Document of The World Bank

FOR OFFICIAL USE ONLY Public Disclosure Authorized Report Number: 38585 - AM

THE INTERNATIONAL DEVELOPMENT ASSOCIATION

COUNTRY ASSISTANCE STRATEGY PROGRESS REPORT

FOR Public Disclosure Authorized ARMENIA

FOR THE PERIOD FY05 - FYO8

February 9,2007 Public Disclosure Authorized

South Caucasus Country Unit Europe and Central Asia Region

This document has a restricted distribution and may be used by recipients only in the performance of their official

Public Disclosure Authorized duties. Its contents may not otherwise be disclosed without World Bank Authorization. DATE OF LAST CAS FOR ARMENIA

June 10,2004

CURRENCY EQUIVALENTS (Exchange Rate Effective January 3 1 2007)

US1 = 359 Drams

GOVERNMENT FISCAL YEAR

January 1 to December 3 1

ABBREVIATIONS AND ACRONYMS

AAA Analytic & Advisory Activities IFAD International Fund for Agricultural Development ADA Armenian Development Agency IFC International Finance Corporation BEEPS Business Environment & Enterprise IMF International Monetary Fund Performance Survey JSAN Joint Staff Advisory Note CAS Country Assistance Strategy KfW German Development Bank CEM Country Economic Memorandum LIL Learning and Innovation Loan CIS Commonwealth of Independent States MCC Millennium Challenge Corporation CPIA Country Policy and Institutional Assessment MDG Millennium Development Goal CPPR Country Portfolio Performance Review MIGA Multilateral Investment Guarantee Authority DFID Department for International Development NGO Non-GovernmentalOrganization DSA Debt Sustainability Analysis NPV Net Present Value EBRD European Bank for Reconstruction & Dev OECD Org. for Economic Cooperation & Development ENP European NeighborhoodPolicy PER Public ExpenditureReview EU European Union PIU Project ImplementationUnit FA0 Food and Agriculture Organization PPP Purchasing Power Parity FDI Foreign Direct Investment PRGF Poverty Reduction and Growth Facility FIAS Foreign Investment Advisory Service PRSC Poverty Reduction Support Credit FSAP Financial Sector Assessment Program PRSP Poverty Reduction Strategy Paper FSU Former Soviet Union SAC Structural Adjustment Credit FY Fiscal Year SIL Sector Investment Loan GDP Gross Domestic Product SME Small and Medium Enterprise GEF Global Environment Facility TA Technical Assistance GNI Gross National Income UNDP United Nations Development Program GOA Government of Armenia UNHCR United Nations High Commissioner for GTZ German Technical Cooperation Agency Refugees IBRD Int’l Bank for Reconstruction & Development USAID US Agency for International Development IDA International Development Association VAT Value Added Tax IDF Institutional Development Fund WBI World Bank Institute IEG Independent Evaluation Group WTO World Trade Organization

Vice President: Shigeo Katsu Country Director: Donna M. Dowsett-Coirolo Team Leader: Anthonv Cholst TABLE OF CONTENTS FOR OFFICIAL USE ONLY

I. RECENT POLITICAL AND ECONOMIC DEVELOPMENTS...... 1

I1. THE GOVERNMENT’S POVERTY REDUCTION STRATEGY ...... 3

I11 PROGRESS IN CAS IMPLEMENTATION AT MID-TERM ...... 4

A Overall Lending Envelope ...... 4 B Progress in Achieving the CAS Results Framework ...... 5 C Analytic and Advisory Activities ...... 9 D. IFC and MIGA ...... 10 E. Partnerships ...... 10 F. Early Lessons of Implementation ...... 11

IV. THE CAS PROGRAM GOING FORWARD ...... 12

V . RISKS ...... 13

TABLES AND BOXES

Table 1. Key Economic Indicators. 2003-2007 ...... 2 Table 2 . IDA Lending During the FY05-08 CAS Period ...... 4

Box 1. Measuring Progress in the Fight Against Corruption ...... 7 Box 2 . Ensuring Integration and Oversight of IDA Projects ...... 12

ANNEXES

Annex 1. Progress Towards Achieving CAS Results ...... 14 Annex 2 . Progress Towards Meeting the MDG Targets ...... 23 Annex 3 . Country Financing Parameters ...... 24 Annex 4 . Partnerships ...... 25 Annex 5 . Country at a Glance ...... 26 Annex 6 . Key Economic Indicators ...... 28 Annex 7 . Armenia: Social Indicators ...... 30 Annex 8 . Key Exposure Indicators ...... 31 Annex 9 . Selected Indicators ofBank Portfolio Performance and Management ...... 32 Annex 10. Bank Group Program Summary (IDNGrants and IFCMIGA)...... 33 Annex 11. Summary of Non-Lending Services ...... 34 Annex 12 . Statement of IFCs Held and Disbursed Portfolio...... 35 Annex 13 . Operations Portfolio (IBRD/IDA and Grants) ...... 36

This document has a restricted distribution and may be used by recipients only in the performance of their official duties . Its contents may not be otherwise disclosed without World Bank authorization .

Country Assistance Strategy Progress Report for Armenia for FYO5-OS

1. This Country Assistance Strategy Progress Report (CASPR) assesses progress in implementing the FY05-08 Country Assistance Strategy (CAS) for Armenia, discussed by the Board on June 10, 2004 (Report No. 28991-AM). The CASPR also indicates adjustments needed to meet evolving needs during the remainder of the CAS period. The document draws inter alia on Armenia’s 2005 and 2006 Poverty Reduction Strategic Program (PRSP) Progress Reports and a 2006 results-based Country CAS and Portfolio Performance Review (CPPR). It also reflects a review of IDA’S analytic and advisory activities (AAA) by the Bank’s Quality Assurance Group (QAG) in June 2006. The main elements ofthe CASPR were discussed with the Government in January 2007.

I. RECENT POLITICAL AND ECONOMIC DEVELOPMENTS

2. The political environment remains stable. The three party coalition led by President Kocharian has governed Armenia with stability in recent years, although there may be changes in the composition ofthe government during the rest ofthe CAS period as a result of Parliamentary elections in May 2007 and Presidential elections in 2008. A national referendum in November 2005 approved changes to the Constitution aimed at strengthening the independence of the judiciary and restructuring relations between the executive and legislative branches. However, the voting process was marred by irregularities and criticized by the OSCE as not meeting international standards; the government has pledged to improve the conduct of the 2007 and 2008 elections. The conflict with Azerbaijan over Nagorno-Karabakh remains unresolved, despite several rounds of discussions between the Presidents, and borders with both Azerbaijan and Turkey remain closed. Armenia is also vulnerable to possible impacts of other regional tensions. In 2006 Armenia signed a compact with the US Millennium Challenge Corporation and a European Neighborhood Policy (ENP) Action Plan, enhancing cooperation with both US and EU partners.

3. Economic growth and management are strong. GDP growth has averaged 12.6 percent since 2004 (the start of the CAS period). This growth has been driven by steadily increasing private investment, heavy remittances and a strong donor financed development program. Prudent macroeconomic policies have maintained sustainable external and internal balances, kept inflation low, and reduced Armenia’s debt burden. External current account deficits have been fully financed through grants or concessional borrowing, and the debt burden has fallen steadily to amongst the lowest ratios for emerging market economies. Safeguards against shocks are provided by a large build up in the single Treasury account in the Central Bank and by international reserve accumulation. The dram has appreciated significantly in nominal terms over the past three years. Armenia is fully on track with its IMF PRGF Program. 2006 2007 2003 2004 2005 (est) (proj) Real GDP growth, YO 14.0 10.5 14.0 13.4 9.0 End ofperiod CPI inflation, YOchange 8.6 2.0 -0.2 5.2 4.0 Current account balance, % ofGDP -6.8 -4.5 -3.9 -5.0 -4.5 Fiscal deficit (consolidated), % of GDP -1.5 -1.6 -2.6 -1.1 -2.3 External public debt, eop, % ofGDP 39.1 33.1 22.4 18.6 16.8 Gross international reserves, % months of imports 4.0 3.3 3.5 3.6 3.9 Total public expenditure (consolidated), % of GDP I 22.4 1 20.8 I 21.9 I 21.1 I 21.7 I Public investment, % ofGDP I 5.2 I 3.9 I 4.1 I 4.0 I 4.6 I Private investment, YOof GDP I 19.5 I 20.0 1 24.1 I 26.4 I 24.8 I Foreign investment, % of GDP I 4.3 I 6.1 1 5.1 1 4.5 I 4.0 I Average exchange rate, annual % change 0.5 -8.4 -14.3 -9.0 -- GNI per capita ($,atlas based) 950 1140 1470 1750 2100 Tax Revenues to GDP ** 14.0 14.1 14.3 14.4 15.2

