US embassy cable - 05YEREVAN1960

UNCLAS SECTION 01 OF 02 YEREVAN 001960 
 
SIPDIS 
 
SENSITIVE 
 
E.O. 12958: N/A 
TAGS: ECON, EFIN, EAID, AM 
SUBJECT: REVENUES AND EXPENDITURES UP IN DRAFT 2006 BUDGET 
 
REF: A) 04 YEREVAN 1651 B) YEREVAN 1705 
 
Sensitive but unclassified.  Please protect accordingly. 
 
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SUMMARY: 
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1. (SBU) The GOAM draft budget for 2006, currently under 
debate in the National Assembly, envisages significant 
increases in health and social security expenditures paid for 
by increased tax revenue and deficit spending.  The budget is 
based on an exchange rate of AMD 420 to the dollar, a dram 
appreciation of approximately 8 percent from the current 
rate.  The IMF Country Representative describes the 2006 
draft budget as consistent with program targets and in line 
with Armenia's Poverty Reduction Strategy.  End Summary. 
 
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DRAFT BUDGET:  HEALTH AND SOCIAL SECURITY EXPENDITURES UP 
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2. (SBU) The GOAM recently submitted its draft 2006 budget to 
the National Assembly.  The draft is currently under debate 
and will likely be approved by the end of November.  Under 
the draft proposal, total expenditures for 2006 will increase 
by almost 15 percent compared to 2005 (from AMD 394.6 billion 
to AMD 451.9 billion -- approximately USD 1 billion at the 
projected exchange rate of AMD 420 to the dollar).  The 
projected total expenditures in the 2006 budget are the 
largest since Armenian independence, with significant 
increases in health care and social security spending. 
Health care expenditures are projected to be AMD 39.1 billion 
(approximately USD 93 million at the projected exchange rate 
of AMD 420 to the dollar) an increase of AMD 6.8 billion 
compared to 2005.  Social security spending is projected to 
reach AMD 55.4 billion (approximately USD 132 million at a 
rate of AMD 420 to the dollar) up by AMD 8.8 billion from 
2005 levels.  The proposed 2006 budget also envisages 
increases in public sector wages and defense spending. 
 
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"AMBITIOUS" TAX COLLECTION TARGET 
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3. (SBU) The 2006 draft budget proposes a significant (15.5 
percent) increase in tax revenue.  The International Monetary 
Fund (IMF) Country Representative described this target as 
"ambitious."  According to statistics provided by the IMF, 
tax revenue collection for the first nine months of 2005 was 
approximately 18.4 percent higher than for the same period in 
2004, but still slightly below the IMF target.  The GOAM also 
plans to increase deficit spending to cover 2006 
expenditures.  Deficit spending is projected to increase by 
AMD 17.9 billion, from AMD 52 billion in 2005 to AMD 69.9 
billion (approximately USD 166 million at a rate of AMD 420 
to the dollar) in 2006.  The IMF Country Representative told 
us the draft 2006 budget was consistent with program targets 
and in line with Armenia's Poverty Reduction Strategy. 
 
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CBA PROJECTS 8 PERCENT DRAM APPRECIATION 
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4. (SBU) The proposed 2006 budget is based on an exchange 
rate of 420 AMD to the dollar.  This estimate, which was 
agreed upon by both the Central Bank of Armenia (CBA) and the 
Ministry of Finance and Economy, indicates that the GOAM 
expects the dram to appreciate against the dollar by about 8 
percent in 2006.  The current exchange rate is approximately 
450 AMD to the dollar, but it has been fluctuating on a 
near-daily basis.  According to Head of the Financial 
Monitoring Center and former Advisor to the Chairman of the 
CBA Nerses Yeristyan, the CBA set the target exchange rate in 
anticipation of an increase of dollar flows into Armenia due, 
in part, to a possible Millennium Challenge Corporation grant 
and a confirmed USD 60 million grant from the Lincy 
Foundation.  Yeristyan said the CBA planned to sterilize a 
portion of the in-flows, but expected that there will be some 
appreciation of the dram.  According to Yeristyan, the higher 
priority for the CBA is not to exceed the IMF-sanctioned 3 
percent inflation rate.  In previous years, the CBA has been 
accused of manipulating the exchange rate in order to mask 
greater than anticipated increases in inflation (ref A). 
 
5. (SBU) The estimated appreciation of the dram was greater 
in last year's 2005 budget than it is in the 2006 budget. 
The average exchange rate in 2004 was 533, but the rate set 
in the 2005 budget was 468 (13 percent lower than the 2004 
average).  This year the margin between the average exchange 
rate and the rate used for the 2006 budget is 9 percent.  The 
average rate to-date for 2005 is 459 and the 2006 budget 
target is 420. 
 
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COMMENT: ARMENIA ON TRACK WITH POVERTY REDUCTION STRATEGY 
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6. (SBU) Steady growth (ref B) and increased tax revenue have 
allowed the GOAM to propose additional health and social 
security spending for 2006.  While there is an on-going need 
for reform within the tax sector, this draft budget shows 
that the GOAM is making progress towards improving its 
economic position and meeting the requirements of its Poverty 
Reduction Strategy.  The projected appreciation of the dram, 
should it materialize, may pose a threat to Armenian exports. 
 Current growth rates, however, suggest that the impact on 
exports to date has been limited. 
EVANS