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± %DVLFDQG&RPSDUDWLYH'DWD)RU,QYHVWRUV $UPHQLDDWD*ODQFH $UPHQLDDQGLWV(QWHUSULVHV &RPSDFW7HFKQLFDOO\6NLOOHG3ODWIRUPVDWWKH*DWHZD\WR)RUPHU6RYLHW8QLRQ )68 0DUNHWV %XVLQHVV,QYHVWPHQWV± 7KH3RWHQWLDODQG5HFRUG 7KH,QYHVWPHQW7HUUDLQ± %DFNJURXQGDQG6HFWRU2SSRUWXQLWLHV 7KH2SSRUWXQLWLHV $JULFXOWXUH +RWHODQG7RXULVP ,QIRUPDWLRQ7HFKQRORJ\DQG6RIWZDUH %XLOGLQJDQG&RQVWUXFWLRQ ,QGXVWULHVDQG7HFKQRORJLHV $UPHQLD,QYHVWPHQW&RQIHUHQFH± 3URMHFW,QIRUPDWLRQ5HVRXUFH*XLGH $JULEXVLQHVV $JULQH[*UHHQKRXVH 3RLQWVRI&RQWDFW 6XJDU5HILQHU\± 6SLWDN6XJDU 3RLQWVRI&RQWDFW %RWWOHG:DWHU([SRUWVDQG3DFNDJLQJ± :DWHUORN//& 3RLQWVRI&RQWDFW )UXLW-XLFHVIURP<HUHYDQ%HHU&RPSDQ\ 3RLQWVRI&RQWDFW ,62&HUWLILHG)UXLWDQG9HJHWDEOH3URFHVVLQJ$UWDVKRW&DQQHU\ 3RLQWVRI&RQWDFW 0LQLQJ &RSSHU6PHOWHU 0LQH'HYHORSPHQW± 0DQHVDQG9DOOH[ 3RLQWVRI&RQWDFW *HJDPD&DEOHV 3RLQWVRI&RQWDFW 6KHQ6WRQH7LOHV 3RLQWRI&RQWDFW (QHUJ\ +\GURHQHUJLD&R/WG± $NKXU\DQ5HVHUYRLU0LQL+33 3RLQWVRI &RQWDFW :LQG3RZHU3URMHFW± :LQGSDN3XVKNLQ3DVV± (&RQQHFWLRQ 3RLQWVRI&RQWDFW 7HFKQRORJLHV 'LDJQRVWLFD0HGLFDO&RUSRUDWLRQ± $7HFKQRORJ\%DVHG+HDOWKFDUH 'HYHORSPHQW0RGHO)RU7KH5HJLRQ 3RLQWVRI&RQWDFW 0VKDN7HFKQRORJ\,QQRYDWLRQ&HQWHU 3RLQWRI&RQWDFW &HQWHUVIRU,QIRUPDWLRQ7HFKQRORJ\ &,7 3RLQWVRI&RQWDFW 6LULXV0RELOH3KRQHVDQG6RIWZDUH 3RLQWVRI&RQWDFW 7RXULVPDQG+RWHOV 5HQFR 7VDNKDG]RU5HVRUW&HQWHU 3RLQWVRI&RQWDFW +RYDQLDQ,QWHUQDWLRQDO/WG± 5HJLRQDO%HG %UHDNIDVW+RWHOV 3RLQWVRI&RQWDFW '6$*URXS <HUHYDQ6HYDQ+RWHOV 3RLQWVRI&RQWDFW 7UDQVSRUW/RJLVWLFV /HDVLQJRI7UDQVSRUW9HKLFOHV± ,QWHUPRWRU$UPHQLD 3RLQWRI&RQWDFW 6XSSOHPHQWDO3URMHFW*XLGHV 7KH(QHUJ\6HFWRU 3RLQWRI&RQWDFW 7HFKQRORJ\,QFXEDWRU± 6RODU(Q,QWHUQDWLRQDO86$ 2LODQG*DV([SORUDWLRQ± $UPHQLDQ$PHULFDQ([SORUDWLRQ&RPSDQ\ 3RLQWRI&RQWDFW ,QYHVWRU3HUVSHFWLYHV± /0(ULFFVVRQ$%6ZHGHQ0LQL3/01± 0DUNHW6HJPHQW6ROXWLRQVDQG5ROORXW6WUDWHJLHV 7XIHQNLDQ%HGDQG%UHDNIDVW± ,PSRUW([SRUW9HQWXUHV86$ 5HJLRQDO7UDQVSRUW3URMHFW &RQIHUHQFH1RWHV 7+((0(5*,1*(&2120< $UPHQLD¶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¶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¶VJURZWKPXVWEHDFFRPSDQLHGE\JUHDWHUJHQHUDWLRQZKLFKLVFULWLFDOWRUHHVWDEOLVKLQJ SXEOLFWUXVWLQWKH*RYHUQPHQW¶VVWUDWHJ\DQGWRKDOWLQJWKHKLJKUDWHRIHPLJUDWLRQ 5HIRUPVLQ WKHEXVLQHVVDQGLQYHVWPHQWFOLPDWHDUHQRZUHTXLUHGZLWKHPSKDVLVRQPLFURHFRQRPLFLVVXHV DQGLQVWLWXWLRQEXLOGLQJLQVHYHUDOFRUHDUHDVLQFOXGLQJDPRQJRWKHUVVRFLDOVHFWRUV$VVHHQLQ WKH (%5'¶V 7UDQVLWLRQ 5HSRUW SS NH\ FKDOOHQJHV UHPDLQ ZKLOH VLJQLILFDQW SURJUHVVKDVEHHQPDGH 7KHVHVHFWLRQVDUHFXOOHGIURPLQIRUPDWLRQPDGHDYDLODEOHDWYDULRXVWLPHVGXULQJE\WKHRIILFHVRIWKH :RUOG%DQN UHFHQWHFRQRPLFGHYHORSPHQWV (%5' 7UDQVLWLRQ5HSRUW ,)& LQWHUQDOSURMHFWUHYLHZV ZRUNLQJILOHVDQGGDWDEDVHV 86(PEDVV\&RPPHUFLDO6HUYLFH ,QYHVWPHQW&OLPDWH%,61,6GDWDEDVH $UPHQLDQ 'HYHORSPHQW$JHQF\ ,QYHVWPHQW3URILOH +6%& &RXQWU\3URILOH LQ<HUHYDQ Key Reform Challenges • With high fiscal and current account deficits, restoration of tax discipline is needed to maintain fiscal balance while