Orbeli Analitical Research

Statistics on the Reduction of the Shadow Economy

11 m. | 2019-07-19

Numerous economic and fiscal results show, that in 2018, reduction was recorded in Armenia’s shadow economy with the trend continuing. According to the results of the previous year, the attempt to reduce the shadow part of the economy has shown a potential improvement of up to 10%.

Corruption, unequal competitiveness, macroeconomic instability, social polarization, low quality healthcare and education: these are part of the direct and indirect results, of a deepening shadow economy [1]. The weight of the shadow economy is based on less tax collected in the state apparatus, which consequently affects the quality of the services provided by the state. The shadow economy or non-formal economy are typical of all the countries in the world, though it differs in its amount. According to the estimates of the International Monetary Fund [2], countries with a developed economy have insignificant shadow levels over the GDP, such as Norway, Canada, the Netherlands, and the United Kingdom, which have about 1-2.3%. As to the developing countries, the estimates are considerably higher.

Average size of the shadow economy in percent of GDP,1991-2015, IMF			Average size of the Shadow Economy in percent of GDP, 2015, The Global Economy
1.	Norway	1%	1.	Switzerland	6.9%
2.	Canada	2.2%	2.	USA	7%
3.	The Netherlands	2.3%	3.	Germany	7.7%
4.	UK	2.3%	4.	The Netherlands	7.8%
5.	Sweden	3%	5.	Australia	8.1%
29.	Armenia	19.5%	34.	Armenia	35.9%
87.	India	46.3%	155.	Gabon	52%
88.	Central African Republic	49.6%	156.	Nigeria	52.4%
89.	Benin	50%	157.	Georgia	53%
90.	Niger	51.5%	158.	Haiti	56.3%
91.	Burundi	64.8%	159.	Zimbabwe	67%

Estimates by the IMF’s PMM (Predictive Mean Matching) Method, show that in Armenia the shadow economy was about 19.5% in 1991-2015. Within international practice and professional frameworks, there is no united method of assessing the shadow economy. In the case of applying other methods to ascertain the shadow economy of Armenia is estimated at 35.9% (The Global Economy rating) [3], or 44% according to the estimates of the World Bank (Structural equation model’s MIMIC Method, 1999-2007) [4].

In Armenia, the official estimates of the shadow economy [5] fluctuate between 15 and 25% of the GDP. Moreover, the Statistics Committee estimates the shadow economy to be considerably higher, about 22-25%, and SRC representatives have a more modest outlook of 15-17% shadow economy.

In April, another representative of the executive body, the Minister of Finance, published figures relating to the shadow economy, this was a first. Particularly, Atom Janjughazyan announced [6] that for 2018, the tax potential of Armenia had been estimated at 438 billion AMD more than the tax collected during that year. However, tax authorities have a strong disclaimer over the published figures (methodology of Ministry of Finance is not coordinated with other agencies), but even in this case the shadow economy can be approximately estimated about 35%.

The reason for the great difference in estimates is again the absence of a unified methodology. The field has also mentioned that the Ministry of Finance and other agencies are working together for developing a system. It is not clear when this unified method and the first acceptable estimate of the shadow economy in Armenia will be ready.

The Main Indicators of a Shadow Reduction

C urrently, there are only economic and financial-budgetary indicators of January-April, 2019, the observation of which highlights a number of important trends which started from 2018.

28% increase in budget revenues and improvement of the tax/GDP ratio.

One of the primary indicators of a reduction in the shadow economy is the tax/GDP ratio. If this ratio grows in percentage, it means that the amount of taxes collected for a period of time has grown more rapidly than the volume of the whole economy. So, according to the 2018 data, tax revenues and state duties of the state’s budget amounted to 21.8% of the GDP, instead of 20.5% in 2017 [8]. As a result, the tax revenues and state duties increased by 1.3% compared to last year, which points out that some reduction occurred the previous year.

This trend further strengthened in 2019. If in the first quarter of 2018, the tax/GDP ratio was 21.5%; in the same period of 2019, it was 24.1%, which means that the indicator has improved by 2.6% point.

Taxes/GDP ratio improvement and shadow economy reduction are naturally not an end in themselves. Due to this, in January-April of 2019, as it had been envisaged by the current government’s project, it was possible to increase the state budget by about 28% or by 107.7 billion AMD [9]. The increase in budget revenues, in its turn, made it possible to increase the salary of military servicemen and teachers on average by 10%, increasing the volume of subsidies provided for numerous projects [10].

Considerable increase in the number of registered employees

On the one hand, tax administration improvement and on the other hand, enthusiasm noticed among citizens after last year’s political events, had a considerable influence in the process of shadow economies reduction. All this was manifested among businesses by registering hidden workers, providing more CCM coupons, declaring results closer to real turnover and by other behavioral features.

