Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized 1 1
Acronyms AAA Analyhcal and Advisory Services AR Armenia Railways BTO Back to Office CAE Country Assistance Evaluation CAS Country Assistance Strategy CEM Country Economic Memorandum CIS Commonwealth of Independent States DAC Development Assistance Committee DFID Department for International Development (UK) EBRD European Bank for Reconstruction and Development ECA Europe and Central Asia ECSSD Environmentally and Socially Sustainable Development EDP Enterprise Development Project ERP Earthquake Reconstruction Project ESW Economic Sector Work FSU Former Soviet Union FIAS Foreign Investment Advisory Service GDP Gross Domestic Product GOA Government of Armenia IBRD International Bank for Reconstruction and Development IDA International Development Agency IFAD International Fund for Agricultural Development IFC International Finance Corporation IFIS International Financial Institutions IMF International Monetary Fund JBIC Japan Bank for International Cooperation Kfw Kreditanstalt fiir Wiederaufbau (German Agency for Reconstruction) LIL Learning and Innovation Lending MDG Millennium Development Goal MTEF Medium Term Expenditure Framework NK Nagorno Karabakh ODA Official Development Assistance OECD Organization for Economic Co-operation and Development OED Operations Evaluation Development OOF Other Official Flows PER Public Expenditure Review PRSP Poverty Reduction Strategy Paper PSD Private Sector Development
SAC ' Structural Adjustment Credit SATAC Structural Adjustment Technical Assistance SCADA Supervisory Control and Data Acquisition SIF Social Investment Fund SME Small and Medium Enterprises SOE State Owned Enterprise TA Technical Assistance USAID United States Agency for International Development WB World Bank WTO 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...
Purpose and Background 1. .. 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 Partnerships...... 14 Aid Coordination ...... :...... 14
3 . Assessment of Development Impact of Country Assistance Macroeconomic Stability ...... 16 Poverty Alleviation and Human Development ...... 16 Infrastructure and Agriculture ...... 17 The Public Sector ...... 19 Private Sector Development and Financial Sector Development ...... 20 Overall Outcome of the Country Assistance Program...... 22 Institutional Development Impact ...... 23 Sustainability ...... 23
4 . Contributionsto Outcomes Borrower Performance ...... 25 Bank Performance ...... 25 Contribution ofOther Partners ...... 26 Impact of 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 Fiscal Adjustment Led to a Sharp Drop in Inflation and. combined with Reforms. to a Steady Growth of GDP ...... 2 1.2 Governance Indicators for Armenia. FSU. and Eastern Europe Countries ...... 3 1.3 Balance ofPayments 1993-2003 ...... 4 2.1 Average Annual Commitments to Armenia. by CAS Period ...... 8 Contents (cont.)
Tables 2.1 Lending (Disbursements). in US$ million. FY93-02. by Sector ...... 8 2.2 OED Performance Ratings (by number ofprojects) ...... 9 2.3 Country Strategy Objectives. and Proposed and Actual Lending...... 10 3.1 Armenia. GDP and Agricultural Product ...... 19
Annexes Annex A : Statistical Annexes ...... 29 Annex B : List ofPersons Interviewed...... 45 Annex C : Management Action Record...... 49 Annex D : Guide to OED’s Country Assistance Evaluation Methodology ...... 51
Attachments 1. Comments from the Govemment ...... 55 2 . Chairperson’s Summary ...... 61 Preface
This evaluation provides an independent assessment ofthe role ofWorld Bank assistance to Armenia during the period 1993-2002. The basis for the Country Assistance Evaluation (CAE) consists of Operations Evaluation Department (OED) project assessments, sectoral reviews, and interviews with past and present Government officials, as well 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 ofinfrastructure and energy was prepared. An OED mission visited Armenia during March 2003, and also met with staff ofEuropean Bank for Reconstruction and Development (EBRD) in London. OED received comments from the World Bank Governor for Armenia, as well as from the Minister ofFinance 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. Independence in 199 1 and the dissolution ofthe Soviet Union left Armenia saddled with many distortions from the command economy. In addition, the country engaged in a conflict with neighboring Azerbaijan over Nagomo Karabakh. The loss oftraditional Soviet markets, severe shortages offoreign exchange, an enormous increase in imported energy prices, and a sharp reduction in credit all combined to produce a drop in GDP of more than 50 percent between 1990 and 1993. The collapse ofthe 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 policy actions on many fronts, including elimination ofwage and price controls, creation of a liberal trade regime, and privatizations, as well 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 still needs to be done are the environment for private sector development and public sector reform.
3. The economy's response was swift. Stabilization was achieved by 1995 and, starting in 1994, the economy recovered steadily with the pace accelerating during the past three years. By 2002, GDP had reached 84 percent ofits 1990 level and is likely to have reached more than 90 percent ofthat level by 2003. Per capita income is now close to the threshold for IDA financing. The incidence ofpoverty has declined slowly, from 55 percent in 1996-98 to 5 1 percent by 2002, but remains high.
4. Since joining the Bank in 1992, Armenia has been the recipient of substantial Bank assistance, both financial and in the form ofAnalytical and Advisory Services (AAA). During 1993-2000, net official development assistance to Armenia averaged annually about 11 percent ofGDP, with the Bank accounting for one quarter. The Bank committed a total ofUS$700 million during FY93-02, for 29 projects. OED has evaluated 14 ofthese 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 ofmacroeconomic 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 ofenergy. In transport and agriculture the Bank's assistance likewise made important contributions-rehabilitation ofthe road network and the irrigation system-but mechanisms are still 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 ofprivatization, but iv much remains to be done to improve the business environment, especially in the promotion ofsmall and medium job-creating enterprises. While laws and regulations affecting the business environment had been established early on, the Bank did not focus on enforcement and implementation until 2001, thereby sacrificing several years of potential progress. In public sector reform, the Bank undertook some analytical work, but did not follow through consistently. On balance, considering all ofthe above, OED rates the outcome ofthe Bank’s assistance strategy as satisfactory.
6. Many aspects ofthe Bank’s assistance program have contributed to the establishment ofa market economy. Furthermore, the Bank has played an important role in areas such as the development ofa regulatory framework, legal and judicial reform, and the creation ofmeans-tested poverty benefits. The Bank’s overall contribution to institutional development is rated as substantial.
7. The benefits ofArmenia’s development progress are subject to a number ofrisks. The risks ofregional instability remain high, which adversely affects the investment climate. Continued dependence on international assistance implies that external sustainability is 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 ofnew firms. A number offactors, however, are working to reduce risks. The benefits ofstabilization are widely recognized. External financial assistance derives fiom diverse sources. Social sector reforms are seen as having bettered the targeting ofscarce resources, and the improvements in the supply ofelectricity are a highly visible contribution to the quality oflife. Balancing the risks and the benefits suggests that the sustainability ofthe Bank’s assistance program should be considered likely.
8. The Bank’s assistance program in Armenia demonstrates that comparatively high official assistance and AAA can be quite successful if they are in support ofappropriate 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 following 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 is key to improving the climate for private sector development and social services.
Gregory K. Ingram Director-General Operations Evaluation 1
1. Purpose and Background
1.1 This report evaluates the World Bank assistance program to Armenia during the period 1993-2002 (“the decade”). The Country Assistance Evaluation (CAE) examines whether: (a) the objectives ofBank/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 on the country’s development during this period. Examining these questions allows the CAE to draw lessons and recommendations for future Bank assistance. In preparing the evaluation OED interviewed present and past Government officials, World Bank staff, staff of partners involved in Armenia, and members ofcivil society; Annex B contains a list of the people interviewed. Annex D describes the methodological approach.
Description
1.2 Armenia is a small, landlocked country in the south Caucasus with an area of 29,800 square kilometers and a population of3 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: it relies heavily on imports for its food and most crops are grown on irrigated land. Its per capita income in 2002 is 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 ofits fuel pipeline and industrial plants.
Economic Development
1.3 Upon independence in 1991, Armenia was saddled with the distortions typical of 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 Domestic and external shocks after independence caused a sharp fall in output between 1990 and 1993, but some important reforms in 199 1 and 1992 prevented a larger decline. The loss oftraditional Soviet markets, severe shortages offoreign exchange, an increase in imported energy prices to international levels, and a sharp reduction in credit caused a fall ofmore 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 ofArmenia’s trade routes. Softening the impact ofthese shocks were important reforms in prices, land, and housing taken in 1991 and 1992, prior to membership in the IFIs. The Government freed the prices ofmost commodities between early 1991 and mid 2
1992, with the exception ofbread 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 Despite these early reforms, Armenia’s situation in 1993 was desperate. Many refugees entered the country as a result ofthe ongoing conflict. The border with Azerbaijan was closed, which stopped most supplies of 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 ofpotential foreign investors; transport costs around 30-50 percent higher than ifborders were open; energy costs around 25 percent higher than if borders were open; and high defense costs.’ The country was also still dealing with the effects ofthe 1988 Figure 1.1: Fiscal Adjustment Led to a Sharp Drop in earthquake. For example, as a Inflation and ... precaution, the country’s nuclear reactor 6.000 1 =I T 6o was shut down, reducing electricity I supplies by a third. The 1992/93 winter Inflatio n ~~ f was one ofthe coldest in the century. 4,000 The lack ofenergy supplies shut down industries and cut offheating for homes, leading to high rates of mortality among children and older people. The collapsing economy led to -____ collapsing fiscal revenues, precipitating 1991 1992 1993 1994 1995 1996 157 1998 1999 2000 2001 2002 2003p a fiscal crisis. The budget deficit -1,000 Year - Lo reached 55 percent ofGDP in 1993, Source: Central Banking Deficit, IMF Economic Developments (several issues), and a reliance on Central Bank Deficit: WE3 2003 Europe and Central Asia Regional Tables. financing led to inflation of5,000 percent. Humanitarian grain shipments ... combined with Reforms, to a steady growth of GDP were required to prevent starvation. 120.0 7 I
1.6 In May 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 20.0 4 i stabilization program was put in place, 0.0 through expenditure cuts and an 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2W1 2W2 2003 Year I’GDP Growth index(1990=100) l/1 overhaul ofthe tax system (see Figure Source: World Bank Regional Estimates & Central Bank of Armenia 1.1). Inflation began to decline sharply. for 2003.
’ In 1991, agricultural land was sold to those currently working it. By early 1992, around two-thirds ofthe land planted for crops had been transferred to farm workers and managers, and by the end ofthat year 90 percent ofall agricultural land had been fully privatized. “Trade Facilitation in the Caucasus, Final Report,” p.6, World Bank, 2000; Growth Challenges and Government Policies in Armenia, 2002, p.87-93; internal OED assessment. 3
During 1994-96, the remainder ofthe 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 di~cipline,~the regulatory regime in the energy sector, and targeting ofsocial benefits. A new law on intellectual property was passed, and reform ofcompany, banking, and bankruptcy laws was undertaken. Reforms, plus substantial international financial assistance, led to a resumption ofgrowth in 1994. However, after 1996, perceptions that reforms had brought about few benefits to the majority ofthe people and a stalemate over a peace agreement in NK weakened government willingness to sustain reform progress. The pace ofprivatization ofmedium and large enterprises slowed, and the enforcement ofthe newly established laws and regulations for the private sector was delayed.
