On November 12, Armenian Prime Minister Tigran Sargsyan unveiled the main principles of action of his government, which are expected to mitigate the effects of the global economic crisis on the Armenian economy. Its main measures are to encourage small and medium businesses, and boosting the purchasing capacity of the population through increased government involvement in the economy.

The government sees three main risks to Armenia emanating from the global crisis, and the expert community shares this vision. These include first, a drop in prices for important Armenian exports goods, first of all copper and molybdenum. This process has already started, as by September-October, the prices for these metals had dropped by 50% from the level of early 2008, resulting in a reduction of their production in Armenia and a loss of some 2,000 jobs. A second factor is the decrease in foreign investment especially in the construction sector, which has been the most rapidly growing sector of the Armenian economy over the last five years; and third, decreased private remittances from Armenians living abroad to their relatives in the country. These remittances (some US$2 billion a year) make up to 20% of Armenia’s GDP and are a key factor in maintaining the living standards and purchasing power of Armenians. Their decrease is expected to follow the economic downturn in the countries of their origin, first of all Russia, where over 70% of this money comes from.

The measures suggested by Sargsyan are, in general, similar to the ones planned or applied by other governments. The government envisages providing loan guarantees and subsidies to the companies in trouble. The government may even take a stake in certain companies. However, the criteria determining the eligibility of companies for receiving these funds have not yet clarified, except for the general requirement of accounting transparency and implying modern corporate governance principles. The government is reported to have prepared a special bill which will be adopted by the National Assembly later this year.

Contrary to most similar anti-crisis programs of other governments, Armenia does not plan to lower tax rates. This is not surprising, as the government has repeatedly failed to reach the expected tax collection rate (tax administration is poor and allows significant tax evasion). Thus, the government will continue its efforts to improve tax collection and accumulating a buffer in the budget to prepare for a worsened economic performance. The government has also started taking steps for improving the business environment for small and medium enterprises (SME), a sector providing more jobs than large companies. Along with technical support for existing and new businesses, the government will extend low-interest loans to this sector, and an initial agreement has been reached with the World Bank to provide US$250 million to the Armenian government early next year for this purpose. Last week the government already provided US$50 million of its own funds for extending concession loans to SMEs.

Another way to stimulate economic activity and create jobs is, according to the Prime Minister, to boost infrastructural projects. In addition to previously declared (and partly initiated) projects of building new power-generating capacities, including a new nuclear power station, Armenia will activate road construction projects. The government hopes to secure loans from the Asian Development Bank for constructing rural roads and a new highway connecting the Georgian port of Batumi to Iran through the western part of Armenia.

According to Sargsyan, Armenia also hopes to receive funding from an unusual source, namely the funds of Diaspora Armenians, who can use the Armenian banks a safe haven during the financial turmoil elsewhere. The Armenian banking system is in fact in a rather unique situation, as the banks are solvent well above the usual adequacy standards, which makes their bankruptcy highly unlikely. At the same time, they have little foreign debt, which makes them independent of the crisis-hit world financial markets. These two factors, together with the relatively small public debt of Armenia, may make investments in Armenian banks quite a good option. In addition, the government plans to create a specific commercial structure, the so-called All-Armenian bank, which is expected to enable the Diaspora Armenians to invest their free cash in the profitable assets of their historical homeland. The government still has to persuade Armenians worldwide that investing in the Armenian banking system is both safe and profitable. If successful, this will be another step toward one of the ambitious goals of Sargsyan’s government, namely to form a regional financial center in Armenia.

Finally, the government plans to sharply increase the public spending to create jobs and provide more people with incomes in the conditions of the coming crisis.

Between 2001 and 2007, Armenia was one of the most successful economies in the world with an annual GDP growth rate over 10% (9.3% in January-October 2008). Experts predict that during next year, the growth will hardly exceed 5 percent. Under these conditions, the government’s biggest challenge is affording its ambitious program.