Note: This document may not always reflect the actual appropriations determined by Congress. Final budget allocations for USAID's programs are not determined until after passage of an appropriations bill and preparation of the Operating Year Budget (OYB).
ARMENIA
FY 1998 Assistance to the NIS Request . . . . . . . . . . . . . . . . . $80,000,000 Introduction
Armenia is a strategically important republic in the Caucasus which is in the early stages of a transition to achieve a democratic market-oriented economy. Its long-term political stability and economic development are inextricably linked to its success as a market economy. Armenia is important to the United States' interests because the economic and political transition taking place offers prospects that it will emerge as a western-oriented democratic participant in world markets -- a model for other NIS and Eastern European states. With a settlement of the Nagorno-Karabakh conflict, Armenia could also provide leadership to promote regional economic integration and political cooperation within the Caucasus.The Development Challenge
Armenia is a landlocked country with a small, homogeneous population (3.4 million), few natural resources, and a mountainous terrain which limits the area suitable for agriculture. Like other countries of the former Soviet Union, Armenia's economic development has been constrained by the legacy of Soviet central planning. The country still experiences severe economic difficulties arising from the breakdown of the former Soviet trade, payments, and financial systems. Conflict over the predominantly Armenia-populated Nagorno-Karabakh region of Azerbaijan led to a trade and transport embargo of Armenia by Azerbaijan and the closure of the Turkish border since 1991. Although a cease-fire has held since May 1994, the borders are unlikely to open until a permanent peace settlement is negotiated. Successful resolution of the conflict would: (a) allow Armenia to reopen trade routes - railways, in particular - to the east through Azerbaijan and to the west through Turkey; and, in turn, (b) make Armenia more attractive to investors; and (c) significantly reduce hardships which currently require massive humanitarian assistance from foreign donors.Armenia held parliamentary elections and approved a new constitution in 1995. In 1996, presidential elections were held in September followed by local elections in November. International observers of both recent elections described them as flawed. Municipal and local governance lacks clarification and legitimization; and laws, though revised and approved, lack implementing procedures and enforcement.
Despite hardships, Armenia's resources are not insignificant and include: a skilled and educated workforce, with strong national identity, and strong support from a large international diaspora and the international community.
Between 1992-1996, USAID primarily focused its resources on humanitarian assistance, which will still be required, but at diminishing levels. Greater emphasis will now be directed to the restructuring of the energy and financial sectors; creating a legal, regulatory, and policy framework for broad-based competition and economic growth; and promoting a democratic transition through better-informed citizen participation in political and economic decision-making.
With donor assistance and Government of Armenia (GOA) commitment, Armenia was the first former Soviet republic to register real economic growth (albeit from a very low base) in 1994 (5%); growth in 1995 was 5.2% and a higher growth rate is expected in 1996. Inflation has come down from 30% a month in 1994, and is expected to average 1% per month during 1996. Foreign reserves have increased, and the exchange rate has remained stable through 1995. Armenia has a relatively low level of indebtedness with a long-term debt to export ratio of 68.9% in 1994. Much of Armenia's $200 million debt is attributable to energy imports from Russia and Turkmenistan. VAT exemptions of key foodstuffs were eliminated, taxpayer identification was developed and progress made on taxrationalization; however, tax collections were far below target in the first half of 1996. Government expenditures have been reduced sharply; prices of most commodities have been liberalized and most state subsidies eliminated. Privatization of small and medium industries has proceeded apace but large state owned enterprises await international tenders. Privatization vouchers distributed to all citizens are now worth one-sixth of their face value, reflecting the publics's loss of confidence in the process.
USAID assistance to date has been approximately 70% humanitarian, predominantly foodstuffs and heating fuel, with significant impact. Over the past three years, the Winter Warmth programs resulted in the delivery of 120,000 kerosene heaters and 76,000 metric tons of kerosene distributed to 250,000 households and to 1,400 schools. The school heating program allowed schools to remain open in winter, increasing school attendance by 54% during the 1994/1995 winter, with a sustained high rate of attendance in 1996. Since 1993, out of a total population of 3.4 million, there have been over 1.5 million recipients of USAID-funded food assistance through grants to CARE and sub-grants to U.S. PVOs under Save The Children Federation. Pharmaceuticals were provided to approximately 400,000 women and children. In 1996, USAID purchased and delivered 201 million cubic meters of natural gas, which was burned to provide electricity for two-and-one-half months for consumers throughout the country.
USAID-provided bulk wheat, together with U.S. Department of Agriculture and European Union shipments, played a key role in meeting humanitarian needs and in promoting political stability. More recently, wheat has been monetized, thus also supporting economic development goals. In FY 1997, we anticipate significantly less wheat will be required.
USAID also supported humanitarian assistance through international organizations, including UNICEF to control diphtheria through the provision of vaccines to immunize the population at risk, including children and adults. USAID-funded assistance, through the International Committee of the Red Cross, supported internally displaced persons and victims of conflict in the Nagorno-Karabakh region. Also, the Caucasus Logistics Advisory Unit (CLAU - under the World Food Program) managed the rail, port, and communications network throughout the Caucasus and made the difference between the efficient delivery of humanitarian assistance and chaos. The CLAU operation, U.S. Center for Disease Control, and PVO programs - all financed by USAID - helped to build Government of Armenia (GOA) and local NGO capacity to manage and respond to human crises and emergencies on their own.