1.7 A drought and the 1998 Russian crisis hit the economy hard; agricultural output growth declined and exports, transfers, and remittances fell. The assassination ofthe Prime Minister, Speaker ofthe Figure 1.2 - Governance Indicators for Ma,Fsv, and Eastern Emyean counhies Parliament, and @ercesltilerankinga“gl199comkies) other officials in 1999 fbrther destabilized the Rule ofLaw economy. But the !I appointment of a WWWV new Prime Minister I Gov- Efectlvm and approval of a ‘I new Government in 1 Fblltlcalstabillty mid-2000 helped I bring political and economic stability. Fiscal excess was reined in and the pace and strength ofreform recovered, especially on energy, privatization, and the environment for private sector activity. Reforms were accompanied by improvement in the quality ofregulations, in the rule oflaw and government effectiveness and the control ofcorruption. Recent surveys on governance show that the private sector enjoys a better business climate in Armenia than in other countries ofthe Former Soviet Union (FSU); specifically, Armenia ranks above the FSU countries in terms ofrule oflaw, government effectiveness, regulatory quality and voice and accountability. It now requires an average of25 days to launch a new business in Armenia (2003), compared to the regional average of48 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 are current in their payments to energy suppliers. 4 Source: Kauffman, Kraay, and Mastruzzi, “Governance Matters 111,” World Bank, 2003; Comparative Data on Doing Business, World Bank, 2003. 4
1.8 The management offiscal, monetary and exchange rate policy, and high levels of international assistance have helped the economy to grow and to improve its 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 ofthe IDA threshold ofUS$865 for that year. The balance ofpayments and international liquidity have also improved in the last decade, although the current account deficit was still 7 percent ofGDP in 2002. Workers remittances and transfers from the Armenian diaspora averaging around 9 percent ofGDP financed about half ofthe trade Flgure 1.3: Balance of Payments 1993-2003 deficit, which is about 20 60% , percent ofGDP (see Figure 50% 1.3). Official development 40% assistance, about 11 percent 30% ;20% of GDP during 1993-200 1, I0 lo% helped to finance the x 0% current account deficit and -lo% to accumulate international -20% reserves that now stand at -30% -40% ‘ around 4.3 months of 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 imports. Ofthat assistance, multilateral institutions lent -Exports mhports +Trade Balance +Current Account 6 percent of GDP, ofwhich Source IntemationalFinancialStatlstics IMF and WB RegionEstmtes. IBRD/IDA comprises about half. Borrowing 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 ofGDP in 2000. Strong macroeconomic performance and a debt-for-equity swap with Russia helped reduce Armenia’s debt to about 43 percent of GDP in 2002, the lowest debt/GDP ratio ofany Commonwealth ofIndependent States (CIS)-7 country except Azerbaijan.
1.9 Inflows of external resources (see Annex A, table 3b) allowed Armenia to consume more than its current income, mitigate economic hardships, maintain a higher level ofaggregate 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 ofthe increase in demand, followed by household consumption and investment; imports also recovered, subtracting around 25 percent from 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 ofthe expansion ofoutput, followed by the contributions of transport and communications, construction and agriculture. During 1998-2001 construction led the growth ofoutput, with 25 percent oftotal growth, followed by retail trade, industry and agriculture, with about 20 percent each. While the recovery ofretail 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 ofdiamonds, 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 fell at about 2 percent per year, reflecting the restructuring still taking place 5 in the economy, and the limited growth of “de novo” firms.5 At the same time these trends show the large gains in productivity already achieved and the potential for hrther 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 The Armenian economy has experienced positive growth since 1994, and by 2003 had recovered to around 94 percent ofits 1990 level, according to official World Bank data. As noted, growth in the last few years has been especially rapid. This is a solid achievement given Armenia’s extemal circumstances, dilapidated infrastructure at the beginning ofthe transition, and domestic political events. Nevertheless, continuing risks ofregional instability, reliance on substantial international financial assistance and a large structural trade deficit all 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 will require higher growth and employment generation in the industrial sector.
1.11 Poverty and income inequality were high throughout the decade, but with a lag have begun to respond to growth. The steep fall in income, a decline in social transfers, and the inability oflarge former state enterprises to pay their wage bills were the proximate factors underlying the significant increase in poverty.6 The incidence of 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 still remained high at 5 1 percent; extreme poverty has fallen from 27 percent to 2 1 percent. However, nearly all ofthe improvement was among the urban poor, and rural poverty remained high. Income inequality also declined, with an estimated Gini coefficient ofincome of0.52 in 2001, down from 0.57 in 1998/99. However, despite this improvement, Armenia continues to have the highest income inequality among ECA countries.’ The stock ofhuman capital has also deteriorated, in part through emigrati~n.~ Confronting poverty and improving social indicators will likely remain a key challenge, as fiscal austerity will continue to limit the resources available for social sector expenditures, although recent efforts at improving targeting have helped ease the plight ofthe poor. Recent estimates by the Europe and Central Asia (ECA) region show that Armenia is only likely to fulfill one Millennium Development Goal (MDG) target- s The Region plans to initiate a study of 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 of 1996 poverty data with that collected later in the decade is difficult due to differences in the definitions and measures utilized. World Bank PRSP, October 2003; also, other intemal WB studies. The Gini coefficient ofexpenditures 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 is the Gini Coefficient for per capita consumption, which was 0.37 in 1991,0.278 in 2001 and 0.273 in 2002. This index suggests some progress in per capita consumption distribution, and it compares more favorably with 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 of the population. 6 maternal mortality-and is not likely to achieve three goals-school enrolment, child mortality and HIV/AIDS and TB incidence."
1.12 Armenia has made good progress in its transition from a centrally-planned to a 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 still lags the more economically developed economies ofEastem 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 oflarge firms, enforcement ofcontracts, and availability ofadequate financing for private firms. Also, in the public sector, a lack ofreform has contributed to bureaucratic obstacles and corruption. These obstacles are hindering the formation andor growth ofsmall and medium-sized firms, which in many transition economies have been found to make a major contribution to employment growth and poverty reduction.
loSee, 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 Armenia joined the World Bank Group in September 1992, and in early 1993, its first loan was on 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.
2.2 The first country strategy embedded in a credit document reflected the turbulent situation from which the country was emerging. The strategy emphasized: (a) economic stabilization and institution building, (b) poverty alleviation and support for better targeting ofsocial 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 ofthe country strategy in the late 1990’s the macroeconomic situation had improved significantly. Bank strategy remained roughly as before: (a) consolidation ofmacroeconomic stability; (b) fostering rapid private sector development through: hrther structural reforms; strengthening the financial system and the legal and judicial framework; and alleviation ofkey bottlenecks in energy, transport, and water; and (c) support for the social sustainability ofreform 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 ofa 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 job 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.
2.3 Overall, the strategies pursued during the decade were substantially relevant to the country’s development needs. The emphasis placed on infrastructure renewal, and the dismantling ofthe remnants ofa centrally planned economy were highly appropriate for the country-especially during the first half ofthe decade. In the infrastructure area, the strategy appropriately focused on maintenance, preservation and improvement ofexisting 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:
” Over most ofthe decade, Bank strategy assumed that if basic reforms could be successfully accomplished, and the vast majority ofassets privatized, then a “supply response” would be forthcoming. Later strategies recognized the need for additional measures such as accelerating the restructuring of large fi,improving the business environment, and strengthening investment promotion. 12 Synergy was excellent in the energy, education, and social protection areas. 8
additional measures were needed to Figure 2.1: Average Annual Commitments to support private sector development if Armenia, by CAS Period broad-based growth with substantial 100 job creation were to take place, and 2 80 that modernizing the public sector 3 60 was 'B a priority. 6 40 2 20 Lending 0 FY93-94 FY95-97 FY98-00 FY01-02 avg, 93-02 2.4 As shown in Figure 2.1 and Table 2.1, from 1993 to 2002 the
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 Economic Policy (adjustment) 60 60 65 65 50 300 42.8%
Agricultural and Rural Dvt. 43 14.5 34.6 33.2 125.3 18.0%
Transport 16 15 40 71 10.2%
Energy and Mining 13.7 21 5 39.7 5.7%
Social Protection 12 20 32 4.6%
Water Supply and Sanitation 30 30 4.3%
Urban Development 28 28 4.0%
TA for Economic Policy* 12 3.8 5 11.4 32.2 3.9%
Private Sector Development 16.8 1 17.8 2.5%
Education 15 15 2.2%
Health, Nutrition, and Population 10 10 1.4% 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 of government, and the FY2001 loan was Judicial Reform Credit. Source: World Bank.
l3For example, bankruptcy or liquidation of unviable medium or large enterprises; more effective enforcement oflaws and regulations; development of a more favorable environment for the entry and growth ofnew firms. l4In particular, the late 1990's country strategy was deficient in not 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 ofthe ECA Region (79 percent) and ofthe overall Bank portfolio (71 percent), and is better than all ofArmenia’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 risk (Annex A, table 5b). Table 2.2: OED Performance RatingsI (by No. of Projects) FY93-94 Percent of projects satisfactory, exit years FY 1993-04 Armenia 86 2.6 With the country engaged in ECA Region 79 an active conflict, FY93-94 lending Bank-wide 71 Azerbaijan 67 was limited to two projects. These Georgia 79 pursued macroeconomic Kyrgyz Republic 83 stabilization, infrastructure Moldova 70 rehabilitation, and institution Tajikistan 71 building. The FY93 Institution Uzbekisthn 67 Source: OED Website, November 2003. Building Loan appropriately focused on stabilization and capacity building. The FY94 Earthquake Reconstruction Project (ERP) addressed critical needs for reconstruction ofbasic infrastructure, housing, community facilities, and commercial structures damaged during the 1988 earthquake. The ERP provided support to the country at a critical time, but limited geographic scope and design deficiencies reduced its 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 Table 2.3 shows the objectives ofeach country assistance, and the proposed and 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 first offive 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 ofthe 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; FY97Fwhichhad not been envisioned in the country strategy-provided firms with export marketing advice as well as loans, and was also intended to strengthen participating banks. The EDP was not
l5However, 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 SACI SACI 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 structural reforms that were Energy Sector Adjustment Irrigation Project expected to lead to a resumption of Agriculture Project Social Investment Fund I growth led by expansion ofthe Enterprise Development private sector. Power Maintenance 1997 (a) consolidation of macroeconomic SAC I1 SAC11 FY98-00 stability; (b) fostering rapid private SATAC I1 SATACII 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 HealthProject Title Registration of key bottlenecks in energy, Municipal Development Education Project transport, and water; (c) support for (water) Health Project the sustainabilityOf Electricity Transmission and Municipal Development and poverty alleviation by strengthening the social safety net Distribution Electricity Transmission and Trade and Transport and reform of the health and Distribution education systems. Facilitation Social Investment Fund I1 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 SACIV govemance and public sector Natural Resources Natural Resources Management services; (c) rebuilding human Municipal Water Irrigation Development capital. PSDII Enterprise Incubator LIL Foreign Investment and Export Facilitation LIL
2.8 The Bank also focused on infrastructure lending in this period, which was 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. While the highway projects were highly relevant, only about half ofthe 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 its goals, but failed to provide training for local governments as
l6The EDP was assessed as moderately unsatisfactory mainly because 5 of the 12 participating banks lost their accreditation, and so benefited little from the project. Also, all participating banks were able to utilize re-flows for up to 10 years, so the credit funded continued unsound lending by these weak banks. 11 envisioned, and also encountered problems with the technical quality and sustainability of sub-projects. However, the SIF increased the poverty focus ofthe Bank program by funding household surveys that helped the targeting ofsocial assistance programs.
