Armenia's public budget for 2021: need for revision? - Nikolas Schmidt, Zareh Asatryan (contributor) - German ...
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POLICY BRIEFING 01|2020 ARMENIA
Armenia’s public budget for 2021: need for revision?
Nikolas Schmidt, Zareh Asatryan (contributor)
Berlin, April 2021
© Berlin EconomicsOutline
1. Introduction
2. Budget for 2021
3. Revenues in 2021
4. How realistic is the revenue plan?
5. Expenditure in 2021
6. Expected additional expenditures
7. Financing the budget deficit in 2021
8. Public and external debt in 2021
9. Conclusions
© Berlin Economics 21. Introduction • The Armenian government drafted an initial budget for 2021 in October 2020 and passed an amended budget law in December 2020 • However, the budget for 2021 does not seem to take into account the negative impact of the military conflict in 2020 on economic growth, revenues and expenditure • Here: assessment on how realistic this budget is and whether a revision is likely © Berlin Economics 3
2. Budget for 2021
Budget for 2021
Central government budget • Oct-2020: draft budget 2021 was passed
35
% of GDP
• Dec-2020, i.e. after military conflict:
30.6
30 28.8 28.9 slight changes of budget 2021
26.8
25.2 25.0
25 23.8
22.3
24.5 23.5 – Lower revenues
20 – Very small increase in expenditures
15 – Increase of deficit by AMD 94 bn
10
(approx. USD 180 m)
5 ➢ Fiscal costs of post-conflict measures
0 and output effect not properly reflected
-1.0
-5 -2.3
-3.9
-5.4 -5.3
-10 Outlook
2019 (actual) 2020 (plan) 2020 (actual) 2021 (draft, 2021 (law,
Oct-20) Dec-20) • Revision of the budget to be expected
Source: Ministry of Finance, note: GDP figures for plans based on gov forecast • Expenditure to rise, revenue likely to be
lower than expected due to suppressed
growth
© Berlin Economics 43. Revenues in 2021
Budget revenues in 2019-2020
Revenue plan
Official transfers % of GDP
Other revenues
2019 • The 2021 budget expects revenues of
Transition prepayments of taxes
Social payments 2020 AMD 1.5 trn (approx. USD 3.2 bn)
Income tax
Turnover tax • This represents a 3% decrease from
Other tax incomes
Presumptive tax 2020
Environment duties
Custom duties • But: mainly a base effect from higher
Stamp duties
Profit tax
non-tax revenues in 2020
Excise tax
Value added tax
• For tax revenue, the government
Source: Ministry of Finance -4 -2 0 2 4 6 8 10 foresees an increase, based on growth
Change in budget revenue 2020-2021 expectations and an ambitious tax
1,800
AMD bn Official transfers and other revenue Revenue from taxes and duties reform plan
23.8% 25.2% 23.6%
1,600
1,400
1,200
1,000
1,464 1,385
800 1,440
600
400
200
101 175 69
0
2019 2020 2021 (gov)
Source: Ministry of Finance, Armstat, note: percentage are % of GDP
© Berlin Economics 54. How realistic is the revenue plan?
Real GDP growth forecasts for 2021 Underlying GDP forecast
• The revenue plan is based on a forecast
MinFin World of 3.2% real GDP growth
Institution CBA IMF
ARM Bank
• Currently this seems rather optimistic
Date of forecast Dec-20 Jan-21 Apr-21 Apr-21 • Growth will likely remain subdued, esp.
Real GDP
due to low investment as a
3.2% 3.1% 1.4% 1% consequence of political uncertainty and
growth, %
Source: Respective institutions the aftermath of the military conflict
Growth outlook
Reactions of investment to conflict flare-ups
500 AMD bn
• Other more recent GDP forecasts expect
400
subdued growth
300 • This is particulary due to dampened
200 investment: conflict flare-ups have had
100
negative effects on investment in ARM
in the past
0
➢ Revenues likely to be lower than
2006Q1
2010Q1
2014Q1
2018Q1
2001Q1
2002Q1
2003Q1
2004Q1
2005Q1
2007Q1
2008Q1
2009Q1
2011Q1
2012Q1
2013Q1
2015Q1
2016Q1
2017Q1
2019Q1
2020Q1
2021Q1
2022Q1
planned by the government
Source: Armstat, GET calculation, note: real investment seasonally adjusted
© Berlin Economics 65. Expenditure in 2021
Expenditure plan comparison from 2019 to 2021 Expenditure planning
Energy
% of GDP • Overall planned expenditure has hardly
2019 changed from the ambitious 2020 plan
Environment
2020 – neither before nor after the conflict
Economic development 2021-Draft
– Higher spending is planned mainly on
Other 2021-Final
debt service, public admin and health
Public services
– Lower spending is planned for public
Health services and infrastructure, but mainly
Police and security
because pre-COVID 2020 plan had
foreseen relatively high spending
Public administration
Social assistance
• It stands to reason that costs arising
from the 2020 conflict may not
Education, culture, R&D
properly reflected in the budget yet
Infrastructure
• Additional expenditures are likely to be
Debt
incurred for the following items
Defense
– Social assistance: for families of fallen
Pension soldiers and support for refugees
0 2 4 6
– (Re-)Building infrastructure in Nagorno-
Source: Ministry of Finance, GET calculation
Karabakh and at the new border
© Berlin Economics 76. Expected additional expenditures: social assistance
Social assistance to soldiers
Estimated cost of compensation for army personnel
• Payments for disabled soldiers or families of
Fund finances after deceased/missing from 1000-Plus Fund
Annually recurring
conflict 2020 One-time
for 20 years • Revenues currently financed by „stamp duty“
(USD m, approx.)