The balance of USAID assistance has been for economic restructuring, improvements in the energy sector, exchanges and training and assistance in democracy and governance which began in 1996. A USAID-financed contract with the University of Maryland provides both economic and legal advice to help Armenia in the process of accession to the World Trade Organization, constructing the legal commercial framework for a market oriented economy and developing the economic analytical capacity of the Government to help the GOA meet requirements and negotiate with the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBRD - World Bank) for various stabilization, stand-by, and sector loan programs. Most recent negotiations (in 1996) are for a $150 million Enhanced Structural Adjustment Facility (IMF) and a $65 million Structural Adjustment Credit (IBRD).
USAID's housing sector reform project has led to the formulation of a legal and policy framework for the continued privatization of housing stock. In January 1996, Armenia was the first of the former Soviet republics to adopt a real estate law which defines basic private property interests and rights. This project also led to the development of Armenia's first condominium association and private building maintenance cooperative, and new laws for such associations and real estate mortgages. Technical assistance was also provided to Government and Parliament to draft the law on local self government, one of the first of its kind in the former Soviet Union and signed into law in June, 1996.
Since 1996 USAID's democracy and governance contractors and grantees have been working with Armenians on new criminal and civil codes. Training has been provided by USAID and other donorsto enable lawyers, judges and lawmakers to become acquainted with western legal procedures, law and legislative drafting and adjudication practices which they can utilize in their day-to-day activities. Similar short term training and technical assistance has been provided to journalists, TV and radio professionals. Prior to the 1995 Parliamentary elections, democratic countries and institutions including those supported by USAID began to introduce the Armenian Central Election Commission and voters to democratic election procedures and citizens rights. A new election law was passed and election procedures were established.
In energy, USAID has assisted the Ministry of Energy in achieving some major accomplishments in the restructuring of the energy sector. Armenergo, the power utility previously responsible for all electricity generation, transmission, and distribution, has been effectively "unbundled" or broken up into three generation companies, one transmission and dispatching company (with some generation), and approximately 52 distribution companies. The electricity distribution companies have been established as separate state enterprises and it is expected that in 1997 these firms will be consolidated into about ten joint stock companies open for partial or full privatization. Divestiture is also planned for the generation companies. In addition, USAID's assistance has been instrumental in the development of draft energy legislation including a general energy reform law and a draft petroleum law. Finally, with respect to tariff reform efforts, on April 1, 1996 the Tariff-Setting Committee of Armenia approved an increase in the uniform nationwide tariff for electric power from 12 to 14 drams per KWH. Although special subsidies for certain rate payers have not yet ended, USAID and other donors believe that this recent development is an important first step toward eventually achieving tariff reform in the power sector.
Economic recovery will depend on the ability of commercial banks to serve as financial intermediaries between savers and investors and increasingly mobilize savings. Improvement in Central Bank operations, through USAID-funded training at U.S. Federal Reserve Banks, contributed to reduced inflation and increased trade, both domestic and regional. USAID designed on-the-job training for Armenian bank examiners with several States' bank regulatory agencies is improving the rigor with which Armenian commercial banks operate. USAID is also contributing to the formation of a viable banking sector by providing technical assistance, training and commodity support for: (1) establishing a modern, "real time" electronic accounting and payments system for timely domestic and international financial transactions; (2) training in modern portfolio management, lending, international accounting standards and (3) establishing through the Eurasia Foundation a commercial lending facility for small and medium enterprises. In a related fashion, USAID grantees (VOCA, International Executive Service Corps) are identifying and assisting potential clients to prepare viable investment and business plans to the benefit of both the borrower and lender.
In the area of fiscal reform a USAID financed U.S. Treasury debt advisor has worked with the Ministry of Finance and Central Bank of Armenia to market Government securities. Progress has been substantial and significant. Whereas the 1996 target was to market T-bills which would finance about 6% of the Government budget deficit, the actual result will be about 20%. Auctions are advertised well in advance of the event, are public and settlements happen with hours of the event. Bills have sold at 30, 91 and 182 day maturities, helping to dampen interest rates and absorb excess liquidity in the monetary system. In late 1996 a foreign investor purchased Armenian 182 day T-bills denominated in Dram, for the first time, assuming the entire foreign exchange risk. The T-bill market is already an established and important policy instrument for the Central Bank authorities to guard against the onset of inflation.
Other Donors
Major donors and lending institutions include the International Monetary Fund, the International Bank for Reconstruction and Development, the European Bank for Reconstruction and Development, and the European Union. Bilateral donors include Germany, Great Britain, Italy, Netherlands and France. The U.S. share of Overseas Development Assistance to Armenia was 45%.FY 1998 Program
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Strategic Goal: Economic Restructuring
The USAID-funded Center for Economic Policy Research and Analysis (CEPRA) was established to provide technical assistance and training to better enable policy makers (government, parliament and executive branches) to formulate economic policies based on accurate measurement of key macroeconomic indicators and projected impacts of alternative policies. The Center's most important task in the past year and for 1997 is providing technical assistance, both economic and legal, to advise the GOA on accession to the World Trade Organization. When completed, Armenia will have in place the legal, commercial and economic framework that will enable and encourage the growth of private enterprise, as dictated by market forces. CEPRA will also provide policy and legal assistance to develop the civil code, enabling legislation to support private enterprise, and provide training for lawyers, judges and business persons in adjudication of commercial disputes.