FY98-00
2.9 The lending program was not as effective as it could have been, as reform progress slowed during the country strategy assistance period. A key objective ofthe 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 of 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 successll at tackling key issues in the sector.
2.10 In the social sectors, the Education and Health projects (FY98) were approved, as well as a second Social Investment Fund (FYOO). The Education project was successll 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 its contribution to the efficiency ofthe system. While the basic benefits package developed under the project was theoretically sound, it was not well suited to the Armenian circumstances ofextremely tight resource constraints.
2.1 1 The Municipal Development Project (FY98) sought to improve water supply in Yerevan and lay a foundation for private sector involvement in managing water resources in Yerevan. These objectives were in line with the late 1990’s country strategy and supported SAC I1conditionality on water sector issues (which continued under later adjustment credits). However, water supply is still operating intermittently and losses remain high because investment to improve the infrastructure has been slow to materialize. Collection performance, although still poor, is improving and has risen from 19 percent in 2000 to 40 percent in 2003. The highly relevant Power Maintenance project, the first energy sector operation, focused on restoring critical generation capacity through rehabilitation and repair ofthermal 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.
FYOl-02
2.12 The 2001 CAS called for US$211.4 million in lending during FYO1-04, ofwhich 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 well 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). While 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 Two Agricultural and Rural Sector projects were approved: Irrigation Development-scheduled in the recent country strategy-which continued the physical rehabilitation efforts ofearlier credits, and also aimed to strengthen the capacity of sectoral agencies; and Natural Resources Management and Poverty Reduction, which aimed to strengthen natural resource management where degradation ofnatural resources and poverty are a problem. The 2001 CAS included a Municipal Water project, a follow- up to the FY98 Municipal Development project. Its main objective is to extend the management contract concept to the rest ofthe country, where conditions may be worse than in Yerevan. However, the project has not yet been identified, and is currently scheduled for FY05.
Analytical and Advisory Services
2.14 Overall, Analytical and Advisory Services (AAA) were well-coordinated with lending. Throughout the decade, the Bank, in collaboration with the Fund, provided advice and technical assistance in macroeconomic management-a very successful aspect ofthe country’s performance.
2.15 The 1993 CEM, the first formal economic report, laid the basis for the Bank’s knowledge ofthe country and helped define the agenda for the Rehabilitation Credit. The publication in 2000 ofthe FIAS report, “Armenia: Administrative Barriers to Investment,” documented the extent to which petty corruption and arbitrary administrative actions obstructed creation ofan environment conducive to private business, and contributed to the design ofSAC IV (FYO1). In FY02, the Growth Study was completed, which had a significant and beneficial impact on the Bank’s lending to Armenia (see Box 2.1). Ifthis study as well as the FIAS report had been completed earlier, it is likely that constraints in the business environment would have been recognized and incorporated into the Bank program earlier. It is worth noting that this is one ofthe likely consequences ofthe nearly decade-long gap between the first CEM (FY93) and the Growth Study (FY02); this illustrates that preparation ofcountry assistance strategies and adjustment loans are not adequate substitutes for the independent analytical work necessary to understand macroeconomic and structural issues.
2.16 Poverty issues were addressed in analyses in 1996 and 1999, a 2002 poverty update, and further informal studies that were part ofthe two Social Investment Fund projects (FY96 and FYOO), the Health project (FY98), and in conjunction with poverty- focused conditions ofthe 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 ofa number of 13 significant reforms, including: a Law on Social Benefits; an increase in the retirement age; improved procedures to collect and distribute pensions; and introduction ofa 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 of “limited income benefits from growth,” i.e., why Armenia’s real GDP had risen 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 of total labor. The study found that a poor business climate and weak private sector capabilities were key factors hindering establishment or expansion ofprivate firm. The study recommended specific actions-including creation of a high-level Business Council-to improve the business climate. It further recommended strengthening investment promotion, business- government liaison, accelerating the restructuring of large industrial firms, and supplying SMEs with consulting and advisory services. In large measure as a result of this analysis, SAC IV and two subsequent LILs (FY02) changed the direction of the reform program and progress towards improving the business climate is being made. Note: *Referred to as the “Growth Study” in this report Source: Growth Study, p.18.
2.17 An intemal Bank study ofpower demand and supply options proved useful in 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 its recommendations proved overly broad and the envisioned comprehensive Power Rehabilitation project was not im~1emented.I~A later report on privatization ofthe 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 ofthe specific policy reform recommendations outlined in the report were incorporated into the structural adjustment program.
2.18 Informal analytical reports on the agricultural sector were completed in 1993 and 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 ofwater 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 of the Agricultural Reform Support project (FY98) and the Title Registration project (FY99). Finally, a comprehensive water sector review
In accordance with an intemal energy sector review, the Bank started preparation ofa comprehensive Power Rehabilitationproject to address the needs ofboth physical rehabilitation ofpower 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 first stage ofwhich was the Power Maintenance project. World Bank, “Privatizing Power,” Report No. 17018, October 28, 1997. 14 was completed that integrates the analysis ofadequate water supply and pricing for various categories ofusers with environmental concerns.
2.19 A strategy for education reform was completed in conjunction with the Ministry of Education. This study guided the implementation ofmore efficient practices in specific pilot areas under the Education project, and also led to the inclusion ofeducation conditions in SAC I1and SAC 111.
2.20 In the area ofpublic sector reform, two analytical reports (1996 and 2000) were completed. Their impact was limited by a lack ofcomprehensive 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 ofgovernance established an agenda, was well disseminated, and stimulated considerable attention, but a lack ofimmediate follow-up diminished its impact.
Partnerships
2.21 Over the decade, the Bank played a key role in mobilizing resources for Armenia. Following the 1994 ceasefire, the Bank played an important role and its participation was an important signal to other donors. During this time, the Bank chaired annual meetings ofa Consultative Group ofdonors to Armenia. Looking back at the period 1993-96, many officials interviewed expressed their appreciation for the help ofthe Bank in providing resources and in working with other (sometimes reluctant) donors during a time of great turmoil in the country, and when it had not yet established macroeconomic stability or a record ofstructural reform. An innovative approach that the Bank utilized was the mobilization ofthe skills and financial resources ofthe Armenian diaspora. A series ofteleconferences was held that permitted workers in high-tech industries in Armenia to tap into the knowledge and experience ofthose living in the United States, Europe, and Russia. This was combined with a matching fund, established under SFI, that enabled diaspora Armenians to make resources available directly to the social sector. The IFC financed a May 2001 Investor Conference for Armenia in New York; however, its efficacy in inducing new investment has not been assessed.
Aid Coordination
2.22 neefectiveness of aid coordination was mixed. Early in the decade, the Bank worked with the govemment to enhance its capacity in this area, and in 1994 the government established an office in the Ministry ofEconomy that played a significant role in donor coordination. However, starting around 1997 the power ofthis office was diminished. Since then the government has played less ofa role, and donors themselves have taken primary responsibility for coordination (see also para 2.27).”
2.23 Donor coordination worked well, for example, in the agricultural sector, where the Bank focused on rehabilitation ofprimary and secondary canals, while the
In response, the Government notes that since 1997, “positive qualitative progress has been registered [by the government] with regard to the coordination of 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 well in the energy sector, where bilateral donors provided grant assistance to buy hardware that complemented Bank policy advice and conditionality as well 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 ofthe Bank credit. Both the Highway and the Transport projects were implemented in close coordination with the activities ofthe Armenia diaspora Lincy Foundation, which provided US$73 million for road rehabilitation between 1998 and 2002.20
2.24 The Bank’s cooperation with the IMF was excellent. The IMF took the lead role among IFIs 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 on conditionality, inter alia, regarding fiscal, energy, and poverty alleviation issues. Recent coordination on the PRSP (published October 20,2003) has also been good.
2.25 Bank coordination with EBRD was also good. EBRD lending for the Hrasdan 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 ofthe Yerevan Brandy Company and complemented Bank’s efforts on privatization. (More detail on the EBRD’s contribution is provided below in para. 4.10).
2.26 However, numerous individuals interviewed2’ observed that after 1997-when the power ofthe aid coordination office in the Ministry ofEconomy was diminished-aid coordination was inconsistent. Bilateral and multilateral donors began to pursue their own agendas-ften with little 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, this 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 million to the following projects: US$73 million for the rehabilitation of 275 miles ofhighways, bridges and tunnels; US$2 1 million for an SME credit line; US$45 million for construction and repair of4,000 housing units in the earthquake zone; US$18 million for renovation of40 cultural institutions; and US$15 million for the renovation ofYerevan’s 12 main streets. *’ These observations were made by govement officials as well as by staff ofseveral donors. 16
3. Assessment of Development Impact of Country Assistance
3.1 Previous sections addressed the framework ofthe Bank’s assistance program to Armenia, and showed that the overall relevance ofthe Bank’s program was substantial over the decade, the program itself was generally well-designed, and the ratings of individual projects were favorable. These ratings indicate that, in general, project objectives were relevant and achieved, but they provide little information on the overall impact ofthe Bank’s assistance. To assess the latter, it 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 is organized according to the main objectives ofthe 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 ofgovernment resources, Armenian policymakers recognized that stabilization was critical. The Bank, with its partners,22 provided consistent advice and analytical assistance, as well as financial support on concessionary terms. Considered overall, the country’s performance in managing macroeconomic policy 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 Poverty Alleviation: As described earlier, poverty increased dramatically with the huge dislocations and fall 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 ofthe Armenia program. In particular, a single, targeted poverty benefit was initiated, replacing a complex system ofchild 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 ofboth the Bank and the government) on reducing obstacles to private business, which is expected to expand employment opportunities. The most recent data show a modest decline in the
22 The Bank collaborated very closely with the Fund, which took the lead role in this area. 17 overall level ofpoverty and a significant decline in absolute poverty. Armenia made progress in this area during the decade, and the contribution ofthe 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 ofteachers as well as non- teaching staff. The condition ofschool buildings was poor, and resources were inefficiently allocated across schools. A 1996 assessment found that only 30 percent of students were able to buy all oftheir necessary textbooks.
