Following a slowdown, the Armenian economy is back on track and posting annual growth in excess of 7%. Finance Minister Vardan Aramyan explains how his government is implementing strategic policies to ensure that growth is sustained, introducing fiscal rules to provide regulatory stability regardless of who is in government, as well as promoting new opportunities for early movers in fields such as energy, pharmaceuticals and technology. As a bridge between the European Union and the Eurasian Economic Union, Armenia is uniquely positioned to offer investors access to millions of consumers.
You have been serving as finance minister for the past two years. What have your biggest successes been so far?
The year 2016 was weak for economic growth, even though we conducted fiscal policies that avoided recession in an adverse environment. So our first step was to create a favourable environment for future economic growth and to ensure a strong recovery, which we succeeded in doing in 2017. In fact, we over-performed in terms of growth, tax collection and other targets for last year. We strengthened the fiscal framework and introduced fiscal rules together with the International Monetary Fund (IMF). In fact, I would describe us as champions in the region in terms of rethinking and upgrading fiscal rules. Our previous regulation was too rigid, and it penalized growth and opportunities for growth. So we looked at what other countries were doing in order to learn lessons from them, but without duplicating mistakes such as those made by Greece, which was in a recession for five consecutive years.
How are investors affected by this new fiscal framework?
We introduced new fiscal rules within the space of just four months with technical assistance from the IMF and after holding a public debate with politicians, academics, NGOs, investors and other actors in society. We drafted legislation, and it was adopted by parliament in December. The beauty of this fiscal framework is that it brings confidence to investors, sending them the message that no matter who the finance minister is, fiscal policy is always going to be prudent, countercyclical and ensure macroeconomic stability. And we took this philosophy to the micro-level as well, interacting with ministers to see how they should build up their plans. In other words, we adopted a rule-based approach for policy design and implementation. And if such rules are clear and understandable to all “players of the game”, i.e. businesses, households, public entities and so on, it will enhance confidence towards your policy and boost efficiency and the overall performance from all economic agents.
What are your biggest challenges for the future?
One of the challenges affecting the entire world, not just Armenia, is the rise of cryptocurrencies. There are differing views about this, and about new technology like Blockchain, the popular software for digital assets. But we need to look at how fast this phenomenon is progressing. The cryptocurrency market has a market capitalization of $500 billion, which compared to the fixed-income market is very narrow, but it is still progressing at a very fast pace, and we need to deal with it. You will not find a single finance minister or central bank manager in the world who will say they are delighted to see these cryptocurrencies interfering with our real economic life, but if this process is unstoppable, then we need to think about ways to manage it. More and more people and businesses are willing to use these platforms, so we need to manage the process without impeding progress. If investors want to use this platform, then we need to convert it into a real industry. There are diverging views, but many countries are now figuring out how to manage this process. Success will be guaranteed for those countries that move faster to create this platform. A transaction with a cryptocurrency is difficult to detect, but you need to create a platform meshing everyone’s interests: those of the government, investors and consumers. We want to do this fast, and we are aware that it’s a challenge, but all challenges create new opportunities.
The World Bank has forecast growth of 3.8% for Armenia in 2018 as investment, manufacturing and trade continue to flourish. What is the government doing to ensure that this kind of growth will be sustained in time?
The main questions to ask are: how are you doing all of this? Is it through short-term endeavours and factors, or by creating a robust framework for mid-to-long-term progress? Is it sustainable? We worked to create the basis for future medium-term growth, and we exceeded expectations for the first year. Part of that was due to positive expectations of all economic agents, to quote the 2006 Nobel Prize-winning economist, Edmund S. Phelps, who introduced the concept of intertemporal problem and argues that expectations play important role in our economic life (the so-called expectations-augmented Phillips curve). We increased our communication with the public, talking to the business community and learning about their problems first-hand. The point about growth is that positive expectations had been created along with our macro fundamentals, our policies and our emphasis on capital expenditure, and investors were willing to utilise their extra capacities to expand production. The result was economic growth in 2017 of over 7%. And the first months of 2018 show 10.3% growth of the economic activity index, which illustrates the dynamics of progress and the positive expectations of the business world.
Your ministry is working to improve the business environment by simplifying paperwork and by increasing transparency at all levels of government. Armenia has also climbed rungs on the Ease of Doing Business Index. How has ease of doing business improved?