Another USAID-contractor, the International City/County Managers Association (ICMA), provides assistance to the GOA to design, test, and develop: (a) a unified system of property registration based on a cadastre system for urban, suburban, and rural areas; and (b) a service to legally register property, convey title and record property values based on market prices. In FY 1998, ICMA will continue its work with Armenians to develop procedures to record, analyze, and report sales to facilitate the development of a real estate market based upon supply and demand, titles and their transferability. In addition ICMA will continue its work started in 1997 to assist local government units to install and operate modern financial and budgeting systems which are compatible with the responsibilities and authorities devolved to them under the Law on Local Self Government, 1996.
Technical assistance in the fiscal sector will enhance national budget and tax administration, property tax administration, and government securities management to improve GOA preparation and administration of national budgets and achieve a more effective and fairly administered system of personal, property, and commercial tax codes. The development of a government securities program is already providing a non-inflationary means to finance the national budget, and the banking system with instruments and markets to effectively implement monetary policy. A resident advisor is working with the Ministry of Finance and the Central Bank to implement a comprehensive legal and policy framework for the issuance of government securities; create a debt and cash management system; establish rules to encourage the development of a secondary market for securities; design financial instruments; and develop a detailed database for bond sales.
During FY 1998, prior assistance in the banking sector should result in stronger, market-oriented central bank and commercial bank operations, ensuring that monetary and fiscal policies already in place are implemented effectively. Assistance, as necessary, will continue.
A key to financial sector reform will be the adoption of a western-oriented, internationally accepted accounting and financial reporting system. With continuing USAID assistance, the new accounting system, standards, and practices will be implemented in commercial banks and selected enterprises, both state-owned and private. Laws establishing internationally accepted accounting procedures and policies for the Central and Commercial Banks, Ministries of Finance and Economy, State Tax Inspectorate and industry will be enacted by the GOA. Reference and training materials are being developed; accounting trainers and advisors to be involved in the conversion to the new accounting system are being trained.
Before the accounting conversion gets underway, USAID has embarked upon a program to train bankers, both in the commercial banks and the Central Bank. The focus of this training will be portfolio management including credit analysis, asset and debt management, international accounting standards, all designed to strengthen prudential relationships between the Central Bank and commercial banking sector, plus the development of sound lending procedures and systems of loan recovery.
USAID's most important initiative toward creating capital markets is the establishment of the market for Treasury Bills. In addition, USAID has funded the establishment of a commercial lending facility for small and medium enterprises (SMEs), through three competitively selected local banks. Personnel from the lending banks receive training from Western bankers and other technical experts in banking operations, accounting and lending procedures. To help stimulate the demand for such loans, USAID grantees and contractors will identify and assist potential clients to prepare viable investment and business plans to the benefit of both the borrower and lender. Horticulture exports will receive particular financial and technical assistance attention.
In response to the Trans-Caucasus Enterprise Fund earmark, USAID is establishing two finance programs intended to support private sector development and growth. The first is a private investment fund partially guaranteed by the Overseas Private Investment Corporation (OPIC). The second is a small enterprise lending program, which reports directly to USAID. Investment activities of the Partnership for Freedom are also planned for FY 1998.
In energy, USAID's emphasis is threefold: (a) to create a climate that will attract private sector participation and ownership, with subsequent improvements in the management of resources and provision of services; (b) to improve the efficiency of the sector in economic terms, with subsequent increases in capital and operating resources; and (c) to reduced the environmental hazards of operating the Medzamor Nuclear Power Plant. To establish an economically sound and environmentally sustainable energy sector in Armenia, USAID resources will be used: to support the restructuring and corporatization of the electric power and natural gas subsectors, including legislative and regulatory reform to promote private sector participation; to strengthen the commercial operations of newly-created energy sector entities, including the introduction of improved metering and collections systems and the adoption of international accounting standards; to mobilize private/public financing for selected energy projects to rehabilitate the energy infrastructure and to reinforce the reform process; and to improve the safety of the Medzamor Nuclear Power Station through short-term safety upgrades and stronger regulatory oversight, while developing energy alternatives to allow the plant to be closed as soon as possible. The European Union, the World Bank, and the European Bank for Reconstruction and Development are also expected to make other significant contributions to the energy sector.
Strategic Objective: Increased soundness of fiscal policies and fiscal management practices
Strategic Objective: Accelerated development and growth of private enterprises
Strategic Objective: A more competitive and market-responsive private financial sector
Strategic Objective: A more economically sound and environmentally sustainable energy system Strategic Goal: Democratic Transition
Armenia has made strides and had setbacks in its democratic transition in the last fiscal year. Presidential and municipal elections held in September and November 1996 respectively were in principle, i.e., legislation and process, a marked improvement over the July 1995 parliamentary elections and constitutional referendum, but in practice, equally flawed. Much progress, however, has been made on the legal reform front, as well as in the growth and strengthening of independent media. Progress on the Civil Code, Criminal Code, and the involvement of indigenous NGOs and media outlets in the revision of the NGO and media laws are reasonable indicators of increasing political will for change.
Armenia is engaged in the difficult process of developing a democratic market-based legal system based on the rule of law. A history of Soviet legal philosophy and infrastructure presents substantial obstacles in the necessary development of transparent legal and judicial processes based oninternationally recognized democratic norms. USAID/Caucasus is dedicated to providing assistance to the Government and people of Armenia in their transition to a rule of law society.
USAID will continue to assist the GOA in developing draft legislation necessary to implement the new Constitution. In order to help the Armenians achieve a solid legal infrastructure, in addition to drafting assistance, USAID will provide a broad range of training in western legal concepts and practices for Armenian lawyers, judges, prosecutors, parliamentarians and members of government ministries. This will be a long-term process: USAID will work with Armenians, and other international donors, to develop an indigenous capacity for providing on-going continuing legal education to all members of legal society, and wide public access to legal information.