3.5 The reform program pursued by adjustment lending and an investment credit was extensive. Pilot reforms (e.g., devolution ofbudget management, revised system management norms) were initiated which have now been extended to nearly the entire country, and these reforms have increased the efficiency ofthe educational system. Basic analyses ofthe 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 ofGDP in 1997, rising to 2.8 percent ofGDP 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 on achievement are limited and the Region estimates that Armenia will not meet the MDG for education.
Infrastructure and Agriculture
3.6 Energy: In 1993, the energy situation was dire: electricity was provided to many areas only 4 hours a day; the frequency ofthe electricity supplied varied, which sometimes damaged electrical equipment; and natural gas supplies were interrupted by periodic closure ofsupply pipelines. Theft ofelectricity was estimated to be as high as 30 percent. The reform program included restructuring the energy sector, tariff increases, establishment ofa regulatory regime, improved collection ofelectricity bills, substantial reduction ofcross-subsidization, and privatization ofthe electricity distribution companies (achieved in November 2002). The price ofelectricity, traditionally very low in the Soviet Union, was gradually raised. From an average rate of0.2 US centskwh in 1993, the price was progressively raised to the current rate of4.9 US centskwh. Many reform measures were difficult or unpopular, especially tariff increases and the sale of the
23 It is important in this regard to distinguish between the country’s progress in reducing poverty, which was modest, and the outcome of the Bank’s assistance strategy with regard to poverty, which 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 ofbillings, despite the increased tariffs. Also, the negative effects oftariff 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 is required to sustain growth, as much infrastructure remains obsolete, and tariffs are not yet adequate to finance the replacement ofcapital 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 Infiastructure: In the mid-l990s, Armenia’s dire fiscal situation had resulted in a neglect ofmaintenance 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 ofdonor-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 of focusing on maintenance and the preservation and improvement ofexisting 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 of Lincy Foundation Funds (US$73 million from 1998 to 2002) permitted coverage ofthe remaining parts ofthe MainRoad network, as well as rehabilitation ofimportant segments ofthe 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.
3.8 Progress was also achieved in improving efficiency and reducing quasi-fiscal 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 Tbilisi and several commuter lines. AR has significantly improved its 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 ofdrinking water companies, tariff increases, and adoption ofa new Water Code. All ofthese were achieved, although the new tariff levels are below what is needed to cover variable costs, and collections reached only 40 percent in 2002 (see also para 2.1 1). Privatization ofthe water supply company (not a credit condition) was considered infeasible, and therefore a foreign operator was hired under a management contract. While institutional progress has been achieved in the water sector, performance improvements have been modest. 19
3.9 Agriculture: At the start ofthe decade, the key issues in the agricultural sector included the poor condition ofthe irrigation system and state ownership of 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 well conceived and successfully executed, but with some shortfalls. The integrity ofa major portion ofthe irrigation system was restored, water losses were reduced, Water User Consumer Cooperatives were established on a pilot basis, and the capacity ofthe Ministry ofAgriculture to manage the system was enhanced. Land markets and the use ofland as collateral expanded, with the number ofland transactions doubling from 2000 to 2002. However, the long-run sustainability ofthe irrigation system is ~ncertain.~~
3.10 Agricultural sector reforms have been quite successful as reflected in the sector’s performance. The Bank’s index ofagricultural reform shows Armenia with a score of7.4 in 2001, higher than any other CIS country (indicating the most extensive reform); the average for the CIS-7 was 5.9, and for all 12 CIS countries it was 5.2. And agricultural production and exports have been strong relative to other sectors. In the early 1990~~as GDP fell precipitously, the agricultural sector performed well (Table 3.1).26 In recent years, exports ofprocessed foods such as tomato paste, cognac, and processed fruits have increased substantially, aided by the privatization ofago-processing enterprises.
Table 3.1: Armenia, GDP and Agricultural Product 1990 1994 1995 1996 1997 1998 1999 2000 2001 2002 Agricultural Product, percent oftotal GDP, at 1996 prices 21.1 37.0 36.1 34.8 32.2 33.8 33.2 30.6 31.2 28.8 Agricultural Product, percent of 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 all levels-were politically-appointedyand the pay and status ofpublic 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 ofpublic services, erosion ofmorale, and the widespread practice of seeking informal fees for services. The weak public sector hindered development in several ways. First, the low pay and status ofpublic employees increased the propensity for employees to seek bribes (thereby placing severe constraints on 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, is supporting the formation offederations of Water Users Consensus Cooperatives to achieve economies ofscale in O&M costs that will enhance sustainability. 26 However, labor productivity in the agricultural sector fell, as many individuals relocated to farms mainly because ofthe lack of work in urban areas. 20
Growth Study found that 48 percent ofentrepreneurs 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 Early in the decade, the Bank provided technical assistance through several 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 its partners27worked to strengthen fiscal management. Analytical work in this area was ofhigh 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.
3.13 In 1998-2000, the Government ofArmenia (GOA) took a much greater interest in public sector reform. The Bank responded by initiating a review ofgovernance and sponsoring a widely-attended workshop in Yerevan in 2000. While GOA 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 SACSsupplemented by a TA and investment credit, were the primary reasons for the lack offollow-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 ofthis issue, and strengthening governance and public sector reform became one ofthe three main objectives. Eventually, SAC N took up elements ofthe policy agenda. A Public Sector Modernization Credit is under preparation, as the TA and investment component, but this has been delayed because ofgovernment reluctance to borrow for TA. Its preparation is now proceeding, and it is likely to advance reform when it is approved. The lack ofemphasis 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.
Private Sector Development and Financial Sector Development
3.14 Private Sector Development: By the middle ofthe decade, Armenia had made 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 ofSOE
*’The Bank worked with the IMF, USAID, and DFID on strengthening treasury functions, establishing a MTEF, and debt management. 28 Information based on interviews ofgovernment officials and Bank staff. With the Bank largely inactive, other donors provided assistance in this area, but not on a comprehensive basis. For example, DFID supported development of a new Civil Service law, passed in 2001 with a considerable expenditure of political capital on the part ofthe government. 21 budget subsidies. However, while the program contributed to private sector development, it 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 ofenforcing the legal and regulatory framework and removing bureaucratic and administrative obstacles to private sector development were not addressed, even though the existence of such problems was recognized by Bank staff working on Armenia.
3.15 Improving the business environment was a principal emphasis ofthe 2001 CAS, 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 firms, consultants, and others indicate that definite improvement can be seen, with more progress in Yerevan than in other parts ofthe country. Survey data also show improvement. The percent offirms paying bribes frequently declined from 40 percent in 1999 to 14 percent in 2002, with the average bribe as a percent ofannual revenue declining from 4.2 percent to 0.9 percent.29 For both of these measures, Armenia’s absolute level ofperformance for 2002 is the best ofany CIS country.
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 on 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 CAE were unanimous in agreeing that an earlier Bank focus on this area would likely have resulted in faster progress, and that today’s business environment would be more congenial to private business.
3.17 Financial Sector Development: Following independence, the number ofbanks in 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 ofmany weaker banks. Adoption ofthe Basle convention’s capital adequacy requirements stimulated a gradual recapitalization of surviving banks, while a loan provisioning program helped reduce bad loans in bank portfolios. The proportion ofnon-performing loans began to decline in 1998, and from December 2000 to December 2002, fell Wher from 25.5 percent oftotal loans to 4.9 per~ent.~’The restructuring ofthe sector also hastened bank privatization, which has been completed. Foreign bank ownership was permitted starting in 1995, and there are presently 5 branches of foreign-owned banks (about 40 percent ofstatutory capital is held
29 World Bank and EBRD, Business Environment and Enterprise Performance Study, 2002. 30 IMF, “Republic of Armenia, Letter of Intent,” March 7, 2003, p. 17, and Economist Intelligence Unit, November 2002. 22 by foreign investors). Between 2001 and 2003, the authority ofthe 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 ofthe Central Bank. Privatization ofstate- 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 I1in requiring that banks adhere to International Accounting Standards (1998).
3.18 Regulatory reforms in the securities markets have lagged behind the banking 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.
3.19 The Bank’s reform program in the financial sector was generally well conceived and successfully executed. However, despite the sector’s progress, it remains somewhat fragile, and has contributed little to Armenia’s growth. This is because, firstly, creditor rights are weak. Secondly, the size and scale ofthe informal sector discourages saving that could flow into the formal system, and limits the number ofbankable investment propositions available for bank financing; as a consequence, the formal banking system plays a small role in the intermediation ofsavings.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 Over the decade, the Bank‘s assistance, in tandem with the IMF and other donors, has made a major contribution to the maintenance ofmacroeconomic 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 its AAA and lending in helping to establish a new social benefit system, well targeted to the poor. The Bank also had an impact on improvements in the efficiency ofthe education sector and on the increased availability ofenergy. In transport and agriculture the Bank’s assistance likewise made important contributions-rehabilitation ofthe road network and ofthe imgation system-but major problems were left unresolved: a mechanism to ensure maintenance spending in transport, the availability ofcredit in agriculture. The Bank’s program had some success in private sector development, especially in privatization, but moved too slowly to support certain aspects ofthe business environment, especially the promotion of small and mediumjob-creating enterprises. The Bank’s strategy to help strengthen public sector efficiency has been ineffective, although recently the program in this area is improving. On balance, considering all ofthe above, OED rates the outcome ofthe Bank‘s assistance strategy as satisfactory.
~
31 Broad money as a proportion of 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,” May 1,2003. 23
Institutional Development Impact
3.21 A significant number ofachievements have been made in institutional development as a result ofthe Bank’s program. Importantly, many aspects ofthe Bank’s assistance program have contributed to the establishment ofa market economy. The energy sector was completely restructured during the decade, capped by the sale ofthe electricity distribution company in November 2002, and the performance ofthe sector improved dramatically. Along with a new Energy Law passed in 1997, and development ofa regulatory framework, this progress contributed substantially to the country’s institutional development.
3.22 Legal and judicial reform was significant, as well, although efforts to strengthen enforcement should have been undertaken earlier. Some ofthe new laws enacted during the period included an array oflaws governing commercial transactions (collateral, banking, companies, bankruptcy), telecommunications, and civil and procedural codes. Laws and regulations governing the financial sector were significantly strengthened during the decade. Adoption ofinternationally recognized capital adequacy requirements and other measures resulted in the closing ofweak banks and the recapitalization of surviving banks. All banks are now private, and there is a significant presence offoreign banks.
