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Armenia Public Expenditure Review (PER) Summary

October 2023

Key Fiscal Performance

• Improved Revenue Collection: Tax revenue reached 23.3% of GDP by 2021, closing a significant gap with regional peers, supported by reforms like tax administration modernization and VAT upgrades.
• Spending Containment: Public expenditure averaged 27% of GDP (2016–2021), below regional averages, contributing to fiscal discipline and debt sustainability (despite a 2020-2021 spike due to crises).
• Fiscal Multipliers: Capital spending has a small positive multiplier (0–0.4), while current spending has limited impact, indicating inefficiencies in public investment.

Spending Efficiency Concerns

1. Sectoral Inefficiencies:

   • Capital Expenditures: Public capital spending stagnated (3.5% of GDP), contributing to a declining public capital stock and implementation delays in large infrastructure projects.
   • Healthcare: Despite progress, OOP spending accounts for 84.8% of total expenditure, leading to financial protection gaps and inefficiencies in pharmaceutical pricing and provider payments.
   • Social Protection: High coverage but inefficiencies in targeting; social assistance programs have a 57% targeting performance issue, with over 47% of beneficiaries not in poverty.

2. Revenue Gaps:

   • VAT collection effectiveness is only 39.1% of potential, and tax evasion remains a challenge.

Policy Recommendations

1. IMprove Fiscal Sustainability:

   • Enforce systematic phasing out of government contributions to Pension Pillar 2 and stabilize pension increases.
   • Explore revenue reforms to mobilize additional resources, but avoid measures hindering economic growth.

2. Enhance Capital Spending:

   • Digitize project registries, update asset registries, and prioritize strategic planning for public investments.
   • Consolidate SA programs and phase out ineffective measures, such as overly generous benefits for non-poor groups.

3. Optimize Healthcare Spending:

   • Institute strategic purchasing reforms, centralized procurement of medicines, and performance-based budgets to reduce pharmaceutical costs.
   • Shift focus from inpatient to primary care funding to better manage NCDs and reduce unnecessary hospitalization expenses.

4. Strengthen Social Protection:

   • Adopt a hybrid means-test for FBP and CCA to improve targeting and reduce inclusion errors.
   • Ensure UHC reform includes cost-control mechanisms and performance-based payments to balance coverage expansion with fiscal prudence.

Fiscal Risks

• Economic Shocks: Policy commitments in Pensions, SA, and UHC could increase spending by 3–4% of GDP by 2026, breaching the 60% debt threshold unless efficiency gains are achieved.
• Debt Sustainability: Interest payments may rise to 20% of total expenditure by 2026, squeezing budgets during economic downturns.

Conclusion: Armenia’s fiscal policy must balance ambitious social and health reforms with fiscal sustainability through data-driven efficiency improvements, strategic spending reorientation, and transparent costing of reforms.