, map out a strategy for a transition, and identify the potential implications o f the use o f IBRD resources. One implication i s that the Bank w i l l undertake fewer operations, and lend less money. The key focus o f such a program could be on poverty-related activities, e.g., the social sectors, the rural sector, and meeting MDGs.
Continue focusing on environment for private sector development. Generating job-creating growth to reduce poverty and expanding exports to reduce the large trade deficit are essential to reducing r i s k s and sustaining progress in Armenia. The Bank should focus its adjustment lending on continuing to improve the climate for enterprises, especially small and medium enterprises; enforcing existing laws and regulations such as bankruptcy procedures; implementing measures to make the judicial system more efficient; and opening al l sectors o f the economy to competition.
Follow through on supportingpublic sector reform. A stronger public sector i s key to improving the climate for private sector development and efficient delivery o f social services. The unfinished agenda o f the institutional and governance review (2000) provides an appropriate starting point. Helping the formulation o f an anti-corruption strategy, reforming customs and tax policy, and improving public administration are priority areas.
Management Response
We agree that this recommendation i s appropriate for any [DA borrower with a per capita income that i s approaching h e IDA operational cut-off, currently set at $865 per capita. [n close consultation wi th FRM and SRF, the Region i s reviewing options for Armenia's eventual transition to blend Itatus. Armenia w i l l remain an IDA-eligible country for the FY05-FY08 period, although some aspects o f IDA lending wil l be affected as the country moves past the IDA 3perational cut-off (e.g. the maturities for new IDA credits shorten when a country has been above the operational cut- 3 f f for two consecutive years). In preparation o f the country assistance strategy for FY05-08, the country team i s working with the authorities and SFRCR to prepare benchmarks that can be used to review Armenia's creditworthiness at mid-term. If the country makes sufficient progress over the next three years, the country assistance strategy envisages a possible first IBRD credit towards the end o f the country assistance strategy implementation period.
We agree with this recommendation and have made continuing private sector-led economic growth one o f the three primary country assistance strategy objectives. The country assistance strategy plans to address this both through implementation o f the current portfolio (including the on-going Judicial Reform Project and the soon to be approved Public Sector Modernization Project) and several new interventions, particularly the planned series o f PRSCs and PRSC TA project (which w i l l focus on improving the environment for private sector growth, improving public sector financial management and addressing priority social sector issues) and new investment operations, complemented by AAA work on competition policy, the financial sector, a C E M and the next PER update.
This recommendation i s completely in line wi th our current strategy. A Public Sector Modernization Project has been appraised and wil l be negotiated shortly, and a follow-up activity i s scheduled for the high case o f the next country assistance strategy. Modernization o f tax and customs administration w i l l be important elements o f the PRSCs and a tax and customs administration project i s slated for the high case o f the next country assistance strategy period. T h e government has just published an anti-corruption strategy with support f i om the Bank, and the next country assistance strategy anticipates supporting implementation through the PRSCs and the PRSC TA project.
51 Annex D
Guide to OED’s Country Assistance Evaluation Methodology
1. evaluation (CAE) m e t h ~ d o l o g y . ~ ~
CAEs rate the outcomes of Bank assistance programs, not Clients’ overall development progress
2. An assistance program needs to be assessed on how wel l i t met i t s particular objectives, which are typically a sub-set o f the Client’s development objectives. If an assistance program i s large in relation to the Client’s total development effort, the program outcome will be similar to the Client’s overall development progress. However, most Bank assistance programs provide only a fraction o f the total resources devoted to a Client’s development by donors, stakeholders, and the government itself. In CAEs, OED rates only the outcome o f the Bank’s program, not the Client’s overall development outcome, although the latter i s clearly relevant for judging the program’s outcome.
This methodological note describes the key elements o f OED’s country assistance
3. significantly f rom the Client’s overall development progress. CAEs have identified assistance programs which had:
The experience gained in CAEs confirms that program outcomes sometimes diverge
0
0
0
satisfactory outcomes matched by good Client development; unsatisfactory outcomes in Clients which achieved good overall development results, notwithstanding the weak Bank program; and, satisfactory outcomes in Clients which did not achieve satisfactory overall results during the period o f program implementation.