In addition, an objective, professional and independent journalistic cadre is a necessary component of a strong democratic society. Armenia's journalists, leaving behind Soviet-style news coverage, and working under continuing technical and structural difficulties, are learning to serve their fellow countrymen as a solid source of objective domestic and international information and news. USAID assistance in media development will attempt to address both the technical and structural problems of independent media in Armenia. In addition to the limited provision of critical equipment, USAID will provide training programs to bolster journalists' capacity to produce quality news reports on political developments. USAID assistance will also focus on developing media associations and networks, providing training in management, advertising, and journalists' rights and responsibilities. These activities will lead to a more pro-active, self-sustainable, media community, capable of providing the Armenian people with the objective news coverage they need to actively participate in their own communities, and in the global community.
Strategic Objective: Increased, better-informed citizens' participation in political and economic decision-making
Strategic Objective Legal systems that better support democratic processes and market reforms Strategic Goal: Social Stabilization
Through technical assistance, training, and limited commodities, USAID will encourage the transformation of Armenia's dependence on humanitarian assistance to a system of family allowances and benefits so that only the most vulnerable segments of the population receive humanitarian assistance. The USAID program will also continue to promote civic action and NGO capacity building, permitting domestic organizations to begin to provide social services and thereby gradually decrease dependency on external aid.
More than 120,000 people affected by the 1988 earthquake and the economic blockade remain without permanent homes. A slow transition to a market economy further constrains economic recovery. Unemployment remains high and most of those employed do not earn adequate wages. USAID programs will attempt to improve economic conditions by generating significant employment and household income so that vulnerable families will decline significantly. To improve the social sector USAID will create a synergy among its other sector programs to establish significant supply response from agriculture and the manufacturing sectors which will be supported by an aggressive program of privatization. Additionally another major factor for ensuring Armenia's successful social and economic transition remains a peaceful and permanent resolution to its political problems with its neighbors.
Strategic Objective: Reduced human suffering in Armenia
Cross-cutting and Special Initiatives
USAID funds a cross-cutting training program which offers learning opportunities for Armenians, mainly in the United States, in a number of sectors which support the strategic objectives of the USAID program. In those instances where activities implemented by other agencies do not directly support USAID's objectives, they are included under this heading.
ARMENIA
FY 1998 PROGRAM SUMMARY*
Strategic Objectives
Economic Restructuring Democratic Transition
Social Stabilization Cross-cutting / Special Initiatives Total Privatization -- -- -- -- -- Fiscal Reform 2,200,000 -- -- -- 2,200,000 Private Enterprise 15,000,000 -- -- -- 15,000,000 Financial Reform 5,800,000 -- -- -- 5,800,000 Energy 15,840,000 -- -- -- 15,840,000 Citizens' Participation -- 5,900,000 -- -- 5,900,000 Legal Systems -- 2,200,000 -- -- 2,200,000 Local Government -- -- -- -- -- Crises -- -- 21,000,000 -- 21,000,000 Social Benefits -- -- -- -- -- Environmental Health -- -- -- -- -- Cross-cutting / Special Initiatives -- -- -- 12,060,000 12,060,000 TOTAL 38,840,000 8,100,000 21,000,000 12,060,000 80,000,000 *FREEDOM Support Act (FSA) Funds
USAID Representative: Geraldine Donnelly
ACTIVITY DATA SHEET PROGRAM: ARMENIA
TITLE: Fiscal Reform, 110-S001.2
STATUS: Continuing
PROPOSED OBLIGATION AND FUNDING SOURCE: FY 1998: $2,200,000 FREEDOM Support Act
INITIAL OBLIGATION: FY 1995; ESTIMATED COMPLETION DATE: FY 2001
Purpose: Increased soundness of fiscal policies and fiscal management practices.
Background: Beginning in late 1994 substantial progress was achieved to improve public expenditures as evidenced by reduced deficit spending and the removal of many cross-subsidies. This effort must be matched with efforts to improve tax codes and administration for functions like collections and the restructuring of the budgetary system with new financial management systems, and elimination of remaining ineffective subsidies. The lack of an internationally-accepted market-oriented national budget law and treasury functions are a major impediment to fiscal reform. Assistance to the Government is needed to develop new financial functions for accounting, treasury operations and executive budget formulation, execution and control.
USAID Role and Achievements to Date: USAID will assist the Ministry of Finance (MOF), the State Tax Inspectorate (STI), and will coordinate with the Ministry of Economy and the Central Bank of Armenia (CBA) to develop fiscal reforms which lead to an internationally-accepted and market-oriented system of national budgeting, tax codes and administration and accounting systems which encourage private enterprise and investment.
Description: Short and long-term technical assistance is being provided to the MOF to improve the methodology for the preparation and administration of the national budget, beginning with the drafting of a new national budget law. Assistance will be given to the STI to achieve a cost-effective and fairly administered system of personal, property and commercial tax codes and to sharply improve tax collections. USAID's property registration activities will assist to establish market-valued methods of property assessment which in turn will expand the municipal revenue base to finance legitimate community services and infrastructure projects. In addition, USAID will launch training and advisory assistance for local government units, newly empowered by law, to carry out municipal planning and financial responsibilities. USAID assistance to the MOF will continue to broaden the Treasury securities market, both bills and bonds, providing the MOF and CBA with a non-inflationary means to finance the national budget which will provide the banking system with instruments and markets to effectively implement monetary policy.
