US embassy cable - 05YEREVAN2018

C O N F I D E N T I A L SECTION 01 OF 02 YEREVAN 002018 
 
SIPDIS 
 
E.O. 12958: DECL: 11/17/2015 
TAGS: ECON, EFIN, EAID, PGOV, AM 
SUBJECT: 2006 BUDGET INCREASES SOCIAL SPENDING 
 
REF: A) YEREVAN 1960 B) YEREVAN 1797 C) 04 YEREVAN 2510 
 
Classified By: CDA A.F. Godfrey for reasons 1.4 (b,d). 
 
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SUMMARY 
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1. (U) On November 11, the National Assembly approved the 
2006 budget which includes a 22 percent increase in public 
spending funded by continued economic growth, improved tax 
collection and international donor support.  The 2006 budget 
calls for AMD 482.2 billion (USD 1.15 billion at the 
projected exchange rate of AMD 420 to the dollar or USD 1.04 
billion at the current exchange rate of AMD 463 to the 
dollar) in expenditures and AMD 412.4 billion (USD 980 
million at the projected AMD 420 to the dollar exchange rate) 
in revenues with a projected deficit of AMD 69.8 billion (USD 
166 million at the project exchange rate of AMD 420 to the 
dollar).  The budget emphasizes social spending and there are 
large increases in expenditures on education and 
transportation. 
 
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EARLY APPROVAL ON SHORT NOTICE 
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2. (U) The National Assembly adopted the 2006 Armenian budget 
on November 11.  Expenditures and revenues were both AMD 30 
billion (USD 71 million at the projected exchange rate of AMD 
420 to the dollar) greater in the final draft than in 
previous drafts.  (Note: Dollar equivalents for the remainder 
of this cable will be provided at the projected exchange rate 
of AMD 420 to the dollar, nearly 10 percent below the current 
exchange rate.  End Note.)  The approved budget includes AMD 
482.2 billion (USD 1.15 billion) in expenditures and AMD 
412.4 billion (USD 980 million) in revenues with a projected 
deficit of AMD 69.8 billion (USD 166 million).  The total 
budget remains a relatively small proportion of gross 
domestic product (GDP) which the International Monetary Fund 
(IMF) predicts will reach USD 4.6 billion in 2006.  The 
budget assumes an exchange rate of 420 drams to the dollar 
(ref A), a GDP growth rate of 7.5 percent and a three percent 
increase in inflation.  The National Assembly approved the 
budget earlier this year than in previous years.  Normally, 
the budget is approved by the National Assembly in late 
November and signed by the President sometime before January 
1.  Opposition Deputy Tatul Manaseryan complained to the 
press that the four-day review period for the final draft was 
insufficient.  The National Unity and Justice Bloc 
oppositions groups, who have been engaged in a periodic 
boycott of the National Assembly, did not participate in the 
final vote. 
 
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EDUCATION AND TRANSPORTATION UP THANKS TO LINCY 
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3. (U) The approved budget includes a greater than expected 
increase in education expenditures, raising total 
expenditures on education and science to AMD 82.30 billion 
AMD (USD 196 million), an increase of 33 percent from 2005. 
Education expenditures constitute 17 percent of total 
expenditures in the 2006 budget and approximately four 
percent of GDP based on the IMF projection of a GDP of USD 
4.6 billion in 2006.  Transportation expenditures are 
scheduled to increase by a remarkable 95 percent to AMD 41.50 
billion (USD 98 million) and account for 8.6 percent of total 
expenditures and two percent of GDP.  The striking growth in 
these two sectors reflects in part the funding priorities of 
international donors, particularly the Lincy Foundation, 
which recently granted the GOAM USD 60 million targeted 
primarily at school construction and road development (ref 
B).  The GOAM includes this grant, and other international 
assistance, as revenue in the budget under the official 
transfers heading.  International grants, however, do not 
account for all of the increase in education and 
transportation expenditures and the GOAM plans to used other 
revenues, including tax revenues, to increase support for 
these sectors as well.  As previously reported, the 2006 
budget also includes significant increases in health and 
social security expenditures (ref A). 
 
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DEFENSE SPENDING UP, BUT STILL LARGELY OFF-BOOK 
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4. (C) In marked contrast to last year, there was little 
debate about the modest increase in official defense spending 
which is slated to reach AMD 74.1 billion (USD 176 million) 
in 2006.  In previous years this issue has been hotly debated 
because the Ministry of Defense controls a number of 
important income generating companies and continues to 
benefit from significant off-budget revenues (ref C).  The 
continuing reliance on off-budget mechanisms to finance 
military spending keeps the defense portion of the GOAM 
budget artificially low. 
 
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MINIMUM WAGE UP; COMPENSATION FOR LOST DEPOSITS 
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5. (SBU) Under the new budget, the official minimum wage in 
Armenia will increase from AMD 13,000 to AMD 15,000 (USD 35) 
per month.  The 2006 budget also contains a 19 percent 
increase in public sector wages which are scheduled to be AMD 
34.4 billion (USD 81 million) or 7.1 percent of total 
expenditures for the year.  The new budget includes a 
provision to reimburse holders of Soviet-era bank deposits. 
According to news reports, approximately one million 
Armenians had assets in Soviet banks which were frozen 
following the disintegration of the Soviet Union.  The value 
of the deposits dropped dramatically due to hyperinflation 
and reimbursement for these losses has been an issue of 
political debate since Armenian independence in 1991.  The 
compensation plan, the details of which are not yet publicly 
available, reportedly gives priority to the socially 
vulnerable, disabled and elderly.  National Assembly Speaker 
Artur Baghdasaryan has used the promise of reimbursement as 
part of his political maneuverings since 2003, and told 
members of the press that the 2006 budget would lay a 
foundation for the reimbursement process, and that subsequent 
state budgets would allocate additional funds to continue the 
program. 
 
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TAX REVENUE TARGET LOWER THAN IN PREVIOUS DRAFT 
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6. (SBU) The National Assembly reduced the tax revenue target 
in this final version of the budget to AMD 345.5 billion (USD 
822 million) which is equivalent to approximately 84 percent 
of all revenues for 2006.  The earlier target of AMD 362.8 
billion (USD 864 million) was described as "ambitious" by the 
local IMF representative and the GOAM fell short of its tax 
collection target during the first nine months of 2005 (ref 
A).  The IMF strongly endorsed the direction of economic 
reforms in Armenia on November 14 by approving an additional 
USD 4.7 million in disbursements under the Poverty Reduction 
and Growth Facility (PRGF) plan which supports Armenia's 
IMF-approved Poverty Reduction Strategy. 
 
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COMMENT 
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7. (C) The increase in social spending in the 2006 budget is 
a positive trend in line with Armenia's Poverty Reduction 
Strategy.  The GOAM's focus on education and transportation 
reflects both the funding priorities of international donors 
and a long-term strategy to improve Armenia's business 
competitiveness.  While it is too early to predict how 
Armenia will perform vis-a-vis other Millennium Challenge 
candidate countries on education and health expenditures, 
these budget numbers suggest the GOAM is making good on 
earlier commitments to increase spending in these areas. 
These initiatives, the increased minimum wage and 
reimbursement of Soviet-era deposits also target the general 
public and may well help the GOAM to garner public support 
prior to the 2007 parliamentary elections. 
GODFREY