Assessments Of Assistance Program Outcome And Bank Performance Are Not The Same
4. By the same token, an unsatisfactory assistance program outcome does not always mean that Bank performance was also unsatisfactory, and vice-versa. This becomes clearer once we consider that the Bank’s contribution to the outcome o f i t s assistance program i s only part o f the story. The assistance program’s outcome i s determined by the jo in t impact o f four agents: (a) the Client; (b) the Bank; (c) partners and other stakeholders; and (d) exogenous forces (e.g., events o f nature, international economic shocks, etc.). Under the right circumstances, a negative contribution f rom any one agent might overwhelm the positive contributions f rom the other three, and lead to an unsatisfactory outcome.
5. OED measures Bank performance primarily o n the basis o f contributory actions the Bank directly controlled. Judgments regarding Bank performance typically consider the relevance and implementation of the strategy, the design and supervision o f the Bank’s lending interventions, the scope, quality and follow-up o f diagnostic work and other AAA activities, the consistency o f Bank’s lending with i t s non-lending work and with i t s safeguard policies, and the Bank’s partnership activities.
Evaluation I n Three Dimensions
6. elements that contribute to assistance program outcomes. The consistency o f ratings i s further tested by examining the country assistance program across three dimensions:
As a check upon the inherent subjectivity o f ratings, OED examines a number o f
36 In th is note, assistanceprogram refers to products and services generated in support o f the economic development o f a Client country over a specified period o f time, and client refers to the country that receives the benefits o f that program.
Annex D (continued) 52
(a) a Products and Services Dimension, involving a “bottom-up” analysis o f major program inputs -- loans, AAA, and aid coordination;
(b) a Development Impact Dimension, involving a “top-down” analysis o f the principal program objectives for relevance, efficacy, outcome, sustainability, and institutional impact; and,
(c) an Attribution Dimension, in which the evaluator assigns responsibility for the program outcome to the four categories o f actors (see paragraph 4. above).
Rating Assistance Program Outcome
7. In rat ing the outcome (expected development impact) o f an assistance program, OED gauges the extent to which major strategic objectives were relevant and achieved, without any shortcomings. Programs typically express their goals in terms o f higher-order objectives, such as poverty reduction. The country assistance strategy (CAS) may also establish intermediate goals, such as improved targeting o f social services or promotion o f integrated rural development, and specify h o w they are expected to contribute toward achieving the higher-order objective. OED’s task i s then to validate whether the intermediate objectives produced satisfactory net benefits, and whether the results chain specified in the CAS was valid. Where causal linkages were not fully specified in the CAS, it i s the evaluator’s task to reconstruct this causal chain f rom the available evidence, and assess relevance, efficacy, and outcome with reference to the intermediate and higher-order objectives.
8. priorities, such as the Mi l lennium Development Goals, and Bank corporate advocacy priorities, such as safeguards. Ideally, any differences on dealing with these issues would be identified and resolved by the CAS, enabling the evaluator t o focus on whether the trade-offs adopted were appropriate. However, in other instances, the strategy may be found to have glossed over certain conflicts, or avoided addressing key Client development constraints. In either case, the consequences could include a diminution o f program relevance, a loss o f Client ownership, and/or unwelcome side-effects, such as safeguard violations, a l l o f which must be taken into account in judging program outcome.
Ratings Scale
9. highly unsatisfactory:
Evaluators also assess the degree o f Client ownership o f international development
OED utilizes six rating categories for outcome, ranging f rom highly satisfactory to
H i g h b Satisfactory:
Satisfactory:
The assistance program achieved at least acceptable progress toward a l l major relevant objectives, &had best practice development impact on one or more o f them. No major shortcomings were identified. The assistance program achieved acceptable progress toward a l l major relevant objectives. No best practice achievements or major shortcomings were identified.
53 Annex D (continued)
Moderately Unsatisfactory:
Unsatisfactory:
Highly Unsatisfactory:
The assistance program did not make acceptable progress toward most o f i t s major relevant objectives, or made acceptable progress on a l l o f them, but either (a) did not take into adequate account a key development constraint or (b) produced a major shortcoming, such as a safeguard violation. The assistance program did not make acceptable progress toward most o f i t s major relevant objectives, and either (a) did not take into adequate account a key development constraint or (b) produced a major shortcoming, such as a safeguard violation. The assistance program did not make acceptable progress toward any o f i t s major relevant objectives and did not take into adequate account a key development constraint, while also producing at least one major shortcoming, such as a safeguard violation.