Host Country and Other Donors: The U.S. Treasury advisors for budget, government securities and tax administration coordinate their activities with the IMF, the IBRD, EU/TACIS and bilateral donors. USAID coordinates its activities in cadastral reform with the IBRD's Institutional Building Loan. USAID through the International City/County Management Association and the World Bank will likely collaborate to develop a "demonstration cadastral program" to develop the government and private sectors' capabilities to survey and map property and government's capability to legally register property titles in a computerized management information system. USAID will provide the technical assistance; the IBRD will fund the commodities; the government will provide offices and staff.
Beneficiaries: The national budgeting law and the government securities program will benefit all Armenians by reducing inflation and by helping establish a more efficient revenue system. The demonstration property registration system will benefit 100,000 home and apartment owners and 50,000 farm owners.
Principal Contractors, Grantees or Agencies: US Treasury; International City/County Managers Association.
Major Results Indicators: Baseline TargetFiscal balance as a percent of GDP -12.7% (1995) -4.7% (1999) (Balance excluding official grants)
Tax revenue as percent of GDP 12.7% (1995) 14% (1999)
Proportion of local governments using -0- (1995) 30% (1999) market-oriented budget & financial systems
ACTIVITY DATA SHEET
PROGRAM: ARMENIA
TITLE: Private Enterprise, 110-S001.3
STATUS: Continuing
PROPOSED OBLIGATION AND FUNDING SOURCE: FY 1998: $15,000,000 FREEDOM Support Act
INITIAL OBLIGATION: FY 1993; ESTIMATED COMPLETION DATE: FY 1999
Purpose: Accelerated development and growth of private enterprise.
Background: Armenia's current macroeconomic policies, legal-regulatory framework, and corresponding institutions are inadequate to fully support the transition to a market economy. Light manufacturing, agribusiness, housing construction, services and high technology have strong development potential, but to attract investment the government must proceed with privatization and formulate economic policies that promote business enterprise and opportunity. Western oriented laws and regulations governing property rights, contracts, banks and commercial transactions are needed to allay the doubts of prospective domestic and foreign investors and to support the transition to a market economy.
USAID Role and Achievements to Date: With USAID assistance the Ministry of Economy and Parliament enacted the first market-oriented real estate law and the first condominium association law in the former Soviet Union. USAID also assisted with the drafting of bankruptcy and mortgage laws. These laws are important to develop real estate markets, ensure legal property rights and create market values for taxing real property. USAID is now helping the GOA to join the World Trade Organization.
Description: The USAID-funded Center for Economic Policy Research and Analysis (CEPRA) was established to provide technical assistance and training to better enable policy-makers (Parliament and Executive branches) to formulate market oriented economic policies based on accurate measurement of key macroeconomic indicators and projected impacts of alternative policies. CEPRA is also engaged in the development of plans, policies, and laws and regulations that support the transition to a market economy. CEPRA will also provide policy and legal assistance to develop a commercial code to support private enterprise and will provide training for lawyers, judges and business persons in adjudication of commercial disputes. USAID will assist the Government to design, test and develop a unified system of property registration based on legal descriptions contained in the real estate law; and a service to legally register property, convey title and record property values based on market prices. USAID will also assist the Government and municipal authorities to develop unified urban planning and development policies (e.g., zoning ordinances), building ordinances, public property auctions. The private investment fund implemented through OPIC and the small enterprise lending program will also support private sector development.
Host Country and Other Donors: CEPRA coordinates its economic policy analysis and legal and regulatory reform of commercial laws with the IBRD, IMF, the European Union, and the Ministries of Economy and Finance. CEPRA assists the American University of Armenia to conduct economic education activities. USAID works with the IBRD in related programs for developing the land cadastral system and small and medium enterprise development. USAID grantees (VOCA and the International Executive Service Corps) identify and assist potential clients to prepare viable investment and business plans to the benefit of both the borrower and lender.
Beneficiaries: Reformed economic policies and institutions will set the stage for foreign investment and the rapid import of new technology to put its skilled labor force back to work. Home owners and land owners will possess guaranteed rights to the use of property. Banks will increase lending because they can collateralize loans and foreclose. Government will increasingly generate revenues from property taxes based on a system of tax laws and procedures that are applied fairly. To support real estate and other markets, commercial laws will guide the way business is conducted.
Principal Contractors, Grantees or Agencies: University of Maryland/IRIS (for CEPRA); International City/County Managers Association (ICMA) is responsible for housing privatization, housing law and property registration. IESC and VOCA provide advisory assistance to Armenian entrepreneurs.
Major Results Indicators: Baseline TargetPrivate sector percentage of income in Yerevan 57% (1995) 80% (1999)
Private sector percentage of employment 43% (1994) 56% (1999)
Private sector as percentage of GDP 50% (1995) 75% (1999)
ACTIVITY DATA SHEET PROGRAM: ARMENIA
TITLE: Financial Reform, 110-S001.4
STATUS: Continuing
PROPOSED OBLIGATION AND FUNDING SOURCE: FY 1998: $5,800,000 FREEDOM Support Act
INITIAL OBLIGATION: FY 1995; ESTIMATED COMPLETION DATE: FY 2001
Purpose: A more competitive and market-responsive private financial sector.