safeguarding core public services. • After a year of paralyzing political uncertainty the reform process needs to regain momentum, including privatization of power distribution and measures to improve the investment climate. • Non-transparent or inconsistent regulation, gaps in the legal framework and uneven application of the rule of law impede investment and call for the accelerated institutional reforms. Liberalization, stabilization Enterprises, infrastructure, and privatization finance and social reforms 1991 Land reform begins (Jan.); Small scale privatization begins (May); Independence from Soviet Union (Sept.) 1992 VAT introduced (Jan); Foreign trade registration abolished (Jan); Privatization law adopted (Aug); Central bank law adopted (Dec) 1993 New currency (Dram) introduced (Nov) 1993 Stock exchange established (May) 1994 First privatization program adopted (Jan); Tradability of land permitted (Feb); Cease-fire in Nagorno-Karabakh (May); Voucher privatization begins (Oct) 1995 Large scale privatization begins (Apr); 1995 Bankruptcy law adopted (May); Foreign Export surrender requirement eliminated (Apr); bank ownership allowed (June); Banking crisis Most prices liberalized (July); Treasury bills peaked (Sept). market initiated (Sept) 1996 First foreign bank opened (Mar); Banking law amended (June); IAS audit of banking system (July) 1997 Full current account convertibility 1997 Bankruptcy law enacted (Jan); Energy introduced (May); Major tax reform (May); First regulatory commission established (Jun); Energy international tenders launched (Nov); new law adopted (Jun); Financial rehabilitation plan privatization law adopted (Dec). for the energy sector adopted (July); National telecommunications operator privatized (Dec). 1998 New customs law adopted (Dec). 1998 Telecommunications law adopted (Feb); Transport law adopted (Feb); IAS accounting for banks introduced (March); Law on accountancy (May) adopted; Securities and Exchange Commission established (Nov). 1999 New law on property rights adopted (Apr); 1999 New poverty benefits system introduced EU partnership agreement (June) (Jan); New civil code introduced (Jan); Increase in energy tariffs (Jan); New reserve requirements for commercial banks (Apr). 2000 European Parliament approves Council of 2000 New securities market law adopted (Jun); Europe accession (June); Law on privatization of First private management of water utility (July). power distribution passed (July). 8 These reforms have not been achieved easily. In 1997-2000 the process was affected by political resistance, insufficient government capacity in several areas, external shocks, and considerable delays in extending the World Bank s Enhanced Structural Adjustment Facility arrangements and disbursement of tranches of the third Structural Adjustment Credit to Armenia (SAC III). However, their continuation has offset, in many ways, the political uncertainties