3.23 Institutional and structural improvements were also made in the education sector, which has increased the efficiency with which the country utilizes its resources in this area, Similar changes were made in the pension area. And the establishment ofthe means-tested poverty benefit constituted a major improvement in the efficiency of targeting poverty alleviation efforts.
3.24 The institutional development impact ofthe 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 of 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 In the decade examined by this CAE, Armenia started from a devastating economic situation, has made substantial progress across a wide range ofareas, and is continuing to make reform progress.
3.26 Nevertheless, the benefits ofArmenia’s development progress are subject to a number ofrisks. While the risks ofregional instability remain high and Armenia is still 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 is not assured. High, but declining, poverty and inequality and limited budgetary resources to improve social services could lead to further social tensions. 24
3.27 There is a hrther risk that recent high levels ofGDP 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 ofnew private firms. With the completion ofmost ofthe “catching up’’ following the sharp decline ofthe early 1990s, in order to sustain a level ofreal GDP growth of6 percent per annum, gross domestic investment would have to increase by at least 2.5 percentage points ofGDP 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 in~estment.~~
3.28 A number offactors, however, are working to reduce risks. The benefits of macroeconomic stabilization are widely recognized by policy makers and the population. Social sector reforms are widely seen as having better targeted scarce resources. The sustainability ofenergy sector reforms is bolstered by the tangible improvement in the supply ofelectricity 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 oflarge 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 is from diverse sources, and is not likely 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.
3.29 Balancing the risks with the benefits achieved to date in the assistance program implies that sustainability-or the resilience to risk ofthe benefits ofthe Bank’s assistance program-is considered as likely.
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, on 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 ofsuccessfbl government performance include education and poverty alleviation, where the introduction of a means-tested poverty benefit improved benefits’ targeting.
4.2 However, reforms slowed after 1997. And, as noted throughout this evaluation, 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. It 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 follow through and develop an agreed strategy.
4.3 Armenia has had a high level ofturnover ofpolicy officials (since 199 1, the 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 policy reform that has served Armenia well. The October 1999, assassination ofthe Prime Minister, Speaker ofthe Parliament, and other leading officials added to the in~tability.~~
Bank Performance
4.4 Overall, the Bank has performed well in Armenia. The Bank’s strategy was relevant, with only a few exceptions. Lending instruments were well formulated, and adjustment and investment operations were coordinated and mutually supporting. ESW was overall ofgood quality, linked to the lending program, and disseminated. The Bank took a risk by fielding missions and identifying its first projects even while the conflict with Azerbaijan was ongoing. This paid offwhen, after the termination ofhostilities in 1994, Armenian officials turned their attention to the rapid implementation ofreforms. While the provision offinancial resources was important, interviews with current and past officials, citizens, and others indicate that the Bank played an equally important role
33 The political aftermath of 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 ofknowledge. The Bank exhibited professional quality when it 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 ofthis transfer occurred through policy dialogue and ESW, a large share also took place through project design and implementation.
4.5 The sequence ofan initial institution building loan, followed by an infrastructure credit, an adjustment credit, and then investment in energy and irrigation was successful. The continuity ofBank staff was also excellent, especially in the energy, macroeconomic, and agricultural areas. As the decade progressed, the Bank made significant contributions to policies in the energy and the social sectors, as well as maintaining a substantial poverty focus. As 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 As progress became evident, the Bank provided additional adjustment funding to support policy 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 ofagreed reforms dominated the agenda. Also, a hiatus in country economic work prevented the recognition ofkey constraints to economic growth and the development of 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. It should be noted that throughout the period ofthis CAE, the steadily improving macroeconomic performance reflected well on the performance ofboth the Bank and the Borrower.
Contribution of Other Partners
4.7 Armenia has been the beneficiary ofconsiderable support from the donor community, and the contribution ofother partners was substantial. The IMF has made a substantial positive contribution to the outcome ofthe assistance program, especially in macroeconomic policy, tax administration, and the financial sector. The Fund provided a total ofUS$257 million in funding from 1994 to 2002 (see Annex A, table 3e). From 1994 through 1998, the Fund’s net disbursements averaged US$36 millionper year, about US$12 per capita. As might be expected, annual disbursements during 1999-2002 declined to US$17.5 million per year, but with repayments averaging US$14.8 million annually, annual net disbursements during that period amounted to only US$2.8 million.
4.8 USAID was the largest bilateral donor, with aid averaging around US$65 million per year (1994-2002). USAID provided assistance in the financial, energy, enterprise, agriculture, and housing sectors, and also supported democratization and privatization. Bank coordination with USAID was mixed; in the energy area, USAID supported conservation and provided electric meters, which complemented Bank policy efforts. 27
USAJD also completed draft legislation in a number ofareas, which supported Bank programs. However, collaboration in other sectors-for example, in the agricultural and financial sector-was less effective.
4.9 IFC investment has been quite limited, mainly due to its view that Armenia presents a lack ofsuitable 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 ofareas, including a corporate governance project (1999-2000), and sponsored a FIAS study (2000) ofadministrative barriers to investment and an Investors Conference (2001).
4.10 EBRD made nine investments in Armenia during the decade, providing a total of US$22.7 million in equity and US$114.2 million 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 ofYerevan 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 Lincy Foundation in highway rehabilitation, and less closely in other areas. From 1996 to 2002, Lincy provided a total of around US$172 million in support to the country: street and highway rehabilitation (US$88 million), an SME credit line (US$21 million), housing (US$45 million), and renovation ofcultural institutions (US$18 million).
Impact of Exogenous Factors
4.12 The impact ofexogenous factors has been mixed during the CAE period. First, regional instability is perceived as very high, which has deterred foreign investment. Second, the lack ofa 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 ofan agreement and removal ofthese barriers would have a substantial positive impact on exports and overall economic perfo~mance.~~ Finally, support from the Armenian diaspora-the transfer ofboth fbnds and knowledge-has had a positive effect.
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 The Bank’s assistance program in Armenia demonstrates that comparatively high official assistance and AAA in support ofappropriate 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 ofthe satisfactory outcome ofthe Armenia assistance program. The first CEMprovided an analytical foundation for the early rehabilitation loan and SAC1, and the Growth Study refocused adjustment lending on creating an appropriate climate for private sector development (see para. 2.15). Analytical work onpoverty was instrumental in improving the targeting ofsocial benefits (see paras. 2.16, 3.3). Energy and education provide good examples ofsynergy 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 oflaws 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 ofa payments culture.
5.2 This evaluation recommends that the future Bank assistance program focus in the following areas:
Prepare a strategy for an eventual transition to IBRD lending. During the decade, Armenia received comparatively high amounts ofdevelopment assistance on 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 ofthe use ofJBRD resources. One implication is that the Bank would undertake fewer operations, and lend less money. The key focus of 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 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 all sectors of 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 ofsocial services. The unfinished agenda ofthe institutional and governance review (2000) provides an appropriate starting point. Helping the formulation of an anti-corruption strategy, reforming customs and tax policy, and improving public administration are priority areas. 29
Annex A: Statistical Annexes
Table 1 : Armenia at a Glance
Table2 : Table 2a. Armenia - Key Economic and Social Indicators, 1990-2000 Table 2b. Armenia’s Fiscal Adjustment, 1995-2002 Table 2c. Total Govemment Tax Revenues in Transition Economies, Percent of GDP (excluding budget grants and non-tax revenues) Table 2d. Social Expenditures in CIS-7 Countries (Expenditures as a percent of GDP)
Table 3 : Armenia - Development Assistance and World Bank Lending Table 3a. Total Receipts Net (ODA, OOF and Private), 1990-2001 Table 3b. Armenia - Flows ofExtemal Assistance, and Debt Sustainability Table 3c. Armenia - List ofIBRD/IDA Approved Projects, 1990-2004 Table 3d. IBRD & IDA Total Net Aid Per Capita in USD (1990-2000) Table 3e. Armenia - Transactions with the International Monetary Fund, 1994-2002 (Total in US$)
Table 4 : Armenia - List of Selected Economic and Sector Work, 1993-2003
Table 5 : Ratings for Armenia Table 5a. Key Ratings, FY93-04 Table 5b. Projects at Risk