Background: USAID emphasizes the financial sector because it is primary to the development of internal and external markets and is a basic service which business and citizens need urgently. New business development for internal markets is impeded by a lack of western oriented commercial banks, better supervised by a stronger, market-oriented central bank. Bank managers and staff require training in international lending procedures and other banking services like commercial paper and financial markets. Outmoded accounting procedures are commonplace in the banks, industry and government ministries, limiting prudent asset management, loan decisions and affecting the accuracy of financial statements for internal and external financial transactions. Finally, capital markets are needed to finance new business investment and government spending.
USAID Role and Achievements to Date: USAID, IMF, World Bank and EU are collaborating to establish a strong, market-oriented Central Bank. This began with the establishment of the domestic electronic payments system (EPS) and the establishment of the Bank Training Center within the Central Bank of Armenia (CBA) in 1996. USAID contributed to the opening of Armenia's first commercial lending facilities in three commercial banks for small and medium-sized enterprises.
Description: USAID will provide technical assistance to the Central Bank and Ministry of Finance to establish a new national accounting system based on internationally-accepted accounting standards and practices that are appropriate for Armenia, including: an accounting practices law or decree. In 1997 USAID has work underway to extend the real time electronic payments to international transactions and to install an electronic accounting system on the CBA platform. When completed the CBA will have the basic modern electronic infrastructure to facilitate domestic and international payments and capital movements. USAID launched bankers' training in 1996 in the CBA's new training center, focussing on international accounting standards, credit analysis, asset and liability management, lending operations, client services, etc. To facilitate the creation of capital markets USAID has funded the Eurasia Foundation to establish a commercial lending facility for small and medium enterprises (SMEs), through competitively-selected local banks.
Host Country and Other Donors: The installation of the EPS is a joint undertaking with the IMF, the European Union (EU), and the IBRD. USAID assistance for accounting conversion is coordinated with the IMF's Accounting Advisor to the Central Bank who is assisting with the installation of the IMF Chart of Accounts. EU short-term accounting advisors coordinate with USAID for accounting conversion.
Beneficiaries: USAID, IMF, World Bank and EU assistance will establish a strong, market-oriented Central Bank. Savings deposits will increase and collateralized-lending will expand as banks compete. Offshore funds will begin to flow into banks, increasing capital for new business ventures. Savers and borrowers will benefit as both are served by a more rational, efficient and market-oriented banking system.
Principal Contractors, Grantees or Agencies: Motorola, Lotus, Sprint, IBM/MERVA and MONTRAN for the Electronic payments and accounting systems. Eurasia Foundation established the Small and Medium-Size Enterprise Loan Fund in Armenian commercial banks. KPMG/Barents is implementing bankers' training.
Major Results Indicators: Baseline TargetFinancial sector assets as percent of GDP 100 (1995) 140 (1999)
Spread between deposit & borrowing rates (%) 56% (1995) 17% (1999)
Level of deposits in commercial banks (index) 100 (1995) 107.2 (1999)
ACTIVITY DATA SHEET PROGRAM: ARMENIA
TITLE: Energy, 110-S001.5
STATUS: Continuing
PROPOSED OBLIGATION AND FUNDING SOURCE: FY 1998: $15,840,000 FREEDOM Support Act
INITIAL OBLIGATION: FY 1996; ESTIMATED COMPLETION DATE: FY 2001
Purpose: A more economically sound and environmentally sustainable energy system.
Background: As a result of the breakup of the Soviet Union, an economic blockade by Turkey and Azerbaijan, and extensive damage to infrastructure caused by the 1988 earthquake, a significant portion of the country's fuel supply and electric generating capacity has been severely impaired. The shortage of power has been a major cause of economic decline. It causes great hardship, impedes the transition to a market economy, endangers public health, and could threaten political stability unless addressed. The energy sector has been weakened by: (1) the 1988 earthquake that led to the 1989 closure of the Medzamor Nuclear Power Plant, leading to a greater reliance on fuel imports; (2) the embargo on natural gas and oil imports by Azerbaijan as a result of the conflict over Nagorno-Karabakh; (3) the civil disturbances in Georgia that led to disruption of natural gas transport through that country to Armenia; and (4) historically low energy prices and low collection rates that have both fostered excessive energy use and resulted in insufficient revenues to cover the maintenance and investment needs of the energy sector, as well as cover the costs of imported fuel. Unit 2 of the Medzamor plant was restarted in November 1995 but, as a type of reactor considered unsafe by the G-7, represents a potential environmental hazard of great magnitude.
USAID Role and Achievements to Date: USAID's emphasis is threefold: (a) to create a climate that will attract private sector participation and ownership, with subsequent improvements in the management or resources and provision of services; (b) to improve the efficiency of the sector in economic terms, with subsequent increases in capital and operating resources; and (c) to reduced the environmental hazards of operating the Medzamor Nuclear Power Plant. To date, USAID has assisted the Ministry of Energy in achieving some major accomplishments in the restructuring of the energy sector. Armenergo, the power utility previously responsible for all electricity generation, transmission, and distribution, has been effectively "unbundled" or broken up into three generation companies, one transmission and dispatching company (with some generation), and approximately 52 distribution companies. The electricity distribution companies have been established as separate state enterprises and it is expected that in 1997 these firms will be consolidated into about ten joint stock companies open for partial or full privatization. Divestiture is also planned for the generation companies. In addition, USAID's assistance has been instrumental in the development of draft energy legislation including a general energy reform law and a draft petroleum law. Last, with respect to tariff reform efforts, on April 1, 1996 the Tariff-Setting Committee of Armenia approved an increase in the uniform nationwide tariff for electric power from 12 to 14 drams per KWH. Although special subsidies for certain rate payers have not yet ended, USAID and other donors believe that this recent development is an important first step toward eventually achieving tariff reform in the power sector.