10. or negligible. ID1 measures the extent to which the program bolstered the Client’s abil ity to make more efficient, equitable and sustainable use o f i t s human, financial, and natural resources. Examples o f areas included in judging the institutional development impact o f the program are:
The institutional development impact (IDI) can be rated as: high, substantial, modest,
0
0
0
0
0
0
0
0
0
the soundness o f economic management; the structure o f the public sector, and, in particular, the c iv i l service; the institutional soundness o f the financial sector; the soundness o f legal, regulatory, and judicial systems; the extent o f monitoring and evaluation systems; the effectiveness o f a id coordination; the degree o f financial accountability; the extent o f building NGO capacity; and, the level o f social and environmental capital.
1 1. Sustainability can be rated as highly likely, likely, unlikely, highly unlikely, or, if available information i s insufficient, non-evaluable. Sustainability measures the resilience to r i s k o f the development benefits o f the country assistance program over time, takmg into account eight factors:
0
technical resilience; financial resilience (including policies on cost recovery); economic resilience; social support (including conditions subject t o safeguard policies); environmental resilience; ownership by govemments and other key stakeholders; institutional support (including a supportive legalh-egulatory framework, and organizational and management effectiveness); and, resilience to exogenous effects, such as international economic shocks or changes in the polit ical and security environments.
55 Attachment 1
Comments from the World Bank Group Governor for Armenia
Mr. Ajay Chhibber, Director Operations Evaluation Department The World Bank Group 1818 H Street, N.W Washington, D.C. 20433 U S A . Fax: (202) 522-3 1.22
March 2,2004
Dear Mr. Chhibber,
Re: Armenia-Country Assistance Evaluation
The Executive Director’s office has recently sent me a copy o f the draft
Atmenian Country Assistance Evaluation, dated January 16, 2004, for my
comments. 1 understand that our Minister of Finance and Economy has already
furnished detailed comments about the m e draft. I will therefore be brief. 1 concur with OED’s evaluations of the Bank’s assistance strategy as
“satisfactory” and the Bank’s overall contribution to insbrurional development
8s “substantial”. I also concur with OED’s assessment of the risks and the benefits that suggests the sustainability of the Bank’s assistance program should
be considered “likely”. Clearly, the Bank’s assistance program in Armenia over
&e last ten years demonswdtes that generous financial assistancc together with analytical and adVisory support can be quite successfd, i f i t i s in support o f appropriate policies and institutional reforms that have Government commitment and strong leadership and implementation capacity. Armenia’s double digit growth rates and stable macroeconomic management through
Attachment 1 (continued) 56 ..
specdy transihi TO an open, mostly private market economy dcmonstrates the validity of OED's assessnicnt.
Nevertheless, during this rapid transition fsom a despotic command
economy to a liberal market economy we are facing unacceptable level o f
poverty and erosion of social infrastructure, particularly, in health and
education, that require our continuous strategic focus and commitment to
improve quality o f life for the entke population. We have, therefore, prepared a
comprehensive poverty reduction strategy in collaboration with the World Bank Group, which requires considerable concessionary fiinds for the next several
years. We would hope that your proposed transition to IBRD lending would not be a speedy process, so as to allow time to conclude this portion of our
economic transition and to achieve sound creditworthiness.
I take this opportuniv to thank the, management and staff o f the World
Bank Group for their generous, dedicated and professional assistance to
Armenia during the last decade and to reassure that we m e determined to
conrinue this close collaboration with the World Bank Group in the fume.
cc: Mr. Ad P. W. Me&& Executive Director Fa: (202) 522-1572
. Vahram Nercissiantz
World Bank &oup Govemor for ArmeNa
57 Attachment 1 (continued) . .
Comments from the Government
To: Mr. Ad ,Melkert Executive Director World Bank
Dear Mr. Melkert, We would thereto like to express our gratitude for the interest you have shown in the
discussion of the position of the Armenian authorities with respect to the Draft Rep* developed by the WB Operations Evaluation Department.
In general, the Government of Armenia (GOA) highly appreciates the broad and significant analysis carried out by the WB team and thereto considers that the Report mainly covers the achievements, which have been gained within the past 10 years in the light o f WB technical and financial support to the GOA, and meantime bares in mind registered shortfalls.