Table 6 : Armenia - World Bank’s Senior Management
Table 7 : Armenia - Millennium 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 Annex A
Table 1: Armenia at a Glance 8/20/03
Europe 8 Lower- POVERTY and SOCIAL Central middle- Armenia Asia income 2002 Population. mid-year (millions) 3.1 476 2,411 Life expectancy GNI per capita (Atlas methcd, US$) 790 2,160 1,390 GNI (Atlas methcd, US$ billions) 2.4 1,030 3,352
Average annual growth, 199862 Ti Population (%) -1.1 0.1 1.o ;NI Labor force (%J 1.1 0.4 1.2 Most recent estimate (latest year available, 199042) Poverty (% of population below national poverty line) 48 Urban population (% of tdalpopulation) 67 63 49 Life expectancy at birth (years) 75 69 69 .I. infant mortality (per 1,000 live births) 34 25 30 Child malnutrition (% of children under 5) 3 11 Access to improved water source Access to an improved water source (% ofpopulation) 91 81 Illiteracy (% ofpopulation age 75+J 1 3 13 -Armenia Gross primary enrollment (% of schod-age population) 99 102 111 Male 99 103 111 - Lowermiddle-income group Female 99 101 110
KEY ECONOMIC RATIOS and LONG-TERM TRENDS 1982 1992 2001 2002 Economic ratios' GDP (US$ billionsl 1.1 2.1 2.4 Gross domestic investmentlGDP 1.6 18.6 19.8 Trade Exports of goods and servicedGDP 39.8 25.6 29.2 -19.8 -1.7 3.2 Gross domestic savingdGDP T Gross national savingdGDP 9.5 14.2 Current account balanceiGDP -9.5 5.8 Interest payments/GDP 0.8 1.o Total debffGDP 46.7 48.5 7.4 9.0 Total debt service/exports 1. Present value of deWGDP 30.9 Present value of debffexports 88.8 Indebtedness 1982-92 199242 2001 2002 2002-00 (average annual growth) GDP .. 5.4 9.6 12.9 6.3 -Armenia GDP per capita .. 6.8 10.4 13.5 -0.7 Lower-middle-income arouD Exports of goods and Services .. -4.0 22.9 27.3 15.6
STRUCTURE of the ECONOMY 1982 1992 2001 2002 Growth of investment and GDP (%) (% of GDP) Agriculture 31.0 27.7 25.9 20 Industry 39.4 34.2 33.2 Manufacturing 33.1 22.4 21.6 10 Services 29.6 38.1 40.9 0 Private consumption 101.3 91.0 86.3 -10 10.5 General government consumption 18.5 10.7 -GDI *GDP Imports of goods and services 61.3 45.9 45.8 I
1982-92 199242 2001 2002 Growth of exports and imports (Oh) (average annual growth) 30 I Agriculture 2.7 11.6 4.4 Industry 4.2 6.8 24.2 20 Manufacturing 3.7 3.8 14.2 10 Services 4.4 9.3 9.7 0 Private consumption 3.3 15.2 -7.9 General government consumption -0.3 3.3 8.6 -10 Gross domestic investment 7.7 24.8 17.7 Imports of goods and services -2.9 2.1 8.2
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 1982 1992 2001 2002 Inflation (x) Domestic prices I I 25 (% change) 20 Consumer prices 728.7 3.1 1.1 15 568.8 4.0 2.3 implicit GDP deflator 10 Government finance 5 (X of GDP, includes current grants) 0 Current revenue 4.0 16.3 16.7 5 -7.7 0.3 0.5 Current budget balance I 111 GDPdeflator -0'CPi I Overall surplusideficit -7.7 -4.3 -2.6
TRADE 1982 1992 2001 2002 Export and import levels (US$ mill.) (US$ millions) Total exports (fob) 220 342 507 Goid, jewelry, and other precious stones 123 259 Machinery and mechanical equipment 28 21 Manufactures 89 Total imports (cif) 334 877 991 Food 21 1 200 Fuel and energy 60 187 Capital goods 62 96 97 98 99 w 01 Export price index (1995=100) Import price index (1995=100J Exports mlmports Terms of trade (1995-100)
BALANCE of PAYMENTS 1982 1992 2001 2002 Current account balance to GDP (%) (US$ millions) 1 Exports of goods and services 230 540 700 0 Imports of goods and services 364 978 1,117 5 Resource balance -1 35 -438 -417 Net income -39 64 88 -10 Net current transfers 174 169 -15 Current account balance -201 -160 -20 Financing items (net) 21 7 234 Changes in net reserves -16 -73 -25 Memo: Reserves including gold (US$ millionsl 334 360 Conversion rate (DEC, local/US$) 0.3 555.1 573.4
EXTERNAL DEBT and RESOURCE FLOWS 1982 1992 2001 2002 (US$ millions) 1 Composition of 2002 debt (US$ mill.) Total debt outstanding and disbursed 989 1,149 IBRD 7 8 IDA 428 530 Total debt seivice 55 74 IBRD 1 1 IDA 3 4 Composition of net resource flows Official grants 42 0 Official creditors 59 63 Private creditors 0 -4 Foreign direct investment 70 0 Pottfoiio equity 0 0 c 195 World Bank program Commitments 75 9 A - IBRD E - Bilateial Disbursements 55 66 B - IDA D - Other multilateral F - Private Principal repayments 0 0 C - IMF G - Short-terr Net flows 55 66 Interest payments 3 4 Net transfers 51 62
Development Economics 8/20/03 33 Annex A (continued)
:'4c'!- :m : : : :*-u 3"- Or(& f 0
: : : :"?P d oor r-
a b
: : :e- %=
.-5 3% , g Annex A (continued) 34
1997 1998 1999 2000 2001 2002 budget, cash -4.70% -3.70% -5.20% -4.80% -4.20% -2.60%
B. Quasi-fiscal Balance (budget arrears + deficit ofthe energy sector) -2.40% -4.70% -5.40% -6.90% -2.60% -2.50% -1.00% 3.30% C. Public sector balance, accrual (budgeted and off-budget, =A+B), -1 1.30% -13.00% -10.10% -10.50% -7.80% -7.30% -5.20% 0.70% percent of GDP
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 Armenia, excluding SIF* 10.8 13.3 14.4 17.3 15.5 14.8 Georgia 10.7 12.7 12.8 13.8 14.2 18 Kyrgyz Republic 17.3 16.7 18.4 15.9 15.3 15.4 Kazakhstan 11.4 12.2 16.2 16 20 19.7 Azerbaijan 17.6 19.1 19.5 18.2 20.8 20.5 Moldova 27.4 29.9 28.3 21.8 22.3 23 Albania 18.3 16.6 20.3 21.3 22.4 22.5 Lithuania 29.6 32.6 32.6 32.1 30.2 28.5 Russia 22.5 33 28.6 28.8 31.3 30.9 Macedonia 35.7 34.7 33.2 34.2 35.2 38.5 Ukraine 36.7 38 36 33.4 35.6 32.8 Estonia 37.7 39.2 36.9 35.5 35.6 38.3 Latvia 37.4 39.9 43.9 40.8 37 38.7 Slovak Republic 45.3 42.8 40.5 41.6 39.2 34.4 Bulgaria 35.9 35.1 37.7 40.3 41.3 NJA Croatia 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 of 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 of 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 Annex A (continued)
Table 3. Armenia: Development Assistance and World Bank Lending
IBRD&IDA Share of Multilateral Assistance, YO - -- 0% 6% 59% 50% 57% 35% 49% 60% 67% 43 %
Share of Total 0% 3% 38% 30% 41% 22% 27% 26% 25Yj 24%/ ssistance, % -- I tI I I *ODA: Official Development Assistance - Grants or loans to countries and territories on Part 1 of the DAC List of Aid Recipients (developing countries) that are: 1 - Undertaken by the Official Sector; 2 - Have promotion of economic development and welfare as their main objective; 3 - Are granted at concessional financial terms (the loan has a grant element of at least 25%). *Other Official Flows (OOF) - Transactions by the official sector with countries on the List of Aid Recipients that do not meet the conditions for Official Development Assistance or Official Aid eligibility, either because they are not primarily aimed at development, or because they have a grant element of less than 25 per cent. **DAC: Development Assistance Committee. The committee of the OECD which deals with development cooperation matters. Source: OECD database 2003. Annex A (continued) 36
Tables 3b: Flows of External Assistance, and Debt Sustainability
International Financial Support, 1993-2001, Percent of GDP Category percent of GDP Total 19.9
Bilateral 4.6
Multilateral 6.1
oiw IBRDiIDA 2.6
Remittances 8
Other (e.g., Lincy) 1.2
2001 2002 2003 Armenia 179 185 158
Georgia 333 308 275
Kyrgyz Rep. 474 433 383
Moldova 320 3 07 286
Tajikistan 476 343 3 24 37 Annex A (continued)
of -Table 3c: Armenia - List IBRI)/IDA Amroved Projects; 1990-2004 IBRD/l Latest Latest Project Date, Rev Sector Board ",":zit Proj ID Proj Name DAAmt DO IP Rnting Stalus Closing Outcome Sustninability Inst Dev
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 $!~~:~~~
17 S S M Closed 07/01/2002 u~~~~~~vUnlikely Modest
Reconstruction 1998 Education 15 S HS M Closed 1013112002 sa::k!ily Likely Substantia
1996 Transport 16 S S S Closed 12/31/2000 sa?kliry Likely Substantia 1996 Social Protection 12 S S S Closed 12/31/2000 E:!;::::; Non-evaluable Modest 1996 Economic Policy
51026 SATAC2 1998 Economic Policy 5 S S M Closed 12/31/2002 Satisfactory Likely Substanti
51 118 Highway Supplement 1997 Transport 15 # # # Closed # 51171 SAC3 65 S S M Closed 0613012001 ~~~;~~~~~Likely Substanti 65189 SAC4
Source: Business Warehouse database as of October 29,2003 Annex A (continued) 38
Table 3d: IBRD & IDA Total Net Aid Per Capita, in USD (1990-2000)
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
Armenia 1.7 24.4 24.5 20.4 11.3 17.2 14.2
Azerbaijan 3.9 4.6 7.1 2.6 7.6 3.4
Georgia 0.2 15.7 14.1 11.8 9.7 14.5 3.4 Kyrgyz Republic 5 7.9 17.7 13.1 14.1 13.8 4.4 10.6
Moldova 9.4 6.5 16.3 7.2
Tajikistan 5.1 3.7 6.2 5.8 3.7
Uzbekistan
Table 3e: Armenia - Transactions with the International Monetary Fund, 1994-2002 (Total, in US$)
Year Disbursements Repayments Net
2002 27,540,000 19,392,188 8,187,813
200 1 13,770,000 10,083,938 3,706,063
2000 16,483,359 -16,483,359
1999 28,8 13,725 13,186,688 15,668,888
1998 52,050,600 581,766 5 1,544,434
1997 23,236,875 23,270,625
1996 46,473,750 46,541,250
1995 41,826,375 41,887,125
1994 23,236,875 23,270,625
Total 256,948,200 59,727,938 197,593,463 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 Work, 1993-2003
Jo- Iocument Title Date Report No Document Type 1. Armenia - Public expenditure review Vol. 1 of 1 (English) 412812003 24434 Economic Report
2. Armenia - Child welfare note 121912002 2449 1 Sector Report 3. Armenia - Poverty update 12/9/2002 24339 Economic Report
4. Growth challenges and govemment policies in Armenia 212812002 23786 World Bank Country Study CAS Public Information Armenia Country assistance strategy public information notice 211 112002 PIN64 5. - Note 6. Armenia - Growth challenges and govemment policies 1 113012001 22854 Sector Report
7. Armenia - Growth challenges and govemment policies, Vol. 2 1113012001 22854 Sector Report 8. Armenia - Country assistance strategy document 412512001 221 11 Country Assistance Strategy 9. Armenia - Improving social assistance in Armenia 61811999 19385 Sector Report
Public expenditures in Armenia : strategic spending for LO. 1111 1/1997 16213 Economic Report creditworthiness and growth 11. Armenia - Privatizing power 10128/1997 17018 Sector Report L2. Armenia - Transport sector review 513011997 16625 Sector Report 13. Armenia - Transport sector review, Vol. 2 513011997 16625 Sector Report 14. Armenia - Transport sector review, Vol. 3 513011997 16625 Sector Report 15. Armenia - Confronting poverty issues 611011996 15693 Sector Report
16. Armenia - The challenge ofreform in the agricultural sector 513111995 14521 World Bank Country Study
17. Armenia - Agriculture and food sector review 2/6/1995 13034 Sector Report 18. Armenia - Agriculture and food sector review, Vol. 2 21611995 13034 Sector Report 19. Armenia - Country economic memorandum 3/24/1993 11214 Economic Report
20. Armenia - Country economic memorandum, Vol. 2 312411993 11274 EconomicReport
S?rce: World Bank Imagebank as of 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 Georgia 14 79 92 57 415 57 84 41 Kyrgyz Republic 12 83 58 42 363 95 48 39
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 of November 13,2003.