4. All three main sectors of the economy - construction (29 percent of GDP in 2006)’ agriculture (19 percent in 2006) and industry (16 percent in 2006) - have contributed to Armenia’s growth. Agriculture, which had a poor year in 2003 due to weather, recovered sharply with cumulative growth of 27.3 percent in 2004-05. Industrial growth has been supported by the processing sector (particularly diamonds) and metal industries. Construction has been supported by the boom in housing. Exports grew at 24 percent annually over 2003-05. Nevertheless, preliminary data indicates that growth in 2006 was driven by construction and services. Agriculture, industry and overall exports grew more slowly (partly related to weather issues and the weak world markets in diamonds and minerals) while imports grew by 22 percent. This suggests that Armenia will need to redouble efforts to increase productivity and diversify exports, particularly given exchange rate appreciation.

5. With sustained growth and sound social protection policies, poverty fell. Armenia saw a significant reduction in poverty, with the proportion of poor declining from 49 percent in 2002 (the CAS base year) to 30 percent in 2005. Growth reduced extreme poverty even faster from 17 percent in 2002 to under 5 percent in 2005. The household survey reveals strong decreases in both urban and rural poverty, and in income inequality. These results can be attributed to increases in wages, social transfers, and remittances from abroad (private transfers grew by 36 percent annually from 2003-06).

1 From 2002 to 2005, poverty in Yerevan declined from 45 percent to 24 percent, in other urban areas from 60 percent to 38 percent, and in rural areas from 45 percent to 28 percent. The income inequality index declined from 0.45 to 0.36. The methodology was revised in 2004, but the strongly downward trend is seen even after adjusting for this.

2 6. Armenia continues to make progress on the reform agenda, though important challenges remain. Both economic and social reforms have continued, as evidenced by improvement in Armenia’s IDA Country Performance Rating (CPR), now among the highest for all IDA countries. Nevertheless, challenges remain. Though wages have been increasing and new jobs are being generated, unemployment remains high at one-third ofthe labor force. While remittances have grown, their value has been partially offset by exchange rate appreciation. Sustained high growth will depend on continuing improvements in productivity, and economic and trade diversification. This in turn requires strengthening of corporate governance; property rights enforcement; streamlined tax and customs administrations; eliminating distortions associated with corruption; improving competition in telecommunications and civil aviation; closer integration with international trade and capital markets; deepening financial markets; and building the human capital necessary for a competitive economy.

11. THE GOVERNMENT’S POVERTY REDUCTION STRATEGY

7. Armenia has a strong poverty reduction strategy in place. In November 2003, the Armenia PRSP was presented to the Boards ofIDA and the IMF. The Boards and the staffs found the PRSP to be comprehensive and prepared through broad participatory processes, both within the government as well as with civil society and donors. PRSP Progress Reports (PRSP-PR) in April 2005 and June 2006 and the Joint Staff Advisory Notes (JSANs) on them concluded that Armenia has had a successful first two years of PRSP implementation, in which most of the targets have been met or exceeded. IDA’S FY05-08 CAS incorporated many PRSP targets into its results framework, which has facilitated monitoring and dialogue with the government and other partners.

8. Armenia has achieved or exceeded most PRSP targets that it set for itself. Key achievements include: (i)stronger than anticipated economic growth and poverty reduction; (ii)improvements in fiscal resources and policy, though tax and customs administrations continue to require strengthening; (iii)increased spending in the social sectors and good progress in initiating systemic social sector reforms - social spending in real terms is higher than anticipated in the PRSP, though it did not achieve targets as a percent of GDP because GDP itself grew more rapidly than anticipated in the PRSP; and (iv) good progress in infrastructure and rural development, although further increasing private sector involvement and reducing rural poverty remain challenges. Armenia is preparing a full PRSP update in mid-2007 with revised targets.

9. Armenia also remains on target to achieve most if not all of its Millennium Development Goals (MDGs) by 2015. In 2005, Armenia published a first progress report on meeting the MDGs. The progress report is notable in providing a strong degree of adaptation to the national situation, setting out more stretch goals than the global targets. Achievement of all of these goals is assessed as either possible or likely. At the same time, challenges continue to exist in promoting gender equality, combating communicable diseases, ensuring environmental sustainability, and implementing the Government’s anti-corruption agenda (see Annex 2 for a fuller review of adapted MDG targets and results).

3 I11 PROGRESS IN CAS IMPLEMENTATION AT MID-TERM

A. Overall Lending Envelope

10. The FYO5-08 CAS was built around a base case of $170 million over 4 years, with the possibility of a high case of $220 million. Thus far Armenia’s annual performance based IDA allocation (PBA) has been sufficient to support the high case. The CAS centerpiece - a series ofPoverty Reduction Support Credits - supports a wide range of reforms, focusing on improving public management and the regulatory framework, the financial sector, human development and the rural economy. This is complemented by a range of investment projects indicated in Table 2 below, which compares original CAS expectations with actual and currently foreseen lending. All ongoing IDA projects in Armenia are rated satisfactory.

Table 2. IDA Lending during the FYOS-OS CAS Period

FY07-08 I FY07-OS Current Projection I SIF I11 $25m PRSC I11 $20 m PRSC I11 $28m Renewable Energy $5 m Advanced to FY06 (see above) Public Sector I1 $10-20m Judicial Reform I1 $22.5m Infrastructure $10-30 m Traffic Management $7.5 -10m Rural Dev I1 $10-30 m Irrigation (Add’l) $5m PRSC IV $15 m PRSC IV $10 - 20m Health Svstems APL I1 $22m FY07-08 IDA $120 -130m

FY05-08 IDA $220 m FYOS-OS IDA $226-236 a/ b/

4 B. PROGRESS IN ACHIEVING THE CAS RESULTS FRAMEWORK

11. The CAS outcomes and results indicators remain valid and the CAS is on a trajectory to meeting them. The CAS sets out three broad pillars of IDA engagement: (i)promoting private sector led economic growth, (ii)making growth more pro-poor, and (iii)reducing non-income poverty. Each pillar contains expected outcomes of IDA’S assistance program and results indicators, drawn from specific projects and Armenia’s PRSP targets. Progress is tracked annually through joint government-IDA Country Portfolio Performance Reviews (CPPRs).

12. The CAS uses many of the Government’s PRSP targets in order to link its results framework to the Government’s goals and tracking mechanisms, and enable fine tuning to be made through the PRSP process. For example, the CAS relies on PRSP targets for tax revenues and social spending, calculated both in real terms and as a percent ofGDP. The PRSP update due in mid 2007 is expected to review progress and set new targets which the country team will reflect in the results framework for the final year of the CAS. Details of progress to date are provided in the results matrix (Annex 1) and summarized below.

Pillar I:Promoting private sector led economic growth

13. An important part of the strategy for achieving the Pillar 1 objective is to help achieve more effective public sector management. Some key reforms supported by PRSC I, 11 and 111 include: (i)strengthening transparency in tax and customs administrations, (ii)regulatory reforms in utilities and telecommunications (including the establishment of a multi-sector Public Services Regulatory Commission - PSRC), and liberalizing trade in air services, and (iii)in the financial sector strengthening creditor rights and building a collateral registry system. The fiscal situation has improved, although tax revenues to GDP have remained in the 14-15 percent range. Armenia no longer experiences payment arrears, fiscal deficits are low, and budget formulation and execution have improved. In the financial sector, the PRSC has supported improved banking supervision, higher capital requirements, and prudent insurance regulations. The financial sector is growing strongly, with the loans/GDP ratio rising from 5.9 percent in 2003 to 8.3 percent in 2005.

