Seeking Solutions Within

The official statistics released in February simply reiterate the inarguable truth: Armenia is heading towards a recession.

Although these facts are not being hidden, they are not being explained either. The government continues to believe (and rightfully so) in the importance of confidence as a key factor of economic stability and is therefore trying to inspire trust and faith. But it is doing so without basing its oratory and encouragement on economic realities, or without actions which assure the population that steps are being taken to ameliorate the situation.

These are unconventional times and require unconventional remedies, including some outside the IMF-World Bank prescription box, not unlike those to which the major economies of the world have already resorted.

I believe that several steps, taken together, can minimize the economic decline.

First, there is a need for open, courageous and sustained public dialogue which is missing, and which would go a long way to inspire confidence and faith in the steps being taken to improve the financial situation. Consumer confidence regarding the government’s economic policies are equally critical in this formula. Some of the government’s actions raised doubts in the public’s mind about the government’s ability to respond to this crisis. First, there were the early pronouncemen’s about this global crisis circumventing Armenia, which raised questions about the government’s sincerity and did nothing to meet the government’s concern about not creating a panic. Earlier, the government insisted on passing a budget based on a high 9 percent growth even as the government’s own numbers were already indicating that this is not a realistic goal. They preferred the politically desirable picture but instead got an economically unrealistic scenario, counting as they said they were, on a quick global rebound. As a result, the compact between business and government remains broken. The confidence-inspiring rhetoric was not able to transform reality.

Second, it is important that the government discuss the Russian Federation $500 million loan with the public and engage it in a conversation about its efficient use. There is no doubt that Armenia clearly needs this money to mitigate the impact of the crisis. The challenge is that it be used to ensure economic growth. Does the Armenian government intend to use the funds to meet its current budgetary obligations? Will it loan at least part of the funds to local banks? Or will it invest the funds in competitive sectors, such as agriculture and mining which have growth potential and local social and economic significance? In other words, shall Armenia use the crisis to solve existential issues and address the short-term challenge of restraining social disenchantment, or should it think about sustainable development?

Third, new money alone will not solve the economic woes either. A step the government must take, and is already late in taking, is to let the Dram find its normal market exchange rate. Already, since early 2008, over $440 million of Armenia’s reserves has been spent to maintain this stability. This spending is nearly equal to the $500 million we are going to owe the Russia’s. This is not sustainable. Sooner or later, the government will be forced to adopt a more flexible exchange rate policy. In fact a depreciated Dram and more realistic Dram rate will boost the value of foreign capital, will enhance the purchasing power of the many who rely still on foreign remittances, will stimulate exports and will promote tourism, which have already suffered as a result of the high Dram value.

Fourth, a government committed to tax reforms must judge correctly not just the nature of the reform but also its timing. While taking the crucial step of modifying the tax structure to help small and medium enterprises, the government is at the same time placing the heaviest burden on the smallest taxpayer by insisting on cash registers for the tiniest individual entrepreneurs, thus driving many out of business. This step could have been delayed. Taxes on the little guy can and should be assessed, but only after the real bottlenecks in our economy are lifted. Monopolies and non-competitive systems are the real causes constricting our economy.

Fifth, the time is right to allow for a larger budget deficit. In an economy where inflationary pressures are low, when credit is tight, when there is a clear economic slowdown, enlarging the budget deficit is not only acceptable but necessary. Armenia’s deficit has been well within the internationally advocated three percent of GDP. Under today’s unusual circumstances, the budget deficit can be allowed to grow to even six percent of our GDP. That additional emission of money can fund public works, thus creating jobs, improving infrastructure and stimulating the economy.

Sixth, this is indeed the time to bring back the best of government intervention on the basis of public-private partnership. It was a laissez-faire, non-regulated market that led to this global crisis. Depending on more of the same unrestricted market developmen’s now means tolerating the excesses of capitalism instead of reining them in. That is what the world has learned. In Armenia, if we were hoping that at the end of this transition, the pendulum that swung from abject communism to extreme capitalism was to come to rest somewhere in the middle between unrestricted competition and total dependency, this crisis allows, indeed forces the government to take on greater responsibility for wise engagement in the economy and at the same time take practical steps to address social problems and ameliorate the conditions of the most vulnerable in society.

Finally, there is a seventh area of action that cannot be avoided or ignored any longer and that is our political reality. The economy rests firmly on politics and law, on predictability and consistency, on transparency and equality. The political situation that exists around us today does not provide space for our economic dreams. It is not just the polarization, it is not just the cynicism, it is not just the lack of trust. It is also the insufficient respect for property rights, it is the sense of impunity on the part of those on whom we depend to reinforce the rule of law, it is the inarguable monopolies at the basis of so much of our trade. The government’s responsibility is to secure our economy and our security. Both require a healthy domestic situation. The government may not be solely responsible for today’s mess, but it has the sole capacity to bring the country out of this mess. There is no way to withstand today’s economic crisis without addressing and resolving today’s political crisis. This crisis is economic and domestic, but it will inevitably affect our foreign relations and thus can affect our security.

In other words, the global economic crisis may have exacerbated the weaknesses of our own economy. The domestic political crisis may have come about as a result of bad judgmen’s on the part of all political actors. But the solution must be sought from within. Not from the Diaspora, which is living its own economic crisis. Not from Russia and China, where money and political expectations come together. But from our own small economy whose problems we see, whose solutions are within reach.

This is the time for responsive governance, for a demonstrated willingness to share the burden for the well-being of all citizens. This is also the time to rally the brainpower and good intentions of those in and out of government, the experience of those in and out of business, the insights of civil society, to make the right decisions.

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