Table 5b: Projects at Risk Net Comm Comm At Country # Proj Amt # Proj At Risk %At 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 of 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 Basil G. Kavalsky Waf& Grais
1995 Wilfried Thalwitz Basil 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 Owaise Saadat
2000 Johannes F. Linn Judy O'Connor 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 1. Eradicate extreme poverty and hunger 2015 target = halve 1990 $I a day poverw and malnutrition rates Population below $1 a day (%) 7.8 Poverty gap at $1 a day (“h) 1.7 Percentage share of income or consumption held by poorest 20% 5.5 Prevalence of child malnutrition (% of children under 5) 3.3 Population below minimum level of dietary energy consumption (%) 35 2. Achieve universal primary education 2015 target = net enrollment to 100 Net primary enrollment ratio (% of relevant age group) Percentage of cohort reaching grade 5 (%) Youth literacy rate (% ages 15-24) 99.5 99.7 99.7 99.7 3. Promote gender equality 2005 target = education ratio to 100 Ratio of girls to boys in primary and secondary education (%) Ratio of young literate females to males (% ages 15-24) 99.7 99.8 99.9 99.9 Share ofwomen employed in the nonagricultural sector (%) Proportion of seats held by women in national parliament (%) 3.7 4 4. Reduce child mortality 2015 target = reduce 1990 under 5 mortality by two-thirds 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 (% of children under 12 months) 93 96 91 5. Improve maternal health 2015 target = reduce 1990 maternal mortality by three-jourths Matemal mortality ratio (modeled estimate, per 100,000 live births) 29 Births attended by skilled health staff (% of total) 96 6. Combat HIV/AIDS, malaria and other diseases 2015 target = halt, and begin to reverse, AIDS, etc. Prevalence of HIV, female (% ages 15-24) Contraceptive prevalence rate (% of women ages 1549) Number of children orphaned by HIV/AIDS Incidence of tuberculosis (per 100,000 people) 58 Tuberculosis cases detected under DOTS (‘h) 42 7. Ensure environmental sustainability 2015 target = various (see notes) Forest area (‘YO of total land area) 11 12.4 Nationally protected areas (% of total land area) 7.4 7.6 GDP per unit of energy use (PPP $ per kgoil equivalent) 1.9 4.4 4.9 C02 emissions (metric tons per capita) 1 0.9 0.9 Access to an improved water source (% of population) Access to improved sanitation (% of population) Access to secure tenure (% ofpopulation) 8. Develop a Global Partnership for Development 2015 target = various (see notes) Youth unemployment rate (% of total labor force ages 15-24) Fixed line and mobile telephones (per 1,000 people) 156.9 154.5 157.5 156.4 Personal computers (per 1,000 people) 2.4 5.7 7.1 General indicators Population 3.5 million 3.8 million 3.8 million 3.8 million Gross national income ($) 1.4 billion 2.7 billion 1.9 billion 2.0 billion GNI per capita ($) 370 730 490 520 Adult literacy rate (% of people ages 15 and over) 97.5 98 98.3 98.4 Total fertility rate (births per woman) 2.6 1.6 1.2 1.3 Life expectancy at birth (years) 71.7 72.3 73 73.6 Aid (% of GNI) 0.1 7.6 11.3 11.2 External debt (% of GNI) 12.9 47.5 46.5 Investment (% of GDP) 47.1 18.4 18.4 19.2 Trade (% of GDP) 81.3 86.1 70.6 74.1 Source: World Development Indicators database, April 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 is less than one dollar a day. Halve, between 1990 and 2015, the proportion ofpeople who suffer iiom hunger. Goal 2 target: Ensure that, by 2015, children everywhere, boys and girls alike, will be able to complete a full course of primary schooling. Goal 3 target: Eliminate gender disparity in primary and secondary education preferably by 2005 and to all levels ofeducation 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 of malaria and other major diseases. Goal 7 targets: Integrate the principles of sustainable development into country policies and programs and reverse the loss ofenvironmental 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 the Special Needs of landlocked countries and small island developing states. Deal comprehensively with the debt problems of 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)
Table 8: Transition Progress Ratings in Central and Eastern Europe and the CIS, 1993-2001 Table Sa: Performance
Country Enterprises Markets and trade Financial institutions Infrastructure Banking Secunties Trade & Govemance Price Large-scale Small-scale Foreign Competition reform & markets Infrastructure & enterpnse non-bank' pnvatization pnvatization liberalization exchange policy interest rate restructuring financial system liberalization institutions ~ I Armenia 3+ 4- 2+ 3 4 2 2+ 2 2+ Azerbaijan 2 4- 2 3 4- 2 2+ 2- 2- Georgia 3+ 4 2 3+ 4+ 2 2+ 2- 2+ Kyrgyz Republic 3 4 2 3 4 2 2+ 2 I+ Moldova 3 3+ 2 3+ 4+ 2 2+ 2 2+
Tajikistan 2+ 4- 2- 3 3+ 2- 2- 1 ~ I+ Uzbekistan 3- 3 2- 12 2- 2 2- 2 2-
Table Sb: Armenia - Structural and Institutional Indicators
1993 1994 1995 1996 1997 1998 1999 2000 2001 Liberalization EBRD index of price liberalization 3.0 3.0 3.0 3.0 3 .O 3 .O 3 .O 3 .O 3 .O EBRD index of forex and trade liberalization 2.0 2.0 3.0 4.0 4.0 4.0 4.0 4.0 4.0
Privatization EBRD index of small-scale privatization 2.0 2.3 2.7 3 .O 3.0 3.3 3.3 3.3 3.7 EBRD index of large-scale privatization 1.0 1.0 2.0 3 .O 3.0 3 .O 3 .O 3 .O 3.0
Enterprises EBRD index of enterprise reform 1.0 1.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 EBRD index of competition policy 1.0 1.0 1.0 1.o 1.O 1.o 1.o 1.o 2.0
Infrastructure EBRD index of infrastructure reform 1.0 1.3 1.7 1.7 2.0 2.0 2.3 2.3 2.3
Financial institutions EBRD index of banking sector reform 1.0 1.0 2.0 2.0 2.3 2.3 2.3 2.3 2.3
Legal environment ! EBRD rating of legal extensiveness (company law) I n.a n.a n.a n.a 3.0 4.0 3.7 3.7 2.7
EBRD rating oflegal effectiveness (company law) ~ n.a n.a n.a n.a 3.0 3 .O 2.0 2.0 2.0 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 of 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 Ruben Hovhannisyan Minister ofJustice Director, Implementation Office Electricity Transmission and Tigran Khachatryan Distribution Project Deputy Minister ofFinance and Economy Sergey Khachatryan Health PIU Tigran Davtian Deputy Minister ofTrade and Economic Ruben Hovhannessian Development Electricity Transmission PIU
Tatul Hakobyan Adibek Ghazarian Deputy Minister ofHealth Irrigation PIU
Karen Sargssian Deputy Minister ofEnergy List of Workshop Participants
Mels Hakobian Armenak V. Darbinyan General Director Director Sevan-Hrazdan Cascade Economic Research Institute (Former Minister ofEnergy, member of (Former Minister ofFinance and NA) Economy)
Eduard Karapetyan, Hranush Kharatian Division Director Head ofthe Ethnology Department Ministry ofTransport SUA
Gagik Arzumanyan Norayr Petrossian Deputy General Director (for Andranik Andereassian, Armenian Copper Program Deputy Minister ofUrban Development) (former Deputy Minister ofFinance) Alex Poghossian Karine Harutyunyan Alpha Plus Education PIU AmenKhudaverdian Alik Astvatsatrian Secretary ofPublic Sector Reform Procumrment Offices Commission Energy PIU Sergy Khachatryan Health PIU Annex B (continued) 46
Ruben Hovhannessian Alexander Astvatsatryan Electricity Transmission PIU World Bank, Procurement Officer EnergyMunicipal projects Adibek Ghazarian Irrigation PKJ Gayane Minasyan Operations Officer Bagrat Yengibarian Environment Section Executive Director, Enterprise Incorporated Foundation Susana Hayrapetyan (Former Director, Foreign Finance Operations Officer Project Management) Social Sector
Tigran Davtian Nerses Karamanukyan Deputy Minister ofTrade and Economic International Finance Corporation Development Head ofOffice, Yerevan
Karen Sargssian Naira Melkumyan Deputy Minister ofEnergy Portfolio Manager
Sofia Hovhannesian Jonathan Walters (for Levon Aghamian Country Economist Agric. PIU) Lev Freinkman Gagik Arzumanyan Country Economist Deputy General Director Armenian Copper Program Helen Sutch (former Deputy Minister ofFinance) Country Economist
Vahram Avanessian Vladimir Vucetic Former Minister ofFinance Energy Sector Specialist
World BanWIFC Helga Muller Social Sector Manager Judy 0’ Connor Country Director Amit Mukherjee Social Sector Specialist Roger Robinson Country Manager Mark Lundell Agricultural Sector Specialist Armine Khachatryan Advisor to the ED Martin Slough Financial Sector Specialist Peter Nicholas Country Officer Reiner Forster Social Sector Specialist Bagrat Tunyan Public Sector Management Specialist 47 Annex B (continued)
Other Donors Private Sector/NGOs
Armen Giulkhasyan Hrant Bagratyan Director, Representative Office in Vice-president Armenia Yerevan Brandy Company The Lincy Foundation Armand Pinarbasi Masoud Keyan Grant Thomton Executive Director Chartered Accountant & Corporate PA Consulting Group Finance (USAID Contractor) Levon Barkhudaryan Paul Dodds Armhpex Bank Attomey/Advisor to USAID (Former Minister of Finance)
Luis Valdivieso Amalia Kostanyan IMF Chairwoman Center for Regional Development David Grigorian Transparency International Armenia IMF Arevik Saribekyan James McHugh Director IMF Resident Representative Armenia Anti-Corruption Resource Center Transparency International
Larisa Alverdian Fund Against Violation ofLaw (NGO)
49 Annex C
Armenia Country Assistance Evaluation Management Action Record
OED Recommendations Management Response
Prepare a strategy for an eventual transition to We agree that this recommendation is appropriate for any IBRD lending. During the decade, Armenia [DA borrower with a per capita income that is approaching received comparatively high amounts of he IDA operational cut-off, currently set at $865 per capita. development assistance on concessionary terms. [n close consultation with FRM and SRF, the Region is The country is approaching the IDA threshold, reviewing options for Armenia's eventual transition to blend yet creditworthiness remains an issue. The Itatus. Armenia will remain an IDA-eligible country for the upcoming country assistance strategy should FY05-FY08 period, although some aspects ofIDA lending review Armenia's creditworthiness, map out a will be affected as the country moves past the IDA strategy for a transition, and identify the 3perational cut-off (e.g. the maturities for new IDA credits potential implications ofthe use of IBRD shorten when a country has been above the operational cut- resources. One implication is that the Bank will 3ff for two consecutive years). In preparation ofthe country undertake fewer operations, and lend less assistance strategy for FY05-08, the country team is money. The key focus of such a program could working with the authorities and SFRCR to prepare be on poverty-related activities, e.g., the social benchmarks that can be used to review Armenia's sectors, the rural sector, and meeting MDGs. creditworthiness at mid-term. Ifthe country makes sufficient progress over the next three years, the country assistance strategy envisages a possible first IBRD credit towards the end ofthe country assistance strategy implementation period.