14. Transparency and accountability in the provision of government services has been strengthened. In addition to the above actions, The Public Sector Modernization Project has supported the application ofmerit based appointments and pay. Civil service appointments are now required by law to be made on a merit basis. Civil service pay was increased by up to 50 percent in January 2006 and raised another 18.5 percent in January 2007, which should help reduce rent-seeking. The PSMP is also helping to improve transparency in public procurement and audits. The PSMP and the Social Investment Fund projects have helped to strengthen local communities through direct capacity building and support for fiscal decentralization processes. The ongoing and planned Judicial Reform Projects are supporting improvements in judicial governance and administration, automation of the case management system, rehabilitation of 12

5 courthouses, and increased legal awareness. All laws, decrees and decisions are now publicly available on the internet, and the “My Rights” TV show has helped to generate significant interest in legal rights by the public. The BEEPS survey and a survey under the project both indicate a rise in satisfaction in users ofthe courts.

15. Private sector growth has also been supported by infrastructure improvements. Power is more reliable through the rehabilitation of 8 electricity transmission stations under the Electricity Transmission and Distribution Project. The rehabilitation of transport infrastructure and the increase in road maintenance under the Transport Project has made transport services more efficient. The 2005 BEEPSsurvey indicates a significant decline in the percentage of firms reporting that telecommunications, electricity, and transport were problems2 IDA also helped to establish two institutions in support of private investment - (i) the Armenian Development Agency (ADA) through the Foreign Investment and Export Facility LIL (jointly with MIGA), and (ii)the Enterprise Incubator through the Enterprise Incubator LIL. The ADA has become one ofthe most effective investment promotion agencies in the region as confirmed by MIGA’s 2006 Investment Promotion Agency Performance Review. The Enterprise Incubator has assisted in attracting investment and promoting exports, particularly in the IT sector (estimated at 2 percent ofGDP).

16. There has been modest progress in ensuring that growth is environmentally sustainable. Under the Natural Resources Management Project, a new Forest Code has been adopted and forest management plans prepared covering 128,000 ha. Rehabilitation of forest areas is currently underway. However, despite parallel attention on the forest framework under the PRSC, uncontrolled logging remains an issue due to weak enforcement and institutions. Introduction of improved watershed management practices has been slow, although there is some recent improvement. The new Urban Heating and Renewable Energy projects will help to build safe, clean and affordable heating and energy systems.

17. Many aspects of governance have improved, though there is still a considerable agenda to be tackled. The Bank Group has employed various surveys - including Doing Business, the BEEPS Survey and the WBI governance indicators -to help measure progress in governance. These surveys show that the rule of law, government effectiveness, regulation and business procedures have all improved significantly. At the same time, they point to remaining issues in corruption, voice and accountability (See Box 1). Activities supported under the CAS to address governance include streamlining the tax and customs administration and corporate governance rules under the PRSC series, improving the rule of law (and voice) under the Judicial Reform projects, and improved procurement and audit transparency under the PRSC and PSMP. The health and education projects are helping to increase hnding for service professionals which should reduce incentives for rent seeking. The SIF is strengthening capacity and voice at the local level.

2 The percentage of firms reporting that telecommunications, electricity, and transport were problems in doing business declined from 26 percent, 30 percent, and 19 percent respectively in 2002 to 12 percent, 9 percent, and 13 percent respectively in 2005 (Armenia BEEPS-at-a-glance, 2006).

6 ues in the last two years.

Bribe Frequency Corruption as a Problem Doing Business Percent of bnssaying unoffiad payments are frequent Percent of firms IiiUicatlng corruption as a problem doing business

10

30

20 02002 02002 8 ZOO6 a2005 io

0 AN31 CIS ECA Aiiri CIS ECA

These results can be complemented by the “Doing Business” survey, which reviews how a country’s laws and procedures are structured to facilitate business. By this measure Armenia is doing quite well; it is now ranked 34’ out of 175 countries world-wide (and the top ranking of the CIS countries), although this survey also points to taxes and customs as being outstanding challenges. Ease of... 2006 rank 2005 rank Doj~pBtiSioess 34 37 Starting a Business 46 48 Dealing with Licenses 36 70 Employing Workers 41 22 Registering Property 2 6 Getting Credit 65 76 Protecting Investors 83 81 Paying Taxes 148 147 Trading Across Borders 119 113 Enforcing Contracts 18 19 Closing a Business 40 39

A third governance index is WI’s composite measure aggregating multiple surveys prepared for each country by 3 1 different organizations worldwide. In 2005 Armenia ranked well over the average CIS score on each of the governance categories, with the top CIS score and statistically close to Eastern Europe in three: government effectiveness, regulatory quality, and the rule of law. At the same time, control of corruption, voice and accountability were identified as continuing weak spots.

Pillar 2: Making Growth More Pro-poor

18. As noted, poverty has declined from around 50 to 30 percent in the last few years and extreme poverty has dropped to below 5 percent. Some 20,000 new small and medium enterprises have been established over the last three years. This growth of private sector jobs, particularly important given continued labor shedding in the public sector, has been supported by the infrastructure and institutional improvements noted above.

7 19. Pro-poor growth has been supported by IDA’s involvement in the rural sectors. Agricultural growth, production and producer prices all increased during 2004- 05, though agriculture growth in 2006 was low. The Rural Enterprise Project is working to promote farm innovations, facilitate market links and develop a seed market. The Agriculture Reform Support Project has helped establish a farmer-focused extension system, an effective Agribusiness Development Center, and expanded farmer credit. The Title Registration Project (closed in FY05) established a reliable registration system, the foundation for a real estate market. Almost all 2.5 million privately-owned land parcels have been surveyed. Water delivery to farmers has increased and management of irrigation systems - through a system ofwater user associations (WAS)-- has improved under the Irrigation Projects. Some 500,000 people living downstream ofdams are safer due to the Dam Safetyprojects which are rehabilitating most of the power, imgation and multi-purpose dams in the country.

20. A second element in ensuring that growth is pro-poor has been IDA’s social protection work. The analytic work has been supported through a Programmatic Poverty Assessment work program. The Social Protection Administration Project has strengthening the Integrated Social Protection Management system. All eligible beneficiaries have received timely payments over the past three years. Measures to improve the targeted family poverty benefits program have been introduced, including better monitoring and a more streamlined appeals procedure. IDA has also mobilized grant hnds to provide the poor with affordable heating systems. The Social Protection Project and the PRSC dialogue are providing the analytic work to assist the Government in developing a new Social Protection and Pension package, with improvements in the family poverty benefit formula. Discussions on a new pension framework are ongoing.

Pillar 3: Reducing Non-income Poverty

21. Good progress is being made in social sector spending and reforms. In education spending rose from 2.3 percent of GDP in 2004 to an estimated 2.9 percent in 2006, representing a strong real increase (although slightly below the 2006 PRSP target of 3.1%, mainly because GDP is growing quite fast). Initial progress has been made in school rationalization. The first phase of the Education APL is helping to develop a national curriculum for primary and secondary education, introduce improvements in testing and teacher training, and support a substantial increase in teacher salaries. These reforms are underpinned by the PRSC. Investments in education facilities are also supported by the Urban Heating Project, and the Social Investment Fund Projects. In 2003, Armenia participated in the Trends in International Mathematics & Science Survey (TIMSS), and will do so again in 2007 which will measure progress on education quality.

22. Progress in health reform has also been strongly supported. Health spending has risen in excess of the targets in Armenia’s PRSP in absolute amounts, though as a percent of GDP it rose only from 1.2 percent in 2004 to 1.5 percent in 2006 (against a PRSP target of 1.9 percent). There has been an important increase in the share of individuals visiting PHC facilities in the bottom two income quintiles - from 3.5 percent in 2003 to 6.5 percent in 2005. In early 2006, the government eliminated all fees for the

8 basic health benefit package (BBP) and preliminary indications are that this is leading to a further rise in utilization among the poor. Participants in the family benefit program also report a decrease in out-of-pocket health payments. The first phase of the Health APL, which supports expansion of family-based primary health care and rationalization of the hospital system is moving ahead of schedule. These developments encouraged the Government and IDA to advance the second phase of the Health APL into this CAS period. Complementary support for improving health facilities is provided under the Social Investment Fund-II, and for health policy reforms under the PRSC.