The presented Report is more appreciated especially in the sense that the lessons, learnt fkom the latter, should be at hand in clear-cut understanding of the targets set in the 4-year Country Assistance Strategy (CAS) for Armenia as well as in the light of actions, undertaken for setting more efficient combination of policies for the achievement o f the latter.
The main considerations with regard to the Evaluation Report, developed by the WB Operation Evaluation Departmen6 is thereto presented underneath:
1. As mentioned in the presented Document, according to the IDA rating Armenia will have passed the threshold, set for IDA financing m the end of the next 4-year period. This presumes that this factor will also affect and decrease I D A financing within the for&& of the present 4-year period. On the other hand, the GOA considers that in the forthcoming years the WB support will continue being of high importance for reducing the present risks for the development of the economy of Armenia and intend$ to get the best use of all the possible means.
'
In the light of the aforementioned things, in this phase we would like to discuss the position o f the Bank with regard to High Case financing envisaged for the forthcoming 4 years
Attachment 1 (continued) 58
as well as the mcchanisms for thc achievement o f the latter. Wc thereto consider that the solutions to the given issue might be covered in the Draft Report. Following are the two suggested clauses:
a) Taking into consideration the achievements of the economic policy, registered within the past years, in the forthcoming support phase the WB programs might be set according to the Optimistic/ High Case Scenario (which will probably exceed the Base Case scenario by USD 30- 40 million).
At least the high macroeconomic performance in 2004 may serve as a launch of the High Case Scenario. We thereto consider that one of the major lapses of the given Document is that the estimatcs o f the past period do not cover the following issue; what is the reason o f failing to use the possibilities of high case financing within the 2001-04 CAS when high performance indicators were registered?
b) As an optional solution to the issue o f meeting financial needs of the country in the light of reduced IDA financing, the need of elaborating the IBRD (International Bank for Reconstruction and Development) Crediting Strategy is thereto formulated in the Draft Report. We agree to this. yet consider that the mere elaboration of the Strategy i s not enough. The aforementioned Strategy should be developed already in the forthcoming year and it should also be clarified within this 4-year Strategy (for h-tance within the last two years) that Armenia will have chance to implement the Loan Programs of the given organization.
#
2. In the given Report the authors have not.mentioned the preconditions, set within the format of previous WB CAS, for the implementation of regional programs. We thereto consider that one of the peculiarities o f the forthcoming CAS might be the carried out discussion of the issue of the implementation of joint investment programs with Georgia. It could result in the duction of the risks, which are presented as “risks of regional uncertainties” in the given Report. In this sense, mainly the possibility of regional development o f programs, previously implemented in the level of infrastructures could be taken into consideration.
3. Given the fact that within the format o f this Document the issues with regard to the provided WB crediting and consultation arc discussed together with the role of thc WB in the economic development of Armenia in general, then it is important to set in the Document the clear-cut WJ3 position with regard to the economic blockade o f Annenia, the negative impact that the latter has had on the economy o f h e n i a Whereas, in the Draft Repoe this issue i s thereto presented as a mere matter of closed borders o f Armenia with Turkey and Azerbaijan. (prjncipally p.51). We consider that this issue should be raised during the discussions and clear and direct estimates together with the WB position with regard to the regulation of this issue should be presented.
Besides all the aforementioned things, the Report contains a number of paragraphs, which should be revised. Our considerations are presented underneath.
In Paragraph 1 of the Summary it is said that the economic decline of the years 90-93 has totaled 63% (the same rders to Paragraph 1.4, page 12). According to official statistics the aforesaid decline ha totaled about 57% (&us in piuagraph 2 of this
’ . . .
’: section it should be said that, acCcFding to 2003 indicators the GDP ratio has totaled. about 90%. This ratio. was also registered m 1989.) In Paragraph 2 of the Summary it is said that the poverty indicator hris t&led 48%.
. . . .’ . > .. .. . . . ,....’ . . .