Continuefocusing on environment for private We agree with this recommendation and have made sector development. Generating job-creating continuing private sector-led economic growth one ofthe growth to reduce poverty and expanding exports three primary country assistance strategy objectives. The to reduce the large trade deficit are essential to country assistance strategy plans to address this both reducing risks and sustaining progress in through implementation ofthe current portfolio (including Armenia. The Bank should focus its adjustment the on-going Judicial Reform Project and the soon to be lending on continuing to improve the climate for approved Public Sector Modernization Project) and several enterprises, especially small and medium new interventions, particularly the planned series ofPRSCs enterprises; enforcing existing laws and and PRSC TA project (which will focus on improving the regulations such as bankruptcy procedures; environment for private sector growth, improving public implementing measures to make the judicial sector financial management and addressing priority social system more efficient; and opening all sectors of sector issues) and new investment operations, the economy to competition. complemented by AAA work on competition policy, the financial sector, a CEM and the next PER update.
Follow through on supportingpublic sector This recommendation is completely in line with our current reform. A stronger public sector is key to strategy. A Public Sector Modernization Project has been improving the climate for private sector appraised and will be negotiated shortly, and a follow-up development and efficient delivery of social activity is scheduled for the high case ofthe next country services. The unfinished agenda ofthe assistance strategy. Modernization oftax and customs institutional and governance review (2000) administration will be important elements ofthe PRSCs and provides an appropriate starting point. Helping a tax and customs administration project is slated for the the formulation of an anti-corruption strategy, high case ofthe next country assistance strategy period. The reforming customs and tax policy, and government has just published an anti-corruption strategy improving public administration are priority with support fiom the Bank, and the next country assistance areas. strategy anticipates supporting implementation through the PRSCs and the PRSC TA project.
51 Annex D
Guide to OED’s Country Assistance Evaluation Methodology
1. This methodological note describes the key elements ofOED’s country assistance evaluation (CAE) meth~dology.~~
CAEs rate the outcomes of Bank assistance programs, not Clients’ overall development progress 2. An assistance program needs to be assessed on how well it met its particular objectives, which are typically a sub-set ofthe Client’s development objectives. If an assistance program is 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 ofthe total resources devoted to a Client’s development by donors, stakeholders, and the government itself. In CAEs, OED rates only the outcome ofthe Bank’s program, not the Client’s overall development outcome, although the latter is clearly relevant for judging the program’s outcome.
3. The experience gained in CAEs confirms that program outcomes sometimes diverge significantly from the Client’s overall development progress. CAEs have identified assistance programs which had:
0 satisfactory outcomes matched by good Client development; 0 unsatisfactory outcomes in Clients which achieved good overall development results, notwithstanding the weak Bank program; and, 0 satisfactory outcomes in Clients which did not achieve satisfactory overall results during the period ofprogram 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 ofits assistance program is only part ofthe story. The assistance program’s outcome is determined by thejoint impact offour agents: (a) the Client; (b) the Bank; (c) partners and other stakeholders; and (d) exogenous forces (e.g., events of nature, international economic shocks, etc.). Under the right circumstances, a negative contribution from any one agent might overwhelm the positive contributions from the other three, and lead to an unsatisfactory outcome.
5. OED measures Bank performance primarily on the basis ofcontributory actions the Bank directly controlled. Judgments regarding Bank performance typically consider the relevance and implementation of the strategy, the design and supervision ofthe Bank’s lending interventions, the scope, quality and follow-up ofdiagnostic work and other AAA activities, the consistency of Bank’s lending with its non-lending work and with its safeguard policies, and the Bank’s partnership activities.
Evaluation In Three Dimensions 6. As a check upon the inherent subjectivity ofratings, OED examines a number of elements that contribute to assistance program outcomes. The consistency ofratings is further tested by examining the country assistance program across three dimensions:
36 In this note, assistanceprogram refers to products and services generated in support ofthe economic development ofa Client country over a specified period oftime, and client refers to the country that receives the benefits ofthat program. Annex D (continued) 52
(a) a Products and Services Dimension, involving a “bottom-up” analysis of major program inputs -- loans, AAA, and aid coordination;
(b) a Development Impact Dimension, involving a “top-down” analysis ofthe 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 ofactors (see paragraph 4. above).
Rating Assistance Program Outcome
7. In rating the outcome (expected development impact) ofan 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 ofhigher-order objectives, such as poverty reduction. The country assistance strategy (CAS) may also establish intermediate goals, such as improved targeting ofsocial services or promotion ofintegrated rural development, and specify how they are expected to contribute toward achieving the higher-order objective. OED’s task is 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 is the evaluator’s task to reconstruct this causal chain from the available evidence, and assess relevance, efficacy, and outcome with reference to the intermediate and higher-order objectives.
8. Evaluators also assess the degree ofClient ownership ofinternational development priorities, such as the Millennium 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 to 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 ofprogram relevance, a loss of Client ownership, and/or unwelcome side-effects, such as safeguard violations, all ofwhich must be taken into account in judging program outcome.
Ratings Scale
9. OED utilizes six rating categories for outcome, ranging from highly satisfactory to highly unsatisfactory:
Highb Satisfactory: The assistance program achieved at least acceptable progress toward all major relevant objectives, &had best practice development impact on one or more of them. No major shortcomings were identified. Satisfactory: The assistance program achieved acceptable progress toward all major relevant objectives. No best practice achievements or major shortcomings were identified. 53 Annex D (continued)
Moderately Unsatisfactory: The assistance program did not make acceptable progress toward most ofits major relevant objectives, or made acceptable progress on all ofthem, but either (a) did not take into adequate account a key development constraint or (b) produced a major shortcoming, such as a safeguard violation. Unsatisfactory: The assistance program did not make acceptable progress toward most ofits 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. Highly Unsatisfactory: The assistance program did not make acceptable progress toward any ofits 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. The institutional development impact (IDI) can be rated as: high, substantial, modest, or negligible. ID1measures the extent to which the program bolstered the Client’s ability to make more efficient, equitable and sustainable use ofits human, financial, and natural resources. Examples ofareas included in judging the institutional development impact ofthe program are:
0 the soundness ofeconomic management; 0 the structure ofthe public sector, and, in particular, the civil service; 0 the institutional soundness ofthe financial sector; 0 the soundness oflegal, regulatory, and judicial systems; 0 the extent ofmonitoring and evaluation systems; 0 the effectiveness ofaid coordination; 0 the degree of financial accountability; 0 the extent ofbuilding NGO capacity; and, 0 the level of social and environmental capital.
11. Sustainability can be rated as highly likely, likely, unlikely, highly unlikely, or, if available information is insufficient, non-evaluable. Sustainability measures the resilience to risk ofthe development benefits ofthe country assistance program over time, takmg into account eight factors:
technical resilience; financial resilience (including policies on cost recovery); economic resilience; social support (including conditions subject to 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, 0 resilience to exogenous effects, such as international economic shocks or changes in the political 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 USA. 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 of the draft Atmenian Country Assistance Evaluation, dated January 16, 2004, for my comments. 1understand that our Minister of Finance and Economy has already furnished detailed comments about the medraft. Iwill 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”. Ialso 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, if it is in support of 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 56 Attachment 1 (continued) ..
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 of poverty and erosion of social infrastructure, particularly, in health and education, that require our continuous strategic focus and commitment to improve quality of 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.
Itake this opportuniv to thank the, management and staff of the World Bank Group for their generous, dedicated and professional assistance to Armenia during the last decade and to reassure that we me determined to conrinue this close collaborationwith the World Bank Group in the fume.
. Vahram Nercissiantz World Bank &oup Govemor for ArmeNa
cc: Mr. Ad P. W. Me&& Executive Director Fa: (202) 522-1572 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 of 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 of 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 IDA 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 of 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 of 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 of the past period do not cover the following issue; what is the reason of 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 of 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 is 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 of the forthcoming CAS might be the carried out discussion of the issue of the implementation ofjoint investment programs with Georgia. It could result in the duction ofthe risks, which are presented as “risks of regional uncertainties” in the given Report. In this sense, mainly the possibility of regional development ofprograms, previously implemented in the level of infrastructures could be taken into consideration.
3. Given the fact that within the format of 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 ofAnnenia, the negative impact that the latter has had on the economy of henia Whereas, in the Draft Repoe this issue is thereto presented as a mere matter of closed borders ofArmenia 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)). 0 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 adweakened 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 coordinationof donor support ...’, The GOA undertakes a number of 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 of 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 ofthe 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 of the Assessment of Development Impact of Country Assistance the idea that the mechanisms for the assurance of 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 of the SAC V, as well as by the amendment made in “hdgct System Law of 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 ofthe Assessment of DevelopmentImpact of Country Assistance, it should be noted that the Bank and the GOAhave recently reached the main understandings. In paragraph 3.19 ofthe 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 ofthe 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.) Ifthe “shadow part” were to count for 60% of tbe remainder 77% of the GDP than the other part, subject to declaration (i.e. the fomdpart) should rota1 17% of the GDP, whereas in Annenia, the collected taxes (to 60 - Attachment 1 (continued) ..
the consolidated budget) total about 17.5% of the GDP. According to the estimates of the GOAthe 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 ofthe communities budgets totaling 1% of the GDP.) Besides, the works, carried out within the format of intemationalprograms (WB, KfW and credit programs of other financial organizations), are not taxable. In other equal conditions, tyc payments, totaling 0.S interestpints 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) of 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 of 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 ofrisks, such as regional instability, dependence on international assistance, limitedjob creation and high levels of 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 of 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 of the country development and successful implementation ofthe Bank program. She also noted the interest of Armenian authorities in developing a transition strategy from IDA to IBRD lending, and stressed the importance ofrisk mitigationmeasures for smooth transition.
5. Main Conclusions and Next Steps. The Subcommittee welcomed the CAE and agreed with the OED rating of Bank assistance as satisfactory. Members concurred that the Bank played an important positive role in Armenia, but noted that the impact of economic growth on poverty reduction in the country was still limited. They commended management for including the CAE’s recommendations in the new country strategy and stressed the importance of 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 utilities reform) could be replicated in other countries. Some members were interested whether the factors ofgovernment ownership of the reforms and prior actions played significant role in the overall success ofthe program. OED and management replied that a well-funded Bank program in Armenia was a response to and in support of the good and coherent policies of the government, which did show a great deal of 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 of 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 of high poverty rates and the relatively high social indicators. OED commended the high quality of the poverty-related AAA products Attachment 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 of other transitional economies. Management added that the issue of inequality is the central pillar of the PRSP and is recognized by the Government a matter of long- term political sustainability.
8. Transition from 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 of helping the country to avoid becoming the victim of its own success. OED and management concurred that despite its impressive performance on a number of 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 is 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 ofthe Armenian government was weakened after the responsible office in the Ministry ofFinance and Economy lost influence. They were interested in particular reasons for that change and possible measures to remedy the situation, given the CAE assessment of 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 its implementation will offer a good opportunity for improving donor coordination.
Rosemary Stevenson Chairperson, CODE Subcommittee