23. Good progress has been made in improving access to basic social and economic infrastructure. Improvements have been seen in access to and quality of drinking water, both in Yerevan and in other areas. In Yerevan, water supply has gone from 7 hours to an average of 18.5 hours a day (and about 70 percent ofYerevan now has 24 hour service). Improvements in water management and metering supported under the Municipal Water and Wastewater and Yerevan Water and Wastewater Projects have led to improved supply, quality, and financial viability of the water utilities. Outside of the urban areas, the Armenia Social Investment Fund-11 has helped to rehabilitate some 300 schools, 25 health facilities and 145 small scale water systems in about 62 villages. c. ANALYTICAND ADVISORY ACTIVITIES

24. Key policy reports over the CAS period have included (i)an economic report (CEM) on second generation reforms, (ii) a report on Rural Infrastructure, (iii) a programmatic poverty assessment and (iv) a programmatic PER The CEM is linked to the PRSC agenda, the Rural Infrastructure in Armenia report has been used by the government to prioritize rural investments (and also by other donors, including the MCC, in the design of their programs), and the programmatic activities are linked to building local capacity and the national publications of the Social Snapshot (for the poverty assessment) and the Medium Term Expenditure Framework (for the PER). These efforts have improved the quality ofpoverty and fiscal data, and strengthened decision making.

25. IDA’S analytic work has continued to strengthen the fiduciary environment. The Country Procurement Assessment Report (CPAR) was completed in October 2004 and establishes an action plan towards international procurement best practices. This was followed up by an Institutional Development Fund (IDF) grant for procurement systems. The Country Financial Accountability Assessment (CFAA) was completed in May 2005 and provided recommendations on the public financial management system. This was followed up by IDF grants for public sector internal audit development and public sector accounting. A Financial Sector Assessment Program (FSAP) was prepared by IDA and the IMF in February 2005 and provides a road map to improving banking and non- banking institutions. A Report on the Observance of Standards and Codes (ROSC) reviewed ways ofstrengthening corporate governance.

26. IDA has supported additional analytic work. IDA recently prepared two analytic pieces to help guide its work in the remaining CAS period: (i)the Labor Market Dynamics study and (ii)a Public-Private Infrastructure Advisory Facility (PPIAF) review

9 ofpotential restructuring in the railway sector. Armenia has also participated in several training sessions extended by the World Bank Institute (WBI), for example for parliamentarians and on pension reform systems. IDA is also managing a Netherlands supported grant for statistical capacity, in addition to statistics support provided under the Poverty Assessment, PER and other activities.

D. IFC AND MIGA

27. IFC has expanded its operations in Armenia from a low base. In FY06 IFC approved two new projects: (i)a loan of $5.2 million for a project for refurbishment and expansion of a locally owned shopping and entertainment center and (ii)an investment in a local bank, specialized in medium and small enterprise lending and consumer loans. This latter consists of a $3.0 million senior loan of which $1 million will be for housing finance, and an equity investment of $1.3 million. IFC is looking into investment possibilities with at least one more bank and one micro-finance institution, and is also examining opportunities in agro-processing, aviation, transportation and logistics.

28. IFC is also providing focused technical assistance on the financial sector. In FY06, IFC conducted a seminar on corporate governance for banks. Currently, IFC is developing a technical assistance program to support the development of the primary mortgage market, in cooperation with KfW. FIAS is supporting the Government on improvements to the legal and administrative regime for securing moveable property. This effort is notable in the level of WBG group cooperation: i.e., it is jointly fbnded by IFC and IDA and is further supported by the PRSCs. FIAS has also updated the “Administrative Barriers to Investment” study. The Government adopted an action plan on this and has asked FIAS to provide TA on implementing it.

29. MIGA helped improve the capacity of the investment promotion agency - the Armenian Development Agency (ADA) - as a participant in the implementation of the Foreign Investment & Export Facilitation (FIEF) LIL. MIGA is open to other opportunities to support foreign investment through political risk guarantees.

E. PARTNERSHIPS

30. IDA has a strong relationship with country counterparts, the donor community and other stakeholders. IDA co-chairs regular donor meetings in Yerevan and is providing analytic and financial support for the preparation and implementation of the PRSP. IDA played an important role in helping the Government prepare an MCC compact, and provided logistical and analytic support to the ADB which recently established relations with Armenia. With increased assistance being provided by the MCC and ADB, and the recently signed European Neighborhood Policy (ENP) action plan, there is a heightened need for donor coordination.

31. IDA has also forged strong sectoral partnerships. Japan has provided preparation support for many projects, and cofinancing for the new Avian Influenza and Judicial Reform I1 projects. The Netherlands has provided significant cofinancing of the PRSCs. The newly approved Renewable Energy Project contained an innovative

10 approach to partnerships, in which a fund was established to support renewable energy projects within a subsidiary of the Cafesjian Family Foundation (CFF), with funding from the CFF, as well as EBRD and GEF (Annex 4 provides further partner information).

F. EARLYLESSONS OF IMPLEMENTATION

32. The NOS-OS CAS for Armenia is a results-based CAS and the country team has learned several lessons in implementing the results framework. First, where a well designed and costed PRSP exists with quantifiable indicators, it is quite helpful to build the CAS results framework around the expected PRSP outcomes and indicators. This permits flexibility in adapting to developments with respect to implementation ofthe broader PRSP, and facilitates dialogue and monitoring by all partners. Second, baseline indicators are extremely important. If they do not exist at the time of CAS preparation (some did not for the Armenia CAS), or cannot be developed within the first year or so of the CAS period, it is preferable to seek alternative ways to define results. Finally, it is important to verify that the data sources to be used for tracking results can be obtained in a timely manner. For the most part the team did not face major difficulties but in a few cases (e.g., some surveys) the data was not available with the frequency needed; these lessons will be reflected in the results framework for the next Armenia CAS.

33. Given the constraints on the IDA allocation and increased support by other donors, IDA must continually seek opportunities to enhance harmonization efforts. IDA must ensure that it is focused in areas of comparative advantage, freeing up space for other donors to take the lead in certain areas. Opportunities of coordinating IDA operations with grant resources from others should be explored. At the same time, IDA should, as it did following the outbreak of avian flu in 2006, continue to respond to emergencies and new priorities.

34. Public-private partnerships have proven to be an important CAS delivery mechanism. During 2005-06, six projects were closed: the Agriculture Reform Support Project, the Title Registration Project, the Transport Project, the Municipal Development Project, the FIEF LILYand the PRSC I.One recurrent theme is the effectiveness of public-private partnerships. This includes use ofa private sector lease in providing water services, private participation on the Board of the Armenian Development Agency, the establishment of a non-commercial public company to provide road services, and involving the private sector in preparing contracts in the title registration project.

35. Analytic work is of high quality, but dissemination could be strengthened. The Bank’s Quality Assurance Group (QAG) reviewed 14 recently completed analytic pieces in June 2006 and concluded that they were ofhigh quality with a strong degree of strategic relevance and impact on the ground. At the same time, the review noted the importance ofstrengthening dissemination with civil society and the private sector.

36. Portfolio quality is good, with all projects rated satisfactory, but attention to fiduciary matters needs to be maintained. Disbursement performance has been strong, at 31 percent in FY05 and 25 percent in FY06. In FY05, a financial management review found that the quality of accounting and internal controls systems was satisfactory for all

11 projects (see Box 2). The new Country Financing Parameters provides increased flexibility in project design and implementation (see Annex 3).

Box 2. Ensuring Integration and Oversight of impIementation is being streamlined through the consoli ect management - 11 implementation units are managin ut 16 projects and various grants. While a few implementation units have separate legal statu a1 Investment Fund and the Renewable Energy R2E the others are fully integrated into line . To further streamline imp1 n across donors, the ADB and the MCC are c using the Government unit that is implementing the IDA-financed irrigation project.

On financial management, all projects have adequate accounting software, filing systems, regular audits and training in financial management systems. Financial management in the country has been further strengthened by the Chamber of Control (COC) becoming more independent and developing a public sector audit process. The Ministry of Finance and Economy has also adopted a timeline for implementation of international accounting standards in the Government sector. IDA also reviews regularly the capacity of audit firms.

Regarding procurement, all projects have clear procurement guidelines and adequately trained staff. This is enhanced country-wide through the amended Public Procurement Law which provides for the roll out of E-Government Procurement (E-GP). The Government has established a procurement website where most of the legislative documents, official procurement bulletin and other state procurement information, including tender announcements and results, are posted. Over the past two years, public procurement has been increasingly decentralized to the line ministries. As per the recommendation in the Country Procurement Assessment, agencies implementing IDA funded projects can now use country systems for NCB and recurrent item procurement.

