Stimulus packages to offset COVID-19 downturn in Armenia

12 m.   |  2020-05-09

T he Armenian Government stated that 150 bil. AMD will be put into the economy as a stimulus with 14 programs aimed at neutralizing the economic downturn that might eventuate after Covid19. The negative impact on the economy has already led to a global economic crisis and the fallout is likely to be expected in Armenia as well. Countries are scrambling to find solutions to overcome or at least mitigate the negative effects of the economic consequences.

Armenia’s economic growth forecasts were made both by local and international organizations, according to which in 2020, Armenia’s economic growth will fluctuate between 1.5% and 1.7%, economic growth may reach 4.5-7.2%. The abovementioned forecasts were made taking into account the economic structure of the country.

In order to bring economic growth to the projected level in 2021 and essentially overcome the crisis, the measures taken include the stimulus of economic activity in key areas for development. Currently attempts are being made to provide more targeted support to the most vulnerable part of the society and to prevent the decline of living standards. 150 bil AMD (worth of $300 mil.) will be provided by the Government this does not include financial aid provided by international assistance programs

The International Monetary Fund envisages to increase financial assistance to Armenia to $280 mil. The European Union has increased its assistance to Armenia to $92 mil. Germany envisages to provide Armenia grants and technical assistance worth $91 mil. With these funds, the Government will be able to expand significantly both economic and social assistance programs.

International experts suggest that in a crisis stimulating demand is key and providing additional resources to the consumer in order to keep spending up won’t let the market sway. The government will also add cash payments to the most affected part of society. The second most widely used method is lending to businesses on preferential terms, in case of which the loan interest rate is subsidized. A grant mechanism would also be used to protect jobs. The mechanism of the tax break widely spread in international practice is not currently used in Armenia, but in the future, depending on the crisis it can be utilized.

Economic measures

W hile developing economic measures, the state has targeted sectors which have taken the biggest hit from the coronavirus and which may later contribute to the recovery of the economy, ensuring long-term and sustainable growth.

In Armenia, because of the coronavirus, the most affected areas with a large share in GDP were tourism, industry, retail and wholesale trade, agriculture and construction. To provide the activity of these sectors, the 1st package of measures envisages providing preferential targeted loans to economic entities, which will be directed to paying employee’s salaries, taxes and duties, buying raw materials, equipment, importing food and paying for services. Currently 249 loans worth 13 bil. 159 mil. AMD have been provided by the 1st measure. The number of loan applications is now 691, worth 39 bil. AMD.

Assistance to businesses will be provided through financial institutions: banks and credit organizations, in the form of co-financing, refinancing and interest rate subsidies. Only 1 of the 3 types of assistance will be applicable to each business. The appropriateness of using these types is determined by the financial structure, assessing the creditworthiness of the business.

The aim of the 1st package of measures is to provide quick access to finance for exemplary businesses with good credit and tax history as well as restrain the difficulties caused by not providing a tax break.

The 2nd package of measures is aimed at supporting agriculture. Since 2015, there has been a decline in this field and the share in GDP decreased in 2019. However, this is a priority field for the economy and will solve the problem of food provision but has the potential to be exported.

Therefore, the agricultural support package will be implemented in two ways: using a lending and compensation component. The lending will be implemented by financial institutions in the form of targeted-loan co-financing and loan/leasing interest rate subsidy.

The following steps have been developed to apply for a loan program:

Actually, the state support programs for agriculture have always been around. Through these current programs an attempt was made to make some additions to already existing packages, aimed at making the financial resources that farms will need to service their agricultural activities more accessible.

According to the Minister of Economy, more than 9000 beneficiaries were involved in state support programs in the field of agriculture in 2019, who used more than 53 bil. AMD of credit or leasing through state support. Based on forecasts, as a result of the above-mentioned package of measures, the number of beneficiaries will exceed 10,000 and the credit resources will exceed 60 bil. AMD in 2020. At present, the number of loans provided under the second measure is 2943, of which 2632 are micro-loans to support farms and 311 for other agricultural purposes.

In general, 4 bil. 343 mil. AMD has already been allocated through the 2nd program. In times of crisis, great importance is placed on small and medium-sized enterprises(SME). Awareness of SMEs in the economy forces state bodies to support these mechanisms. The support directed to this field has found a place in the 3rd Action of efforts to neutralize the coronavirus. The study found that support should be provided to tourism services, accommodation and catering, healthcare, manufacturing, transportation, storage and SMEs operating in other services.

Furthermore, the turnover of SMEs in this field in 2019 should have been at least 24mil. AMD, the maximum – 500mil. AMD, as well as the turnover of each quarter shouldn’t be less than 10% of the annual turnover and should have a good credit and tax history. The above-mentioned is clearly shown in the example.

E.g. The turnover of SME operating in the field of manufacturing industry amounted to 30 mil. AMD in 2019.

Case 1. If the turnover of the given economic entity in any quarter of 2019, for instance in January-March was 2.7 mil. AMD, than that business is left out of the list of beneficiaries of the above-mentioned package, as the turnover for the quarter was less than 10% of the annual turnover.

Case 2. The above-mentioned business will be a beneficiary if the turnover for each quarter of 2019 was at least 3 mil. AMD.  

