The International Monetary Fund (IMF) praised controversial tax legislation enacted in Armenia this week as it announced the release of a $22 million loan tranche to the authorities in Yerevan on Thursday.
The IMF said its Executive Board approved the latest installment of a $116 million lending program for Armenia launched in March 2014. The three year Extended Fund Facility (EFF) is designed to support macroeconomic stability and reforms promised by the Armenian government.
The disbursement raised to about $71.5 million the total amount of EFF funding made available to the government and the Central Bank of Armenia to date.
The IMF’s previous three-year scheme worth approximately $410 million was launched in 2010 to help Armenia recover from a severe 2009 recession. The money was mainly used for financing state budget deficits and replenishing the country’s hard currency reserves.
In a statement, the IMF largely approved of the Armenian authorities’ fiscal and monetary policies, saying that they met “most targets” agreed with the fund. In particular, it praised their efforts to increase public spending on social programs and capital projects through corresponding rises in tax revenue.
“The new tax code provides a major opportunity to broaden the tax base by reducing exemptions and addressing gaps and thereby supporting both consolidation and increases in growth-enhancing spending,” Mitsuhiro Furusawa, the IMF’s deputy managing director, was quoted as saying.
The Armenian parliament passed the 700-page code in the first reading on Wednesday amid strong criticism voiced by its opposition minority and some pro-government lawmakers. They objected to its provisions envisaging higher taxes on fuel, alcohol and tobacco as well as increases in income tax levied from many employees.
The critics say that the comprehensive tax legislation will suppress economic activity and lead to more tax evasion. The government has denied those claims. It has at the time expressed readiness to accept “reasonable” amendments before pushing the code through the parliament in the final reading in September.
The Armenian government’s tax revenue has increased considerably in the past several years. But it is still equivalent to only one-fifth of Gross Domestic Product, a low figure even by ex-Soviet standards. The modest proportion results, in large measure, from widespread tax evasion, corruption and privileged treatment of entrepreneurs linked to the government.
The IMF and the World Bank have long been pressing the Armenian authorities to improve tax collection and the domestic investment climate.
“Pursuing further structural reforms to enhance competition, competitiveness, and regional and global integration remains critical to reduce vulnerabilities and support medium-term growth,” said the IMF’s Furusawa.
The Armenian government pledged to speed up such reforms last month. Prime Minister Hovik Abrahamian said the government will step up its declared fight against corruption, make tax administration less arbitrary and crack down on business monopolies.