IV. THE CAS PROGRAM GOING FORWARD

37. The CAS framework remains valid and no major shifts are needed. Armenia continues to be one of the strongest IDA performers, and barring any unforeseen developments, it is expected that in terms of volume and sectoral composition the IDA assistance program will remain in the high case range for the balance ofthe CAS period. The centerpiece of the CAS will remain the policy-based support provided through a series of PRSCs, with PRSC-111 being expanded to cover capacity building needs in tax and customs administration, and PRSC-IV on track for delivery in FY08 to continue to support Armenia’s overall reform agenda.

38. IDA also remains on track as regards investment projects. The SIF-111 operation went to the Board in October 2006. The public sector project in the CAS will be a continuation ofthe ongoing Judicial Reform project, Judicial Reform I1 In light of the progress made in health, the second phase ofthe Health Systems Modernization APL is being advanced. Building on the sector note on urban transport, the FY08 infrastructure project has been sharpened to focus on Traffic Management and Safety. The CAS anticipated that some IDA financing might be provided for continuing its longstanding support in the rural sector. As other donors have since made new commitments in this area, and the current Rural Development project is in implementation, it is likely that IDA will provide only a small amount of additional financing for the Irrigation Project

12 However, further IDA support in the rural sector during this CAS period might be considered if Armenia’s IDA resources are higher than anticipated.

39. Armenia could begin some modest borrowing from the IBRD during the CAS period. Results of a Bank creditworthiness analysis indicate that Armenia is eligible to absorb a small amount ofIBRD financing in the last year ofthe CAS (FY08).3 Of course, any use ofnon-concessional funds would need to be weighed against the need to maintain a prudent debt strategy. IBRD lending during this period would not affect Armenia’s IDA allocation. If Armenia maintains its growth and reform trajectory, the next CAS will lay out a more explicit framework for transitioning from IDA to IBRD.

40. Work is also underway to build a pipeline of projects for FYO9 and beyond. Future projects will be further delineated in the next CAS, but some advanced planning has begun. IDA’s future role in the rural sector needs to be carefully considered in light of other donor activities (see above), but a well targeted follow-on Rural Development Project may be considered early in the next CAS period. Other projects that may be considered in the early part of the next CAS include Education APL 11, a follow-on water supply and waste water project, a possible public finance project, and a possible next series ofdevelopment policy operations (PRSCs).

v. RISKS 41. While the economic environment within Armenia remains strong, there are some risks to watch. The strong exchange rate appreciation over the past three years underscores the need for continued attention to competitiveness. Supporting agricultural productivity (via IDA’s rural projects) and reducing bamers to trade (via the PRSC agenda) continue to be priorities. The high level ofremittances reinforces the need for a stronger financial sector to more effectively channel these resources. Finally, Armenia is vulnerable to rises in energy prices. The two projects on Renewable Energy and on Urban Heating will help to reduce reliance on external energy sources.

42. Political Risks also bear watching. The 2007 parliamentary and 2008 presidential elections are not expected to alter Armenia’s commitment to reform, but they may affect the pace of reform. The timing of policy related operations takes these considerations into account. IDA will also prepare policy option briefs for consultation with the new Government. Externally, changes in the frozen conflicts of the Caucasus could open up trade and growth opportunities, while renewed conflict could make the assistance strategy more difficult to achieve. Any major adjustments to strategy related to significant geo-political developments would be discussed with the Board.

43. Finally, Armenia faces risks relating to natural disasters such as flooding and earthquakes. IDA is helping to ensure the use of appropriate construction codes in its projects and is helping the Government take preventive measures through the national dam safety program. The new Avian Influenza Preparedness Project is also assisting the Government in preparing for the risk ofa possible disease outbreak.

The Bank is reviewing needs in transportationand railways and this could be an area of IBRD lending.

13 c e W 9 > &e v) cvl 'g w c .i! %E 4% I

Annex 2. Progress Towards Meeting the MDG Targets

Targets MDG Likelihood of Meeting MDG Targets 1. By 2015 Reduce the poverty Likely. Poverty has already declined sharply from 49% in 2002 Eradicate level to less than the 1990 level to about 30% in 2005. Further reductions are anticipated, with extreme 2. Halve the proportion of continued economic growth and investment in the social sectors. poverty and people who suffer from hunger hunger between 1990 and 2015 3. Ensure that by 2015, every Likely. Net enrollment currently stands at close to 100 percent. Achieve child will be able to complete a Public spending on education is increasing. The main challenges universal full course ofhigh quality in education are to improve quality through curriculum and primary secondary schooling textbook reforms, extend education services to encompass pre- education. school and grades 11-12, and enhance tertiary and vocational education standards. Promote 4. Increase by 2015 women’s Possible. Gender equality is fairly good at the educational gender participation in political level, but the participation ofwomen in politics is still low, with equality and decision-making just 5% ofParliament, and no women ministers. Amendments empower to the electoral law would ensure that by 2015 at least 25% of women the legislature would be women. 5. Reduce by 213 between 1990 Likely. Under five child mortality has been falling rapidly from and 2015 the under-5 mortality 24 per 1000 live births in 1990 to 13.6 in 2005. Immunization Reduce child ratio. against childhood diseases ranged in the 90- 95% range. Health mortality expenditures have been increasing and the proportion ofpoor accessing health care services has increased significantly: Improve 6. Reduce by 213 between 1990 Likely. Maternal mortality has declined rapidly from 38.5 per maternal and 2015 the maternal mortality 100,000 live births in 1990 to 16 in 2005. Continued health ratio. improvement in health care is expected to reduce pregnancy complications further. Combat 7. Have halted by 2015 and Possible. The level ofHIVIAIDS is quite low - estimated at HI ?%AIDS, begun to reverse the spread of around 3,000 cases or around 0.1% ofthe population. The malaria and HIVIAIDS incidence ofMalaria is even lower, with only six local cases other diseases. 8. Have halted by 2015 and reported in 2004. Deaths due to TB were only 4.6 per 100,000 begun to reverse the incidence of population in 2004. While the targets are reachable, the already malaria and other maior urban low levels and the uncertainty ofthe statistics raises some diseases. questions. Ensure 9. Integrate the principles of Likely. In 2004,95 percent ofhouseholds in urban areas and 74 environmental sustainable development into percent ofrural households had access to a centralized waste stability: country policies and programs collection system. 128,000 ha ofland are now covered by a and reverse the loss of Forestry Management Plan. And heating in housing has also environmental resources increased. The challenge now is to strengthen the quality and 10. Increase access to safe frequency ofwater supply, to extend water supply to more drinking water remote areas, and to effectively implement forest management 11. Improvement ofhousing plans and reduce illegal logging. The quality ofthe water of conditions by 2015 Lake Sevan also remains an issue. Develop a 12 Ensure such level of Likely. It is notable that Armenia has a strong PRSP global governance and protection of consultative process and Armenia qualified for and signed an partnership human rights that would MCC compact and an ENP action plan in 2006. At the same for :ontribute to increased ODA and time, improvements in governance and donor support will development. its efficient utilization depend on continued deepening ofthe anti-conuption agenda, 13. In cooperation with the including both public and corporate aspects. private sector make available by On communication, it is notable that negotiations between the 2010 the benefits ofnew telecommunication monopoly and the government have brought technologies especially a partial liberalization and the expectation offull liberalization information & communications. has been advanced to 2009 from 2012.

23 Annex 3. Country Financing Parameters

late: April 6,2005 Item Parameter Remarks / Explanation

Cost sharing. Limit on the up to 100% The Bank may finance 100 percent of the proportion of individual project costs in projects where this is appropriate and costs that the Bank may finance necessary. This is expected to be applied selectively. The flexibility to finance up to 100% would be helpful in certain project types such as Social Investment Fund type operations. In general, however the current cost-sharing approach i.e., Bank financing of about 90% is expected to continue. Recurrent costfinancing. Any No country In determining Bank financing of recurrent limits that would apply to the level limit on costs in individual projects, the Bank will take overall amount ofrecurrent recurrent cost into account sustainability issues at the sector expenditures that the Bank may financing. and project levels. Accordingly, appropriate finance? justifications for recurrent cost financing would be presented regarding: (i) the sustainability of project achievements; (ii)the implied future budgetary outlays; and (iii)the clear demonstration of sustainability of Bank- financed recurrent costs. Local costfinancing. Are the Yes The criteria for Bank financing of local costs requirements for Bank financing of are met. The Bank may finance local costs in local expenditures met, namely that: the proportions needed in individual projects. (i)financing requirements for the country’s development program would exceed the public sector’s own resources (e.g., from taxation and other revenues) and expected domestic borrowing; and (ii)the financing offoreign expenditures alone would not enable the Bank to assist in the financing ofindividual projects. Taxes and duties. Are there any None There are no taxes that are judged to be taxes and duties that the Bank unreasonable. At the project-level, the Bank would not finance? would consider whether taxes and duties constitute an excessively high share of Droiects costs.