In particular, between January-March of 2019, the number of officially registered employees in Armenia was 564.7 thousand, which has increased by 8.2% or by 42.8 thousand compared to the same period of 2018 [11] (the difference was about 51 thousand in January, 2019). This can be an unprecedented progress in declaring unregistered workplaces in Armenia, which significantly reduced the volume of shadow in the labor market. Besides this, it has had a clear financial manifestation: in January-April of 2019, the amount of tax revenues collected by SRC increased by 21% compared to the same period of last year [12]. Of course, such growth in taxes is also a result of 6.2% increase in average nominal salaries (10.3 thousand AMD), though it is not possible to underestimate the role of reduction of shadow workplaces.

Of course, such tax growth is as much a result of 6.2% increase (10.3 thousand AMD) in nominal salaries, though it is impossible to underestimate the role of shadow workplaces’ reduction.

As it could be expected, the increase in the number of registered employees also had its significant influence on the volume of mandatory payments of the Soldiers’ Insurance Fund. In January-April of 2019, the amount of stamp payments made by businesses was 2 billion 185 million AMD, that is by 500 million AMD or 30% more compared to the same period of 2018 [13].

Significant increase in tax turnover and in CCM coupon numbers

The tax turnover amount collected by the State Revenue Committee has increased by 42% compared to 2018. This is quite normal, especially taking into account the fact that in the first quarter the number of printed SRC coupons increased by 20 mil. 710 thousand compared to the previous year, and with an additional turnover of 55.1 bil. AMD which has been registered [14] (only in May more than 13.1 mil. SRC coupons were printed). Of course, the overprinted SRC coupons were not completed, just by the taxpayers’ turnover, but the improvement of the two indicators is evident and the combination can also highlight significant progress of shadow reduction in economy. The upcoming expected turnover increase by up to 115 million AMD will boost the businesses to show more realistic turnover, as nowadays’ threshold of 58.35 mil. AMD prevents from moving to the common tax field.

Change in the State Budget Revenue’s Structure

Based on the data of the first 4 months of 2019, the profit from tax revenues have increased almost twice (by 96.6%) compared to January-April of the previous year, providing 28.3% of state budget tax revenues and duties. In 2018, the same indicator was just 18.3%, 13.4% in 2017 and 14% in 2016. Furthermore, the state revenues have not increased due to traditional VAT or excise tax, the final payer of which is a citizen, but due to an increase in the amount of tax collected by tax payers.

In addition, during the same period, the revenues from income tax have also increased significantly in the structure of state budget tax revenues. Instead, the share of environmental tax, customs and social payment has decreased. It is also noteworthy that in the first quarter of this year the amount of taxes paid by 1000 the largest taxpayers has increased by 24%, 21% increase in their income tax and 48% in revenue tax.

Up to 10% shadow reduction in 2018

A s a supplement to the above mentioned indicators and trends we can make an assessment and calculation about the shadow dynamics of the economy, by using consulting research methodology of “Taxation and the Shadow Economy” [15] published by the World Bank. According to WB, there is a significant correlation between shadow reduction dynamics and the amount of collected taxes.

According to the research, due to 1% reduction in the shadow economy, tax revenues/GDP ratio has been improved by 0.125%. If taking into account that in 2018, tax revenue/GDP ratio was 21.8% and has been improved by 1.3 % compared to 2017 [16], we can say that according to the above mentioned formula the shadow in Armenian economy has been reduced by about 10%. Certainly, this indicator is not perfect or complete, as it does not include the impact of LR changes, the restoration impact of damage to the state as a result of the SRC discoveries of last year. The real picture of the economies shadow share assessment and dynamics can be reached only after the clarification of the methodology developed by the Ministry of Finance and SRC. However, with all this and other indicators it becomes clear, that the shadow reduction in economy has registered a tangible progress.

The registered progress, of course, has a positive tendency, though it shouldn’t be limited to what is gained, as a shadow economy is in the other fields of economic activities as well and it is not completely disclosed.

There is still much to be done both at legislative and administrative levels. Important steps should be taken to create non-cash turnover expansion mechanisms, compulsory wording of property and income, introduction of additional impulses and privileges to pull out of the distinct shadow economy that Armenia fosters.

[1] The Evolution of the Shadow Economy in Transition Countries: Consequences for Economic Growth and Donor Assistance, 2000, pp. 43-47

[2] Shadow Economies Around the World: What Did We Learn Over the Last 20 Years?, IMF 2018, pp. 46-47

[3] Shadow economy - Country rankings, The Global Economy 2018

[4] Shadow Economies All over the World, World Bank 2010, p. 45

[5] NA briefing - 07.06.2019, SRC President Davit Ananyan

[6] See 6

[7] RA Government session - 18.04.2019, Minister of Finance Atom Janjughazyan

[8] Report on the implementation of the RA State Budget for 2018, pp. 156-157

[9] Summary of the RA State Budget Execution for January-April, 2019, p. 1

[10] RA Government Consultation

[11] Salaries and Employees’ numbers in January-April, 2019

[12] Information on revenues controlled by RA SRC for April 2019