We take these reports as indicators of what we need to do, and each year we adopt a time-bound action plan based on them in order to improve our business environment. But, on the other hand, you cannot just look at business indicators and see where you stand compared with 180 other countries. You need to go deeper and look at the causes and think in the medium to long-term. So we asked ourselves: what kind of growth do we need for our country, and how do we achieve it? We don’t have oil or good geography, but Michael Porter of Harvard said that in some instances disadvantages can become advantages to some businesses or countries, as it forces them to think more strategically and act differently from other countries in the region. So we have no choice but to rush to be competitive, which entails improving the business environment in terms of cleaning market entrance barriers, improving taxation or trading across borders and other issues. But our policies are also aimed elsewhere.
What are these other policies to foster long-term growth?
We are also focusing on human or labour force competitiveness, which is equally important. The global world is expanding, introducing new approaches every day. But it is humans who are doing this, and if your labour force is not up to date, you will soon fall behind. Labour skills matter a lot and you need to catch up the growing needs of fast changing world. Many years ago we introduced chess at our schools as a compulsory subject, and after a couple of years we are already noticing the benefits, as our younger generation thinks more strategically and more broadly. We do believe that this big pool of new strategic thinkers can satisfy the demand of new-fashioned jobs. And then there is institutional competitiveness as well; how can you deliver services to the public in a more effective way? We have a programme to digitalise public services, and as an example we have made great progress to expand electronic platforms for public procurement. The essence of this is to look at what people and businesses really need from you. Another example: we redesigned our website at the Finance Ministry based what people were looking for when they entered our website. We created a simple, user-friendly website with the “triple click” principle that allows user easily to find whatever he/she is looking for. User numbers have skyrocketed. This is because we came at the problem from the demand side; we considered what people are demanding.
How important is FDI to the growth of the economy, and what message would you like to send to investors in GCC countries?
We need to show them the competitive advantages that we have and others do not. Everyone talks about their favourable tax system and their legal stability and so on, but Armenia also has a complementarity policy – we became members of the Eurasian Economic Union (EEU) and we also have a Comprehensive and Enhanced Partnership Agreement with the European Union (EU), highlighting the key dimensions of our reforms. As a member of this big Eurasian family, we can guarantee a market of 180 million consumers. Meanwhile, we are very close to EU standards. Two years ago, we delivered a message of opportunity for investment in Armenia for early movers, portraying ourselves as a bridge between two large economies, the EU and the EEU. This has become a reality because in November of last year, being a member of EEU we signed the CEPA agreement (Comprehensive & Enhanced Partnership Agreement) with the EU, benchmarking our reform priorities. Now we are working on a deeper action plan on how to work with the EU without violating the principles of the EEU. The message to GCC investors is that there are good opportunities here, and if you are the first to arrive, you will have an advantage. Opportunities are shrinking, but we can guarantee that we will deliver on our promises. We are aware that our messages need to be backed by clear, demonstrable progress.
How do you see the UAE playing a more relevant role in the Armenian economy?
There are different areas of interest. Two years ago we talked about a good chance for first movers, and now we are creating favourable platforms for that through free economic zones. There is a lot of interest in these zones at the moment. We also have opportunities in technology, agro-business, pharmaceuticals that comply with EU standards, food processing and energy – energy that can be sold not just in Armenia, but also abroad to Georgia, Iran and Russia. And we have lots of tools supporting these activities through favourable interest rates and other measures.
You talked about the importance of human capital. What are the special characteristics of the Armenian people that make them stand out?
As policymakers, we are putting an emphasis on the innovative and creative thinking of our labour force. A study by the OECD says that the gap between non-traditional new jobs and availability of skilled people fitting to those jobs is expanding, because old jobs cannot serve the needs of new companies. Firms who want to become regional or global player or safeguard their position in the markets are always keen to look for affordable solutions to their technological needs. Armenians are an innovative nation – they think strategically, and we want to convert this into advantages for our industries. We teach chess at schools to encourage this kind of thinking. We need a new skilled labour force that does things in a more proactive and efficient manner using digital technology. If you can create a sustainable platform where new generations continually improve their strategic thinking, then you are on the right track.