24 Annex 4. Partnerships

A number of donors have extensive programs in Armenia, requiring active management and coordination. The Government plays a key role in aid coordination, particularly the Ministry of Finance and Economy through the Poverty Reduction Support Program (PRSP) process and the individual line ministries. UNDP and IDA are helping to support this process - the next stage of which is the preparation of a full PRSP update, due in mid-2007. Key partners are noted below:

Sector Lead National Agency International Partners Donor Ministry of Finance and Economy, All donors Coordination PRSP Steering Committee Poverty Reduction PRSP Steering Committee, IMF/UNDP/USAID/UNHCR/ National Statistics Agency /EU/GTZ/DFID/UNICEF Public Ministry of Finance and Economy IMF/EU/DFID/USAID/GTZ/ Sector/Governance Public Sector Reform Committee UNDPI NETH Judicial Reform Ministry of Justice USAID, GTZ/EU//UNDP/ Cassation Court JAPAN Health Ministry ofHealth, Ministry of USAID/UNDP/WHO/UNICEF/ Territorial Administration UNHCR/GTZ/GFATM/DFID Transport Ministry of Transport and /EU/UNDP/US AID/IFAD/CC/ Communications AsDB/EBRD Education Ministry of Education and Science UNICEF/EU/UNHCR/GTZ/ WFP/UNDP/USAID AgricultureRural Ministry ofAgriculture, Ministry EU/FAO/WFP/IFAD/USDAI Development of Territorial Administration GTZ/UNHCR/DFID/UNDP/ USAID/UNIDO/ MCC/ AsDB/SIDA Local Community Ministry ofTerritorial USAID/EU/UNDP/DFID/NETH Development Administration, SIF Energyhleating Ministry of Finance and Economy; EBRD/JBIC/EU/US AID/GTZ/ Ministry of Energy IMF/UNDP/AsDB/GEF Private Sector Ministry of Industry and Trade, USAID/ EBRD/EU/IMF/NETH Armenian Dev. Agency Environment Ministry ofNature Protection UNDP/EU/FAO/UNIDO/SIDAI USAID/EBRD/GTZ/UNEP/GEF Re fugeeshlousing Dept ofMigratiomrban UNHCR/WFP/KfW/EU Construction Ministry Financial Sector Central BankMinistry ofFinance IMF/USAID/KfW/EBRD & Economy Water State Committee on Water USAID/UNDP/UNHCR/IFAD/ Economv WFP/KfW/AsDB/MCC Social Protection Ministry of Labor and Social UNDP/UNHCR/US AID/EU/ Issues UNICEF

25 Annex 5

Armenia at a glance 1/05/07

Europe EL Lower- POVERTY and SOCIAL Central middle- Development diamond' Armenia Asia income 1 2006 Population, mid-year (millions) 30 473 2 442 GNI per capita (Atlas method, US$) 1,750 3,3w 1690 Life expectancy GNI (Atlas method, US$ billions) 53 1,557 4 116 I Average annual growth, 1999-05 Population (%) 04 00 09 GNI Gross Labor force (%) -3 3 05 14 per primary Most recent estimate (latest year available, 1999-05) capita enrollment Poverty (% of population below national poverty line) 30 Urban population (% of total population) 64 64 50 - Life expectancy at birth (years) 73 69 71 I Infant mortality (per 1,000 live births) 12 29 32 Child malnutrition (% of children under 5) 3 11 Access to improved water source Access to an improved water source (% of population) 89 91 81 1 Literacy (96 ofpopulation age 15+) 99 97 89 Gross primary enrollment (% of school-age population) 97 102 112 ~ -Armenia Male 103 113 1- Lower-middlemcume group Female 101 111

KEY ECONOMIC RATIOS and LONG-TERM TRENDS 1985 1995 2005 2006 ~ Economic ratios' GDP (US$ billions) 15 49 83 Gross capital formation/GDP 18 4 29 7 30 4 I Exports of goods and services/GDP 23 9 27 2 22 3 Trade Gross domestic savings/GDP -19 8 16 5 16 3 - Gross national savingslGDP -69 25 7 25 5 , Current account balance/GDP -22 7 -3 9 -5 5 Domestic - Capital Interest payments/GDP 06 07 06 1 formation Total debVGDP 25 2 37 9 32 7 I Total debt service/exports 37 10 3 107 Present value of debffGDP 16 0 Present value of debffexports 47 3

1985-95 1995-05 2005 2006 2007-09, (average annual growth) GDP -134 85 14 0 134 7

GDP per capita -12 1 89 139 133 7 ~ Lower-rniddlemcume arouo I Exports of goods and services -348 151 35 7 31 15

STRUCTURE of the ECONOMY

~ 1985 1995 2005 2006 o growth of capital and GDP (K) (% of GDP, at factor cost) 40 - Agriculture 42 3 21 0 19 3 I Industry (incl. construction) 32 0 44 0 45 5 Manufacturing 25 2 132 12 2 Services 25 8 35 0 35 2

Household final consumption expenditure 1087 77 5 75 0 .io- 00 01 02 03 04 General gov't final consumption expenditure 11 2 11 2 12 0 -GCF +GDP O5 Imports of goods and services 62 2 40 4 38 0 I

1985.95 1995-05 2005 2006 Growth of exports and imports (K) (average annual growth) I Agriculture -2 6 50 11.2 04 Industry (ind. construction) -26 0 97 8.5 19 4 Manufacturing -15 4 58 9.7 -3 0 services 79 103 4.0 13 8 Householdfinal consumption expenditure -82 55 10.0 12 0 General gov't final consumption expenditure -2 2 32 20.0 19 0 Gross capital formation -24 5 12 9 22.2 30 0 Exports -Imports Imports of goods and services -26 5 71 24.0 22 0 -

Note 2006 data are preliminary estimates Group data are to 2004 *The diamonds show four key indicators in the country (in bold) compared with its incomegroup average If data are missing, the diamond will be incomolete

26 Armenia ~

PRICES and GOVERNMENT FINANCE 1985 1995 2005 2006 Domestic prices (% change) Consumer prices 176.0 0.6 2.9 Implicit GDP deflator 161.2 3.2 4.8 Government finance (% of GDP, includes current grants) Current revenue 19.9 15.7 16.0 Current budget balance -1.7 1.5 2.3 GDP deflator *CPI Overall surplusldeficit -9.0 -2.6 -1.6 - I TRADE 1985 1995 2005 2006 Export and import levels (US$ mill.) (US$ millions) Total exports (fob) 271 974 1000 t '2,000- Gold, jewelry, and other precious stones 336 I Machinery and mechanical equipment 33 Manufactures 119 172 Total imports (cif) 674 1,802 2,200 Food 225 146 Fuel and energy 224 297 Capital goods 56 414 99 04 01 02 03 Export price inde$2000=100) 128 116 Import price inde$2000=100) 125 116 I Exports rn ImportsO4 O5 Terms of tradQ000=100) 102.5 98 I

BALANCE of PAYMENTS 1985 1995 2005 2006 Current account balance to GDP (X) (US$ millions) 1 Exports of goods and services 305 1,323 1,400 Imports of goods and services 796 1,962 2,400 Resource balance -491 -639 -1,000 Net income -10 45 138 Net current transfers 168 409 480 Current account balance -333 -193 -340 Financing items (net) 362 -188 -150 Changes in net reserves -30 -163 -120 Memo: Reserves including goldl/S$ millions) 110 667 800 Official exchange rat@ocal/US$) 355.7 4545 412

