The Armenian government’s draft budget for next year is reduced by over five percent compared to that of 2009. It envisages cuts in most important public expenditures (including military ones), but leaves social payments and salaries intact. A twelve percent cut in the military budget is unlikely to disrupt the military balance in the region, although Azerbaijan, Armenia’s only military adversary, will keep its military expenditures high. In addition, the 2010 budget provides enough funds for stimulating the economy, which was badly damaged in 2009.

BACKGROUND: On October 30, discussions about Armenia’s draft budget started at the National Assembly permanent Committees. Its adoption in the first reading is scheduled for November 15. The budget proposed by the government for next year will be smaller than in 2009, although the government and international financial organizations expect that the economy will grow by 1.5 percent next year, whereas it is expected to have shrunk by at least 15 percent in 2009. In January-September, Armenia’s GDP shrunk by 18.3 percent compared with the same period in 2008, one of the worst economic performances in the world.

In the pre-crisis year 2008, the state budget of Armenia accounted for around 822 billion Armenian drams in expenditures (nearly US$3 billion). The expenditures of the current year are expected to be 900 billion drams (US$ 2.43 billion), with US$ 554 million borrowed abroad to compensate the sharp decrease in tax collections. Among the creditors are the IMF, the World Bank, the Asian Development bank, and Russia, which provided an interstate credit. In 2010, the government plans to reduce expenditures to the equivalent of US$2.3 billion with the deficit reduced to US$495 million. Thus, Armenia’s state budget will be smaller next year than in 2009, although the economy is expected to grow by 1.5 percent in 2010 compared with the catastrophic decrease in 2009.

Hence government expenditures in 2010 will be at least 5 percent lower than the real expenditures in 2009 or 9 percent lower than the official budget for 2009 (which will be only partly fulfilled). Accordingly, most expenditure items will be reduced compared with the planned level of the 2009 budget. State pensions and salaries of the budgetary sector employees will be kept unchanged; while the social protection expenditures will be cut by 3.9 percent. The largest cuts will be in health care expenditures (16.7 percent), education (12.4 percent) and defense expenditures (22 percent). In all these spheres, salaries will be kept constant and the reduction will be achieved through construction restrictions and some reform projects. Among the cut items are also some expenditures of secondary importance such as cars and furniture for state offices. As for the defense budget, the Government claims that its planned reduction, 116.2 billion drams (US$314 million), down from 149 billion (US$402 million), will not damage the fighting efficiency of the Armenian army. No detailed breakdown of these expenditures is available, but evidently the construction of new barracks will be postponed, while the defense needs will not be affected.

In parallel with the efforts to reduce foreign borrowings and curb the state debt, the Government implements a range of measures aimed at improving tax collection and reducing the shadow economy.

IMPLICATIONS: The Armenian Government makes energetic efforts to overcome the strongest economic decline since 1993. At the same time it faces challenges related, first, to the political crisis following the presidential elections of February 2008 and second, to possible difficulties which can arise from its normalization of relations with Turkey, if the Turkish-Armenian protocols signed on October 10 are ratified by the two parliaments.

The opening of the Turkish-Armenian land border may, along with positive effects, result in new challenges to Armenian business and the Government implements an extensive set of reforms to enhance economic efficiency. On the other hand, keeping the military balance with Azerbaijan remains an important task for Armenia. The two countries are involved in a long dispute over the status of the Armenian-populated enclave of Nagorno-Karabakh, and fought a war in 1991-1994. A ceasefire has since then been effective in the conflict region through a balance of military forces. While Armenia has a defense budget equivalent to US$402 million in 2009, the defense budget of Azerbaijan is equivalent to US$1.5 billion (1.2 billion Azerbaijani manat). This difference is usually explained by several factors, which force Azerbaijan to retain a much larger military budget. First, Armenia needs troops only on its borders with Azerbaijan, as its borders with Iran and Turkey are protected by Russian troops, and Georgia is a friendly country, while Azerbaijan needs to keep troops along the long borders with Iran and Russia, besides its borders with Armenia and the cease-fire line with Karabakh and Armenian-controlled territories surrounding Karabakh. Second, Azerbaijan needs a military fleet in the Caspian Sea, which is rather expensive. Third, as a member of the Collective Security Treaty organization, Armenia buys weapons from Russia at much cheaper prices than does Azerbaijan. Fourth, the defensive arms Armenia needs to protect its positions against Azerbaijan are cheaper than the offensive arms Azerbaijan needs in a possible recapture of Karabakh, which is now under Armenian control. Low efficiency of Azerbaijani military expenditures is also often mentioned among the reasons of this unbalance.

For the next year, crisis-hit Armenia plans to reduce its military expenditures by 22 percent while Azerbaijan, whose economy has been growing in 2009, does not plan any reduction of military expenditures for the next year, maintaining a stable budget. While this is unlikely to disrupt the existing military balance with Armenia, the risk of resumed violence still remains. In Armenia, two scenarios of such a relapse into war are considered. First, the Azerbaijani leadership could order attacks on Armenian positions to prevent a Armenian-Turkish rapprochement, and eventually reach a breakthrough in Karabakh. Second, the increased tension caused by the new developments could create uncontrolled local conflicts which could grow into a new war. 

Another serious problem for the Armenian government is providing new impetus for the economy. In July-September, the economy stopped declining, and the government is likely successful in its efforts to prevent a sharp decline in living standards under the severe crisis. In addition, the government has managed to initiate a number of infrastructure projects during this crisis year, such as the motorway Iran-Armenia-Georgia and commissioning a new block of the Medzamor Nuclear Power Plant. In parallel, the government expects its measures aimed at improving the business climate and stimulating the economy to provide results next year, which would allow the country to face a potential opening of the Turkish border with a more competitive economy.

CONCLUSIONS: With one of the worst economic downturns in the world, Armenia has managed to keep its public expenditures high to prevent an extensive decrease in living standards and keep its defense potential high. Next year Armenia will reduce its budget, and among other cuts, military expenditures will be reduced by 22 percent. Although the military expenditures of Azerbaijan will then exceed those of Armenia more than fourfold, this decrease will hardly disrupt the military balance in the region. In any case, a risk of resuming violence between Armenia and Azerbaijan next year is not completely disregarded in Armenia. The Armenian government also takes steps to help the economy recover after the deep recession during the current year and to enhance its competitiveness ahead of the expected opening of the Turkish-Armenian land border.

AUTHOR’S BIO: Haroutiun Khachatrian is an analyst on political and economic issues based in Yerevan, Armenia.