on every employee; recent reform increased
Revenues 16 61 and changed from flat to progressive duty
Expenses 100 30 • One time payments are lacking financial
coverage in the short term
Balance -84 31
Source: 1000Plus/Insurance Foundation for Servicemen, GET estimate
• Recurring payments are presumably covered
with increased duty after reform
• Risk for state budget: decreasing revenue due
to lower employment; change in duty revenue
Estimated cost of one-time support for refugees due to switch to progressive system
Costs for refugees Figures Refugee support
• One-time support to refugees from Nagorno-
Number of refugees in ARM 75,000 Karabakh to ARM: USD 135 per person pledged
(though number of people receiving unclear)
One-time support per person USD 135
• Risks for state budget: not all costs associated
Total USD 10 m with refugees covered by one-time payment,
Source: Government of Armenia, GET estimate such as education, housing, unemployment
© Berlin Economics 86. Expected additional expenditures (II)
Infrastructure
• New external border of Armenia (southern part of Eastern border) to be secured
• In some cases new civil infrastructure/houses (where the new border divided villages,
e.g. Shurnuk)
• Costs of necessary increased maintenance of Lachin corridor; unclear cost of new
corridor AZE-Nakhichevan
Costs stemming from Nagorno-Karabakh
• Armenia supports Nagorno-Karabakh through budgetary transfers and has pledged
another USD 200 m (approx. 1.7% of Armenian GDP) for 2021
• Thus, costs incurred there could have an impact of state budget of Armenia
• Costs include rebuilding civil infrastructure (e.g. new houses for 10,000 people)
• Costs associated with territorial loss such as agricultural land, hydropower output,
mining output
© Berlin Economics 97. Financing the budget deficit in 2021
Eurobonds placed by the government of Armenia
Year 2013 2015 2019 2021
Eurobond
Volume,
700 500 500 750 • In Jan-21, ARM issued a 10y
USD m
Eurobond of USD 750 m, more
Maturity, years 7 5 10 10
than originally planned
Yield to maturity
at issue, %
6.25 7.50 4.2 3.88
• Good credit conditions are mainly
Source: Ministry of Finance a result of global liquidity
Deficit financing plan for 2021 as of Dec-20 provision
Gross financing needs AMD 764 bn USD 1,461 m
Budget deficit AMD 341 bn USD 653 m
Usage of additional funds
Debt redemption AMD 286 bn USD 547 m
Net financial assets AMD 137 bn USD 261 m
• Decreasing domestic financing
Financing sources AMD 764 bn USD 1,461 m • Additional spending for higher
Treasury bonds AMD 370 bn USD 708 m expenditure
Disbursement of
AMD 152 bn USD 290 m • Replenishing reserves with the
external loans
goal of securing external
Eurobonds AMD 242 bn USD 463 m
Source: Ministry of Finance, note: approximate values, USD values based on FX
sustainability
rate from 31.12.2020
© Berlin Economics 108. Public and external debt in 2021
Public debt (central government)
Public debt (central government)
75 % of GDP
70
69.4 68.5 • Large increase of debt to GDP ratio from
65 63.1 49.9% in 2019 to 63.1% in 2020
60 • Technically violates the fiscal rule, but
55
51.2
exception due to military conflict
49.9 Fiscal rule
50
• Public debt likely to grow in 2021 to 69%
45
2018 2019 2020* 2021* 2022* ➢ For compliance with fiscal rule,
Source: IMF, *forecast/estimate, note: central government‘s public and
publicly-guaranteed debt consolidation efforts necessary
Public external debt
Public external debt (lhs)
7,000 USD m
Share of total public debt (rhs)
% 84 External debt
Government benchmark for share of external debt (rhs) 82
6,500
• Public external debt has also grown in
80
78
2020, and especially 2021 (due to the
6,000
76
Eurobond), rising above even the
74
government’s own adjusted benchmark
5,500
72 • Current good external financing
5,000 70 conditions could be an opportunity to
Nov-19
Nov-20
May-19
May-20
Jul-19
Jul-20
Sep-20
Jan-19
Mar-19
Sep-19
Jan-20
Mar-20
Jan-21
Mar-21
secure external sustainability
Source: Ministry of Finance; note: incl. external debt of the Central Bank
© Berlin Economics 119. Conclusion • The budget for 2021, passed in December 2020, now appears somewhat unrealistic • Revenue projections are based on overly optimistic growth expectations • Expenditure plans do not reflect the necessary spending resulting from the 2020 conflict, esp. social spending and infrastructure ➢ Likely prospect of a budget revision with lower revenue and higher expenditure ➢ However, fiscal and external sustainability to be watched when considering budget revision © Berlin Economics 12
About the German Economic Team Financed by the Federal Ministry for Economic Affairs and Energy, the German Economic Team (GET) advises the governments of Moldova, Georgia, Ukraine, Belarus and Uzbekistan on economic policy matters. Furthermore, GET covers specific topics in other countries, such as Armenia. Berlin Economics has been commissioned with the implementation of the consultancy. CONTACT Nikolas Schmidt, Project Manager Armenia schmidt@berlin-economics.com German Economic Team Tel: +49 30 / 20 61 34 64 0 c/o BE Berlin Economics GmbH info@german-economic-team.com Schillerstraße 59 www.german-economic-team.com 10627 Berlin © Berlin Economics
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