Description: While initial USAID assistance to the energy sector involved the provision of critical equipment and fuel supplies, assistance is now focused on the systemic economic reform of the sector and the reduction of the hazards presented by the nuclear plant. To establish an economically sound and environmentally sustainable energy sector in Armenia, USAID resources will be used: to support the restructuring and corporatization of the electric power and natural gas subsectors, including legislative and regulatory reform to promote private sector participation; to strengthen the commercial operations of newly-created energy sector entities, including the introduction of improved metering and collections systems and the adoption of international accounting standards; to mobilize private/public financing for selected energy projects to rehabilitate the energy infrastructure and to reinforce the reform process; and to improve the safety of the Medzamor Nuclear Power Station through short-termsafety upgrades and stronger regulatory oversight, while developing energy alternatives to allow the plant to be closed as soon as possible. In Armenia, the two energy subsectors having the greatest impact on the economy are the electric power and natural gas subsectors, and these are the two subsectors where USAID is concentrating its assistance. Assistance is channeled through three institutional contractors: one provides technical assistance in support of energy sector restructuring and privatization, including legislative and regulatory reform; another provides technical assistance and commodity support to facilitate restructuring and privatization as well as energy supply system rehabilitation; and the third is providing short-term training in all activity areas. Two US government agencies also provide nuclear safety support: one covers operational safety improvements and the other covers regulatory strengthening.
Host Country and Other Donors: The World Bank is currently taking the lead in developing a $100 million loan package for rehabilitating and strengthening the power transmission and distribution system, including improving the commercial operation of the enterprises. The Japanese have provided a $600,000 grant through the World Bank for technical assistance to the Ministry of Energy. Technical assistance from the European Union is currently being provided to support the formulation of energy efficiency policies and legislation. The European Union is also assisting the Ministry of Energy in developing energy efficiency legislation and in strengthening billing and collection systems.
Beneficiaries: Approximately 2.0 million residential and commercial consumers of electricity and natural gas.
Principal Contractors, Grantees, or Agencies: Three U.S.-based institutional contractors: Hagler Bailly (restructuring and privatization), Burns and Roe (rehabilitation of energy systems), and the U.S. Energy Association (training); and two US Government agencies: the Department of Energy (nuclear safety upgrades) and the Nuclear Regulatory Commission (nuclear safety regulation).
Major Results Indicators:*
Independent regulated utilities with meaningful financial statements established
Independent regulated utilities with sufficient current earnings and profits to sustain operations
Private sector participation in the energy sector.
State-owned enterprises fully divested
*Baseline and target data will be developed during the next planning period.
ACTIVITY DATA SHEET PROGRAM: ARMENIA
TITLE: Citizens' Participation, 110-S002.1
STATUS: Continuing
PROPOSED OBLIGATION AND FUNDING SOURCE: FY 1998: $5,900,000 FREEDOM Support Act
INITIAL OBLIGATION: FY 1993; ESTIMATED COMPLETION DATE: FY 2000
Purpose: Increased better-informed citizens' participation in political and economic decision-making.
Background: Like other countries emerging from the shadow of communist rule, Armenia is struggling to consolidate nascent democratic governance. Civic society is weak and fragmented: solid democratic pluralism, independent media, and nascent private voluntary organizations need to be developed and strengthened for democracy to survive, and for a market economy to flourish. There is little tradition of spontaneous popular organizations established outside the previous government-inspired context. Freedom to make wide-ranging personal economic and political choices are a new and largely untried phenomenon.
USAID Role and Achievements to Date: USAID-funded activities in the area of independent media development have led to the establishment of the first independent television network in Armenia. Additionally, USAID activities supported the nascent development of the country's first domestic election monitoring non-government organization, and continue to support the strengthening of this indigenous organization.
Description: USAID contractors and grantees are currently working with independent television stations, political parties, parliamentarians, and indigenous non-government organizations to foster the growth of civil society and grass-roots democratic reform efforts in Armenia. These activities will be expanded in FY 1996 and FY 1997.
Host Country and Other Donors: These programs are being coordinated with other USAID activities, such as the USAID-funded Armenian Assembly of America-sponsored NGO Center (for private voluntary organizations), and the Eurasia Foundation, as well as with the U.S. Information Service (USIS). Additionally, USAID's efforts are being coordinated with international donors working in these areas, including the United Nations Development Program and the European Union.
Beneficiaries: These efforts seek to benefit approximately 6,000 individuals and organizations actively involved in civic participation and democratic reform efforts, as well as the general population over time, in encouraging further and deeper citizen participation during the country's difficult transition to a democratic market-oriented state.
Principal Contractors, Grantees, or Agencies: Current grantees include Internews, National Democratic Institute (NDI), and International Foundation for Electoral Systems (IFES). Additional grants and contracts will be established with other private US firms for expanded assistance in this area.
Major Results Indicators:*
% of bills introduced by deputies after consultations with NGOs
Citizens who listen to, watch, or read independent news daily
*Baseline and target data will be developed during the next planning period.
ACTIVITY DATA SHEET PROGRAM: ARMENIA
TITLE: Legal Systems, 110-S002.2
STATUS: Continuing
PROPOSED OBLIGATION AND FUNDING SOURCE: FY 1998: $2,200,000 FREEDOM Support Act
INITIAL OBLIGATION: FY 1995; ESTIMATED COMPLETION DATE: FY 2000
Purpose: Legal systems that better support democratic processes and market reforms.