.: According to the data of the National Statistical Service of RA this indicawr has ’ . ’ ’ ’ ’
. ‘ :i , . .. .. .. ..-.: . *
,. .. ;..:‘ ... I , . ’.. ’., :.: .. ,
59 Attachment 1 (continued) . .
totaled 50.9% (This very ratio, which was principally discussed with the WB WE, also put in the Poverty Reduction Strategy Paper (PRSP)). In Paragraph 1.6 of the Section of Purpose and Background it is said ‘‘. @er 1996,
Perception that refam had brought few benefits to the majoriry of the people weakehed popular support for rdo rm...” and thus “. ..inuns@ed regional insrabiliry a d weakened the Government’s willingness to tackle emenched sested interests with close ties to the militqy ...” This part together with the subsequent one with regard to indifferent position of rhc GOA with regard to the fiscal and monetary policies has nothing to do with the reality. We thereto suggest removing this pan during the discussions. In Paragraph 1.8 of thc section of Purpose and Background it is said that in 2000 the country’s debt indicator was over 50%. Whereas in reality this indicator has totaled 47.9% (this should be verified)
0 The Indicators for poverty and extreme poverty, which are brought in Paragraph I . 1 1 of the section of Purpose and Background, are different fiom the official ones, registered in Armenia. Particularly, fiom 1998-99 up to 2001 the poverty has dropped by 5 interest points instead of 7. (This totals about 9%). We thereto suggest revising these indicators so as to match to the PRSP indicators. We do not share the position of the Bank, presented in Paragraphs 2.23 and 2.27 of the Section of the World Bank Assistance to Armenia, 1993-2002, which says that the GOA“ ... has taken less of the role for the coordination of donor support ...’, The GOA undertakes a number o f actions in the elaboration and implementation of Country Assistance Programs of the aforementioned organizations. Since 1997 positive qualitative progress has been registered with regard to the coordination of donor support. A number of examples are the evidence of the latter. Besides all the other proves is the fact that after the adoption of the PRSP the GOA has hold great many discussions with the donor organizations for the concordance of donor programs to the priorities set in the PFSP. In Paragraph 2.15 o f the Section “World Bank Support to Armenia, 1993-2002” the observation with regard to the fact that economic development has not resulted in the decline of poverty, is not right. The analysis carried out within the format of the Review on the “Growth lssuts and the Policy o f the Government in Armenia in 2002” (the latter is used m the Report) has proved the contrary. Thc facts with regard to the aforementioned things are thoroughly presented in the analytical part of the PRSP. In paragraph 3.7 of the Section o f the Assessment of Development Impact of Country Assistance the idea that the mechanisms for the assurance o f essential proceeds for the maintenance of roads in Armenia are not assured. Within the format of the understanding, reached between the WB and the GOA in the light o f the SAC V, as well as by the amendment made in “hdgct System Law o f RA” in 2002, the concrete mechanisms far the resolution of this issue has been set. With regard to the Public Sector Modernization Credit, referred to in Paragraph 3.13 of che Section o f the Assessment of Development Impact of Country Assistance, it should be noted that the Bank and the GOA have recently reached the main understandings. In paragraph 3.19 o f the Section of the Assessment of Development Impact of Country Assistance, the shadow economy indicator of Armenia, totaling 60% of the GDP does not correspond to the reality. The simple evidence of the latter might be the foIlo&ng: about 23% of the GDP counts for the field of agriculture, which is actualtytax exempt (For this very reason the GOA considers that there is no sense to qWIify the agricultural share of the GDP as shadowy.) If the “shadow part” were to count for 60% of tbe remainder 77% of the GDP than the other part, subject to declaration (i.e. the fomd part) should rota1 17% of the GDP, whereas in Annenia, the collected taxes (to
0
- Attachment 1 (continued) 60 ..
the consolidated budget) total about 17.5% of the GDP. According to the estimates of the GOA the shadow economy counts for the 30% of the GDP, not more. In Paragraph 4.3 of the section of the Contribution to Outcomes, it is said "...in Armenia dose cooperation has been set wlfhfn a number of leading firms and influential politicians, thus indicating noncumpetitlve behavior and barriers to en&y in a number of key sectors... " Which does not correspond to the reality. The figures of Table 1 should be revised, given the fict the actual figures for 2002-03 are known now. The figures for Annenia, presented in Table 2c refer to the state (central) budget and do not cover the revenues of the Social Foundation (totaling about 3% of the GDP as well as tax revenues o f the communities budgets totaling 1% of the GDP.) Besides, the works, carried out within the format of intemational programs (WB, KfW and credit programs o f other financial organizations), are not taxable. In other equal conditions, tyc payments, totaling 0.S interest pints more of the GDP would be made within these programs. This means that the total tax revenues of the Annenia would amount to 19% of the GDP. As compared to other countries and an incomparable figure is thereto presented for Armenia and it should be revised accordingly.