EXTERNAL DEBT and RESOURCE FLOWS 1985 1995 2004 2005 (US$ millions) Composition of 2005 debt (US$ mill.) Total debt outstanding and disbursed 371 1,660 1,860 IBRD 5 7 7 IDA 91 776 744 I A. 7 Total debt service 11 147 124 IBRD 0 1 1 IDA 0 6 9 Composition of net resource flows - Official grants 91 61 67 Omcial creditors 100 45 36 Private creditors 0 -1 3 Foreign direct investment (net inflows) 25 217 248 Portfolio equity (net inflows) 0 World Bank program Commitments 117 0 19 A - IBRD E ~Btlateral Disbursements 92 78 34 B - IDA D - Other multilateral F - Private Principal repayments 0 1 4 1 C - IMF G - Short-ten Net flows 92 77 30 Interest payments 0 6 6 Net transfers 92 71 24

Development Economics 1/05/07

27 Annex 6. Key Economic Indicators

Actual Estimate Indicator 2002 2003 2004 2005 2006 National accounts (as % of GDP) Gross domestic product /a 100 100 100 100 100 Agriculture 26 24 25 21 19 Industry 35 38 38 44 46 Services 39 38 37 35 35 Total consumption 95 94 93 87 85 Gross domestioc fixed investment 21 23 24 29 32

Government investment 1.. 4 4 Private investment 25 29 Exports (GNFS) /b 29 32 27 27 22 Imports (GNFS) 47 50 42 40 38

Gross domestic savings 6 6 10 17 16 Gross national savings ic 18 18 20 26 25

Memorandum item Gross domestic product (US$ million at current prices) 2,376 2,807 3,577 4,903 6,300 GNI per capita (US$, Atlas method) 810 960 1140 1470 1750

Real annual growth rates (“h,calculateed from 1996 prices) Gross domestic product at market prices 13.2 14 10.5 14 13.4 Gross Domestic Income

Real annual per capita growth rates (“h,calculated from 1996 prices) Gross domestic product at market prices 12.9 13.6 10.2 13.7 13.3 Total consumption 8.2 7.6 9.1 10.8 10.0 Private consumption 9 6.9 8.9 9.7 10.0

Balance of Payments (US$ millions) Exports (GNFS) h 698 903 985 1323 1400 Merchandise FOB 514 696 738 98 1 1000 Imports (GNFS) b/ 1107 1406 1514 1962 2400 Merchandise FOB 883 1130 1196 1566 1900 Resource balance -409 -502 -529 -639 - 1000 Net current transfers 173 218 270 342 420 Current account balance -148 -189 -162 -204 -340 Net private foreign direct investment 111 121 217 248 263 Long-tern loans (net) 50 35 44 89 172 Official 68 17 45 36 66 Private -18 -18 -1 53 106 Other capital (net, incl. errors&omissions) 50 -40 -66 -30 -42 Change in reserves id -63 74 -33 -163 -202

Memorandum items Resource balance (% of GDP) -17.2 -17.9 -14.8 -13.0 -15.8 Real annual growth rates(2000 prices) Merchandise exports (FOB) 63.7 47.0 5.9 25.9 na Primary 732.2 52.6 -1.1 18.4 na Manufacturers 37 26.7 36.2 49.4 na Merchandise imports (CIF) 13.4 36.7 12.0 35.1 na

28 Armenia - Key Economic Indicators (Continued)

Actual Estimate Indicator 2002 2003 2004 2005 2006

Public finance (as YOof GDP at market prices)e Current revenues 16.6 17.8 15.4 16.1 16.2 Current expenditures 16.1 13.7 13.8 14.7 13.9 Current account surplus (+) or deficit (-) 0.5 4.1 1.6 1.5 2.3 Capital expenditure 3.3 5.6 3.7 3.9 4.0

Monetary indicators M2/GDP 15.6 14.4 15.0 16.3 19.0 Growth ofM2 (%) 23.0 10.4 22.3 27.8 36.6

Price indices (2000=100) Merchandise export price index 100.6 92.9 92.5 96.5 87.2 Merchandise import price index 101.0 95.8 90.3 87.5 83.0 Merchandise terms oftrade index 99.6 97.0 102.4 110.4 105.1 Real exchange rate (US$/LCU)f 87.4 85.1 90.7 98.9 114

Inflation (eop) (YOchange) 2.0 8.6 2.0 -0.2 5.2 GDP deflator (% change) 2.4 4.7 6.3 3.2 4.8 a. GDP at factor cost b. "GNFS" denotes "goods and non-factor services." c. Includes net unrequited transfers excluding official capital grants. d. Includes use ofIMF resources. e. Consolidated budget. f. "LCU" denotes "local currency units.'' An increase in US$/LCU denotes appreciation.

29 Annex 7. Armenia: Social Indicators

Latest single year Same regionlincome group

Europe & Lower- Central middle- 1980-85 1990-95 1999-05 Asia income POPULATION Total population, mid-ye$nillions) 3.3 3.1 3.0 472.5 2,441.6 Growth rat<% annual average forperiod) 1.5 -1.4 -0.4 0.0 0.9 Urban populatio$% of population) 66.6 68.6 64.1 63.6 49.5 Total fertility rate (bihs per woman) 2.5 1.6 1.4 1.6 2.1 POVERTY (% ofpopulation) National headcount index 29.8 Urban headcount index 30.7 Rural headcount index 28.3 INCOME GNI per capitflSS) 470 1,470 3,300 1,690 Consumer price inde$2000=100) 68 1 I7 Food price inde<2000= 100) INCOMEKONSUMPTION DISTRIBUTION Gini index 0.31 Lowest quintil(% of income or consumption) 15 Highest quintil$% of income or consumption) 27 SOCIAL INDICATORS Public expenditure Health(!! ofGDP) 1.4 4.0 2.0 Educationp! ofGNI) 2.7 4.1 3.5 Net primary school enrollment rate p! of age group) Total 94 Male Female Access to an improved water source (94 ofpopulation) Total 89 91 81 Urban 99 98 93 Rural 87 80 70 Immunization rate (% of children ages 12-23 months) Measles 96 96 93 86 DPT 98 91 93 88 Child maInutritio~!%under 5 years) 3 11 Life expectancy at birth bears) Total 73 72 13 69 71 Male 71 69 70 64 68 Female 76 76 76 73 73 Mortality Infantlper 1,000 live births) 25 14 12 29 32 Under 5lper 1,000) 20 14 34 40 Adult (1 5-59) Malelper I,000 population) 15.8 21.6 14 316 182 Female(per 1,000 population) 8.5 11.9 12 134 114 Matemallper 100,000 live births) 35 17 58 153 Births attended by skilled health st@) 94 86

CAS Annex B5. This table was produced from the CMU LDB system. 07/14/06 Note: 0 or 0.0 means zero or less than half the unit shown. Net enrollment rate: break in series between 1997 and 1998 due to change from ISCED76 to ISCED97. Immunization: refers to children ages 12-23 months who received vaccinations before one year of age or at any time before the survey.

30 Annex 8

Armenia - Key Exposure Indicators

Total debt outstanding and disbursed (TDO) (US$m) a/ 1054 1386 1,782 1,871 1,860 2050

Net disbursements (US$m) a/ 63 96 159 47 92 131

Total Debt service (TDS) (US$m) a/ 55 85 124 175 138 121

Debt and debt service indicators

TDO/XGS b/ 168.9 169.4 168.7 146.2 111.2 111.1 TDOlGDP 49.8 58.3 63.5 52.3 37.9 32.0 TDS/XGS 10.2 12.2 13.7 17.8 10.3 8.3

IBRD exposure indicators (YO) IBRD DSlpublic DS 2.0 1.7 1.3 1.5 3.8 1.7 Preferred creditor DS/public DS 52.1 69.3 32.1 61.2 87.4 83.6 (%) c/ IBRD DS/XGS 0.2 0.1 0.1 0.1 0.1 0.1 IBRD TDO (US$m) d/ 7.4 8.6 8.1 7.5 6.8 6.1 o/w present value of 0 0 0 0 0 0 guaranteees (US$m) Share of IBRD portfolio (YO) 0 0 0 0 0 0 IDA TDO (US$m) d/ 428 533 666 776 744 843