Background: Armenia inherited a Soviet legal infrastructure that presents substantial obstacles in the country's evolution toward a market-oriented society based on the rule of law. Armenia's legislative infrastructure, judicial structure, and legal society as a whole all require assistance in reform, reconstruction and retraining. The former Soviet model was designed to protect certain restrictive legal concepts not consonant with Western civil and constitutional rights for individuals and non-official associations and groups.
USAID Role and Achievements to Date: USAID funded a judicial conference in July 1995, which brought U.S. Supreme Court Justice Scalia to Armenia to discuss issues such as judicial independence and ethics with members of the Armenian judiciary and government. Additionally, USAID has funded Armenia's drafters of the country's Civil Code to travel to the Netherlands to participate in USAID-funded conferences which provided European and U.S. drafting expertise to Newly Independent States (NIS) drafters working on a model civil code.
Description: USAID contractors and grantees began work in FY 1996 and FY 1997 with legal institutions, such as the National Assembly, Constitutional Court, Ministry of Justice, Procuracy and Executive offices, on legislative and institutional reform and restructuring. Additionally, USAID will sponsor assistance in the retraining of the country's judges, lawyers and parliamentarians in international legal norms, as well as work on the grass-roots level with indigenous bar associations and legal advocacy non-government organizations, and the dissemination of legal information to the general population.
Host Country and Other Donors: These programs will be coordinated with other USAID-funded activities, particularly in the area of commercial law reform, with USAID-funded Center for Economic Policy Research and Analysis (CEPRA) and the Center for Institutional Reform and the Informal Sector (IRIS) activities. These efforts will be coordinated with international donors, including the United Nations, the European Union, and French and German legal consultants.
Beneficiaries: These efforts will benefit Armenia's legal institutions and legal advocates in the transition to a governmental system based on the rule of law and market principles, and thus will benefit the three million Armenians who rely on these institutions, both governmental and non-governmental, to support and protect their individual and property rights in accordance with the constitution and internationally recognized human rights statutes.
Principal Contractors, Grantees, or Agencies: Private U.S. firms will be contracted to carry out these activities.
Major Results Indicators:*
Number of commercial disagreements adjudicated through the judicial system.
Degree to which punishment for same crime is relatively consistent over time.
*Baseline and target data will be developed during the next planning period.
ACTIVITY DATA SHEET PROGRAM: ARMENIA
TITLE: Human Suffering 110-S003.1
STATUS: Continuing
PROPOSED OBLIGATION AND FUNDING SOURCE: FY 1998: $21,000,000 FREEDOM Support Act
INITIAL OBLIGATION: FY 1994; ESTIMATED COMPLETION DATE: FY 1999
Purpose: Improved sustainability of social benefits and services.
Background: Following the break-up of the Soviet Union, Armenia experienced total disruption of existing social services, which were quite comprehensive under the old socialist regime. The government and USAID have determined that it is not useful or productive to rely on the old Soviet system of social categories for the distribution of humanitarian assistance or the provision of social services, as these categories are inadequate for identifying real vulnerability. What is required is the verification of poverty among identifiable households. At the same time, public and civic organizations have an important role in identifying social needs and activities to benefit vulnerable groups. However, both local non-governmental organizations (NGOs) and communities themselves presently lack the experience and capacity to perform this role.
USAID Role and Achievements to Date: USAID funds a program designed to improve the targeting and delivery of humanitarian and government assistance to vulnerable households. To date approximately 700,000 households have been registered and entered into a national data base. Major USAID- and other donor humanitarian assistance programs have begun to use beneficiary lists generated from this computer database, thus increasing the likelihood that assistance is reaching the most vulnerable portion of the population. USAID funds an NGO training and resource center, which has identified over 150 viable indigenous NGOs, trained over 50 NGO representatives in principles of management and leadership, and facilitated the creation of a cohesive, active NGO sector. Many of the strongest NGOs who have benefited from the NGO Center's services have already begun implementing programs in humanitarian assistance and social services.
Description: USAID focuses on two activity areas: creation of a computer database of registered households ranked according to social vulnerability; and capacity building of local NGOs and civic action groups to provide or revitalize social services inadequately covered by the public sector. A USAID-funded U.S. private voluntary organization is refining the database of registered households by increasing the number registered to include the entire population and improving the criteria used to calculate the vulnerability ranking of each household. Under this program, government social workers are being trained to manage the database, verify vulnerability status of individual households and design interventions for the most vulnerable households. USAID funding to U.S. and local NGOs will be used to provide management training, technical assistance and grants to local non-governmental organizations and civic action groups in order to increase local NGO and civic action group capacity to assess community needs and provide humanitarian and social services.
Host Country and Other Donors: The European Union conducts capacity building within the Ministry of Social Welfare. United Nations High Commission for Refugees (UNHCR) and United Nations Development Program (UNDP) have provided funding to some local NGOs for humanitarian assistance projects. The World Bank has provided major funding for social infrastructure rehabilitation.
Beneficiaries: These activities are intended to provide improved targeting of humanitarian assistance and social benefits to the most vulnerable parts of the population, which may number as high as 250,000 families.
Principle Contractors, Grantees, or Agencies: USAID implements activities through U.S. and local organizations including most prominently Save the Children Federation, Fund for Democracy andDevelopment, CARE, and Fund for Armenian Relief, among others.
Major Results Indicators: *
Number of services privatized
Change in numbers of public/private partnerships
*Baseline and target data will be developed during the next planning period.
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