61 Attachment 2
Chairperson’s Summary Committee on Development Effectiveness
Meeting of March 17,2004
1. The Informal Subcommittee (SC) o f the Committee on Development Effectiveness (CODE) met on March 17, 2004 to discuss the Armenia Country Assistance Evaluation prepared by the Operations Evaluation Department (OED).
2. Background. The evaluation found that the Bank was successful in helping the country to establish a market e-conomy, achieve macroeconomic stability and attain a high rate o f economic growth. The OED report stressed that the Bank’s program in Armenia showed that comparatively high official assistance combined with analytical and advisory services can be quite successful if appropriate policies, institutional reforms, continued government commitment and ownership are in place. OED has rated the Bank’s program in Armenia as satisfactory, but noted that current gains are subject to a number o f risks, such as regional instability, dependence on international assistance, limited job creation and high levels o f poverty.
3. Management broadly agreed with and welcomed the CAE findings as timely, and noted that some issues identified in the report led the preparation o f and will be reflected in the new Armenia country strategy.
4. The Chair representing Armenia thanked OED for preparing an excellent report and noted that the Armenian Government broadly concurred with the CAE’s findings and recommendations. She noted that the CAE presents a positive case both from the perspective o f the country development and successful implementation o f the Bank program. She also noted the interest o f Armenian authorities in developing a transition strategy from IDA to IBRD lending, and stressed the importance o f risk mitigation measures for smooth transition.
5. Main Conclusions and Next Steps. The Subcommittee welcomed the CAE and agreed with the OED rating o f Bank assistance as satisfactory. Members concurred that the Bank played an important positive role in Armenia, but noted that the impact o f economic growth on poverty reduction in the country was s t i l l limited. They commended management for including the CAE’s recommendations in the new country strategy and stressed the importance o f drawing lessons from the Bank’s successful experience in Armenia.
The following points were raised:
6. Lessons learned. Members welcomed the Bank’s program in Armenia as well balanced and properly coordinated. Many members were interested in the positive lessons from the Armenian experience, whether the successful approach applied by the Bank in Armenia (e.g. the uti l i t ies reform) could be replicated in other countries. Some members were interested whether the factors o f government ownership o f the reforms and prior actions played significant role in the overall success o f the program. OED and management replied that a well-funded Bank program in Armenia was a response to and in support o f the good and coherent policies o f the government, which did show a great deal o f ownership in promoting liberalization and macroeconomic stabilization efforts.
7. Growth and poverty reduction. The subcommittee agreed that the Bank played a crucial role in Armenia, although some members expressed concerns about limited impact o f growth on poverty reduction and income inequality. They asked whether strategy adjustments for the Bank program are required, given that the significant and impressive growth has not translated into adequate poverty reduction and employment. One member was interested in the correlation o f high poverty rates and the relatively high social indicators. OED commended the high quality o f the poverty-related AAA products
At tachment 2 (continued) 62
in Armenia and noted that this situation - when growth does not transcribe into adequate poverty reduction - has been observed in a number o f other transitional economies. Management added that the issue o f inequality i s the central pillar o f the PRSP and i s recognized by the Government a matter o f long- term political sustainability.
8. Transition f rom IDA to IBRD. Members urged the management to take a cautious approach in Armenia’s expected transition from IDA to IBRD lending, and stressed the importance o f helping the country to avoid becoming the victim o f i t s own success. OED and management concurred that despite i t s impressive performance on a number o f indicators, Armenia’s transition to IBRD lending should be approached with extreme caution, given the country’s high dependence on external assistance. Management noted that Armenia’s closeness to reaching the IDA threshold i s being incorporated in the new country strategy together with scenarios and criteria for a transition strategy to IBRD lending.
9. Donor coordination. Many members acknowledged the CAE observation that the donor coordination function o f the Armenian government was weakened after the responsible office in the Ministry o f Finance and Economy lost influence. They were interested in particular reasons for that change and possible measures to remedy the situation, given the CAE assessment o f donor coordination as partly inefficient. Some members pointed that the PRSP should be the main driver for donor coordination. OED and management noted that the Board has recently discussed Armenian PRSP and concurred that i t s implementation will offer a good opportunity for improving donor coordination.
Rosemary Stevenson Chairperson, CODE Subcommittee