IFC (US$m) Loans 0 0 0 3 4 12 Equity and quasi-equity e/ 4 4 5 5 5 6

MlGA MlGA guaranteees (US$m) 0 0 0 0 0 0 a. Includes public and publicly guaranteed debt, private nonguaranteed, use of IMF credits and net short-term capital b. “XGS denotes export of goods and services, including worker‘s remittances c. Preferred creditors are defined as IBRD, IDA, the regional multilateral development bank, the IMF, and the Bank for International Settlements d. Includes present value of guarantees. e. Includes equity and quasi-equity types of both laons and equity instruments

31 Annex 9

CAS Annex 82 - Armenia Selected Indicators* of Bank Portfolio Performance and Management As Of Date 01/08/2007

Indicator 2004 2005 2006 2007 Portfolio Assessment Number of Projects Under Implementation a 18 16 18 16 Average Implementation Period (years) 3.0 3.3 3.4 3.3 Percent of Problem Projects by Number a, 5.6 0.0 0.0 0.0 Percent of Problem Projects by Amount a, 3.8 0.0 0.0 0.0 Percent of Projects at Risk by Number a, 11.1 0.0 0.0 0.0 Percent of Projects at Risk by Amount a, 5.5 0.0 0.0 0.0 Disbursement Ratio (%)e 31 .O 30.7 24.7 16.9 Portfolio Management CPPR during the year (yeslno) Supervision Resources (total US$) Average Supervision (US$/project)

Memorandum Item Since FY 80 Last Five FYs Proi Eva1 bv OED bv Number 22 11 Proj Eva1 b; OED b; Amt (US$ millions) 61 5.6 232.8 % of OED Projects Rated U or HU by Number 9.1 9.1 % of OED Projects Rated U or HU by Amt 12.0 6.6 a. As shown in the Annual Report on Portfolio Performance (except for current FY). b. Average age of projects in the Bank's country portfolio. c. Percent of projects rated U or HU on development objectives (DO) andlor implementation progress (IP). d. As defined under the Portfolio Improvement Program. e. Ratio of disbursements during the year to the undisbursed balance of the Bank's portfolio at the beginning of the year: Investment projects only. All indicators are for projects active in the Portfolio, with the exception of Disbursement Ratio, which includes all active projects as well as projects which exited during the fiscal year.

32 Annex 10: Bank Group Program Summary (IDNGrants and IFC/MIGA)

Actual and Proposed IDA Lending Program, FYO5-08 Strategic Rewards implementation Fiscal year Project US$(M) (H/M/L) Risks (H/M/L) ,

Actual PRSC 20.0 H H 2005 Yerevan Water 20.0 M L Total FY05 40.0

Actual PRSC2 20.0 H H 2006 Rural Development 20.0 H M Urban Heating 15.0 M M Renewable Energy 5.0 M M Avian Influenza Control 6.2 M M Total FY06 66.2

Planned PRSC 3 28.0 H H 2007 Judicial Reform Project 2 22.5 M M SIF 3 25.0 H L Health Systems (Phase II) 22.0 M M Additional Irrigation 5.0 M L Total FY07 102.5

Planned PRSC4 10-20 H H 2008 Traffic Management & Safety 7.5-10 M M Total FY08 a/ 17.5 - 27.5 a/ In addition, Armenia is eligible to receive a small IBRD loan of about $10 million in FY08, possibly in the area of transport and rail.

CAS Annex B3 (IFC & MIGA) for Armenia Armenia - IFC and MIGA Program, FY 2003-2007 2004 2005 2006 2007 IFC approvals (US$m) 3.25 9.60 2.00

Sector (YO) Accommodation & Tourism 38 Finance & Insurance 62 46 100 Wholesale and Retail Trade 54

Investment instrument(%) Loans 62 85 100 Equity 15 Quasi-Equity 38 Other

MIGA guarantees (USrSm) 2.70

33 Annex 11: Summary of Non-Lending Services

Completion Product FY Cost (US$OOO) Audiencea Objectiveb

Completed Prior to CAS Country Procurement Review (CPAR) FY03 152 G,D,B,PD K, PD, PS Urban Heating Review FY03 156 G,D,B,PD K, PD Financing Sector TA FY03 185 GD K, PS Poverty Assessment FY04 183 G,D,B,PD K, PS Country Financial Assessment (CFAA) FY04 147 G,D,B,PD K, PD, PS

Completed in FYO5-07 Rural lnfrastucture Strategy FY06 125 GD K, PS Poverty Assessment (programmatic) annual 100 pa GD K, PS Public Expend Review (programmatic) annual 100 pa GD K, PS Treasury Pilot (IDF Grant) FYO5106 50 G K, PS CEM FY07 250 G,D,B.PD K, PS, PD Labor Market Dynamics FY07 70 G,D,B,PD K, PS, PD PPIAF on railways restructuring FY07 350 G, PD K, PS

UndetwaylPlannedfor FYO7-08 Poverty Assessment (programmatic) annual 100K pa G,D,B, PD K, PS Public Expend Review (programmatic) annual 150K pa GD,B K, PS Country Environmental Study FY08 175 G,D,B,PD K, PS, PD PPIAF on railway concessioning FYO7-08 450 G K, PS CPAWCFM Update FY08 100 G,D,B,PD K, PS, PD Public Procurement (IDF) FYO7lFYO8 45 G K, PS TA for Statistics Capacity Bldg FYO6lO7108 45 G K, PS a. Government, donor, Bank, public dissemination. b. Knowledge generation, public debate, problem-solving.

34 Annex 12: Statement of IFCs Held and Disbursed Portfolio

Committed Disbursed and Outstanding FY Approval Company Loan Equity Quasi Partic Loan Equity Quasi Partic

2002 ACBA Leasing 1.67 0.27 0.00 0.00 1.67 0.27 0.00 0.00 2004 Armeconombank 1.83 0.00 0.00 0.00 1.83 0.00 0.00 0.00 2000/ 2004 Hotel Armenia 0.00 0.00 4.82 0.00 0.00 0.00 4.82 0.00 2006 lnecobank 3.00 1.30 0.00 0.00 3.00 1.30 0.00 0.00 2006 NAREK 5.20 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Total 11.70 1.67 4.82 0.00 6.S 1.57 4.82 0.00 Portfolio:

Approvals Pending Commitment Loan Equity Quasi RiskMgt Guai'tee Partic lnecobank 0.10 GTFP Armeconombank 1 .oo

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s s s

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TSOTN

Tashir T

e e

Ashtarak e Ashtarak

Aragats (4090 m) ashir

Stepanavan Stepanavan

r r r

ISLAMIC REPUBLIC To T’bilisi

C C C

LORRI

a a a

u u u

OF IRAN

YEREV YEREVAN 02 30 Miles 20 10 0 102030400 c c c V Vanadzor

Alaverdi

anadzor a a a

s s s Aras

Ar Artashat

u u YEREV u YEREVAN

AN

AN Hrazda tashat tashat

s s

n s To T’bilisi

KOT KOT KOTAYK’

M M M

ARARA

ARARAT AN Ararat Ararat

A A

o o o YK

YK Hrazdan Hrazdan

u u u ’ ’

n n Sevan n Sevan

t t

Dilijan t Dilijan

a a

Naxçivan a

T

i i

45 i To

n n

Gavar n Gavar

° A

E r s s s a

50 Kilometers s

TAVUSH T

GEGHARK GEGHARK’UNIK’

A

Ijevan Ijevan VUSH V VUSH

A a AZERBAIJAN Karmir Kar

r

p r

a Sevan

V VAYOTS’

mir

d Lake

A

A Martuni Mar Y Yegegnadzor

DZOR DZOR e

egegnadzor

YOTS YOTS n tuni

i To Gäncä

s

’

UNIK

R Vaik V

Artsvashen Ar To Naxçivan Gäncä

aik

a

tsvashen ’ To Vardenis V Jermuk Jer

ardenis

n To Gäncä

muk

g

’

e

K

u

r a

Z Z

Z 46 To Ordubad

a a a Angekhakot Angekhakot

n n n °

E

g g g

e e e

z z z

SYUNIK

SYUNIK’ GEORGIA

u u u

r r r

V

o

R R R

Megri r Megri

o a a a

t n n n

a

n g g g

e e

e Kapan Kapan

AZERBAIJAN Goris Goris

’

Qubadli

To Qubadli

ARMENIA

To

To Füzili

Mingechevir Reservoir

Aras 47 ° E 47 ° E

39

40 41

°

° °

N

N N IBRD 33364 IBRD