Action 3 will provide assistance to businesses through the Investment Support Center (ISC) and financial institutions. Applications will be submitted through the following procedures: beneficiaries who meet the criteria of the Action 3 apply to ISC for lending by filling out the online application on the website and presenting the information set by the Ministry of Economy for their selection. After conducting relevant studies ISC will sign a contract with the bank that serves the business and will provide access to the loan amount for the bank, who will provide it to the business by non-cash or bank transfer.

Currently 343 credit applications amounting to 3 bil. 926 mil. AMD and have been approved within the framework of the Action.

With the 3rd package, the state tried to provide business with liquidity pads, so that businesses could withstand the crisis-related challenges and could dutifully fulfill its obligations: salary, taxes and other payments.

The Government is also encouraging businesses to keep on all employees with the aid of the salary fund during the crisis.

For this purpose the 5th Action was developed, through which a one-time grant was envisaged to stimulate businesses with 2 to 50 employees within the period from January 1 to April 1, 2020 and the actual payroll of these entities hasn’t decreased during the mentioned period. Generally, as a result of the 5th Action, the Government will pay the average monthly salary of every 5th employee of the beneficiary businesses. Therefore, the amount of the support will be 16-50% of the salary fund depending on the number of employees. 9.901 beneficiaries have already been paid in the amount of 1 bil. 597 mil. AMD within the framework of Action 5.

The programs were also given to businesses who are the subject of micro-enterprise. The 10th Action envisages to provide one-time assistance of 68,000 -136,000 AMD to economic entities. The number of beneficiaries will be about 6000. Currently, 83.4 mil. AMD of assistance has been provided to 1485 actual beneficiaries.

Social measures

T he crisis has affected certain groups of the society more than others who are facing many difficulties. Therefore, it is planned to provide 100,000 AMD in support to each family with a child under 14 year-old, where the parents or one of the parents has lost his/her registered work in the period between March 13-25 within the framework of the 4th social assistance program developed by the Government. About 18,000 families having a child under 14 year-old are eligible for support within the framework of the 4th Action.

Employees who were registered from January 1 to March 13, 2020 but  have been dismissed from work within the period from March 13-30, will be provided with assistance amounting to 68,000 AMD under the 6th Action. Currently the number of beneficiaries for this measure is 6,723. 

Pregnant women are also included in the support packages. Women who are in the 12-33rd week of pregnancy and have been registered in a medical organization as of March 30, 2020, and are not employed including the spouse can receive this support. This group was envisaged to be provided with support within the framework of the 7th Action. The Government allocated 875 mil. 300,000 AMD for this package, which will provide about 8700 pregnant women with one-time financial support.

We have already noted that the government’s economic measures are mostly aimed at businesses affected by the crisis. The 8th Action was developed planning to provide a one-time financial assistance of 68-136,000 AMD to people of these affected spheres: employees and employers. Currently, under the 8th package, already 80,505 people have already been provided with an assistance of 5 bil. 571 mil AMD and 4227 applications are still being considered.

It’s obvious that families with children under the age of 18 faced the greatest difficulties in the current crisis as they have no source of income and with parents who are unemployed. The assistance provided to these families will be 26,500 AMD for each child, which was envisaged by the 9th Action presented by the Government. Currently, transfers were made to 51,791 beneficiaries amounting to 1 bil. 398 mil. AMD, and more than 130,000 applications are being considered.

As a result of these social measures taken, the Government has already spent 12.5bil. AMD. The difficulty of making utility payments in such a difficult social crisis was also taken into account. Thus the 11th Action was developed, within the framework of which it is planned to provide 50% of the expenses to the people who as of February 2020 didn’t exceed 10,000 AMD for natural gas and 5000 AMD for electricity. Within the framework of this program, it is planned that the overall number of beneficiaries will reach 600,000, of which about 222,000 subscribers will receive up to 7500 AMD assistance for utility bills for natural gas and electricity.

The 12th Action plan of the Government is a scope of reimbursing for utility payments with 30% of the expenses covered of those whose consumer bills amounted to 10.001-30.000 AMD for natural gas and 5.001-10.000 AMD for electricity in February.

The 11th and 12th actions are completed and the envisaged payments are fully completed. 

The 13th Action has been developed to support this group. Families eligible for family and social benefits as of April 2020 have the opportunity to use this package and they will be provided with 50% of the benefits. 30% of the allocated money will be transferred as a service fee for electricity and gas, and 70% will be provided in cash together with the payment of April benefit. About 85.000 beneficiary families will have the opportunity to use this package. Additional one-time assistance allocated for this program will be 1.2 bil. AMD. The 13th action is under the implementation stage.

Students were also included in the government’s support programs and they will be aided within the framework of the 14th package of measures. Support will be provided directly through tuition reimbursement and indirectly through zero or low interest student loans. In fact, the implementation of this measure implies that tuition fees should not be an obstacle for performing students.

Such support measures may be a precedent for non-crisis situations, as it will significantly change the attitude towards the education system:

Additional problems for the state in terms of employee identification have left many out. Businesses in need of support and people in certain social groups have also been left out of the list of beneficiaries. In this regard, the Government is making changes both in existing programs and is developing new ones.

Different assessments and criticism about the measures have been voiced. Particularly about providing a tax break to businesses. However, in contrast to the proponents of this approach, the instrument of providing a tax break is not currently the most effective mechanism for providing assistance, as it may lead to a significant reduction in state budget revenues. As a result, the state will not be able to implement a number of steps, such as capital expenditure, through which it will be possible to restore the economy in a post-crisis situation.