The Government of the Republic of Armenia

First of all, let me thank you on behalf of the Government of the Republic of Armenia for the discussions that took place at the National Assembly. The standing committees, the members of Parliament raised various questions for over a week regarding the State budget, and we had the opportunity to produce explanations. The discussions resulted in numerous recommendations accepted, with dozens of proposals to be subject of discussions in the coming months. Only 27% of the proposals have been declined, and now we are submitting the amended bill for your approval.

Dear colleagues, the 2014 State budget features are included in the budget bill, and I will try to present our views in the light of the National Assembly debates.

The first feature is that we are going to join the Customs Union. This means that we will have a large amount of work to do, including legislative changes, ratification of international treaties and industrial policy adjustments that we believe can provide significant and tangible results for the economy.

You may be aware that Armenia’s new industrial policy is yielding tangible results in pharmaceuticals, information technologies, brandy and wine-making where exports boasted a double-digit growth in the past three years. This trend will be maintained after joining the Customs Union. We have achieved relative advantages in light industry, and I would like to inform you that the government of the Republic of Armenia has approved two new programs in shoe-making and textile industries. They were developed and financed jointly with the private sector. The above two sectors are supposed to develop assuming that by acceding to the Customs Union we will be able to regain our past performance.

Dear colleagues, we are set to improve the business environment in 2014. While we had some progress in recent years, nevertheless the World Bank ranked us 37 among 188 countries, which is still far from our expectations, and we have a way to go in the following 3 areas in 2014: first of all, a breakthrough is needed in tax and customs administration, secondly the judicial system is to be improved and, thirdly, the mechanisms applicable to construction permits should be simplified to bring in extra investments into the Republic of Armenia.

The third feature is that within a couple of days a mandatory funded pension system will be introduced in Armenia. For over a decade, this system has been developed by two presidents, three prime ministers, a coalition of four parties, dozens of experts, international organizations and the world’s top experts.

A lot of discussions were held in different formats over the past ten years, including two enlarged meetings with the President of the Republic as attended by our coalition partners and experts who had a critical approach to the concept.

This concept has been discussed involving mass media. I myself have organized dozens of workshops to present the logic and the mechanisms of the concept that we approved in 2010. We made a decision to meet our opponents halfway and introduce the concept in January 1, 2014. That is time was allowed for the private sector to get prepared and the State to test the needed infrastructure.

I would like to emphasize that pension reforms are globally deemed to be the most difficult, and so has been the Armenian reform since independence, because it relates to every citizen of our country and all the sectors of the economic system.
Dear colleagues, we have about 510 thousand pensioners in Armenia. More than AMD240bn has been allocated from the State budget to pay pensions in 2014. The 2014 budget bill provides that the average pension will be raised by 15 percent to AMD 36 thousand from 31 thousand. Nevertheless, we are well aware that the mentioned level of pension is not enough to ensure a decent old age.

If we take into account that the minimum consumer basket stands at AMD 41 thousand, while the minimum healthcare basket is 51 thousand, with the base pension rising only to 14 thousand, we will see that hundreds of thousands of our citizens living on pensions come below the poverty threshold.

We need at least 270 billion drams in additional funding to take the base pension from 14 thousand to 41 thousand. This means that whereas welfare spending constitutes 48 percent in the State budget, another 20-25 percentage point rise in pension payments would be an extremely heavy burden for the Treasury considering that there are only 500 thousand people paying income tax and that the principle of generations’ solidarity is still applicable in Armenia. Therefore, it is obvious that the aforementioned social security tax is crucial to ensure decent pensions for our citizens.

Is it possible to solve this problem? Yes, it is possible, if we significantly increase welfare taxes in Armenia or if we change the retirement age. The latter is more tangible and painful to society given the fact that we have an aging population, with 15 percent population at the age of 60 and over, which means that we are an aging society.

Moreover, those born after the Second World War are reaching the retirement age, which implies that the number of pensioners in Armenia may increase significantly for the next 10 years. In turn, this means that the burden of welfare spending will go aggravating every year and we are forced to find a solution.

Please be advised that this issue is not only specific to the Republic of Armenia. The pension crisis is the most important challenge in the 21st century, especially in the financial sector. The problem is more complex in those countries where population aging trends were observed.

We are convinced that there is no alternative to the proposed pension reform as we are moving toward a more equitable system, because the solidarity pension system implies that pensions can be as high as the State can raise the necessary from active population. This means an increased burden on the citizens or equitable distribution of pensions, which in turn implies that your service record will have nothing to do with level of your pension since the financial burden falls on the working generation.

The funded system is a fair system which takes into account all your earnings, and creates incentives for you to save for a wealthy old age. The opposition-rejected political principle of ours consists in that the citizens and the State should share in the responsibility for a secure old age. This is the essence and the rationale of our reform.

To create an additional incentive, we have set aside 20 billion drams in the draft State budget for the year 2014, because 275 thousand citizens from January 1 shall switch to the new system and the first payments will have to be made to their personal accounts until February 20. The State is committed to add 5 percent to increase their savings to double their 5-percent contributions.

Over years, the accumulated funds will stimulate economic development in the Republic of Armenia, because we will form a long-money market, without which our economic system cannot have long-term resources and long-term resources will not be routed to the development of our economy. This is an exceptional opportunity to overcome the trap in which we find ourselves due to the currently population principle of solidarity between generations.

At the same time, we are well aware that many seem to be dissatisfied with this system as it may create certain complexity and difficulty for them, considering that any reform implies changing the rules of conduct, while the latter cannot be changed that easily.

I wish to remind you the introduction of the compulsory third party risk insurance system. You may remember the arguments produced by our opponents who blamed the Government for our deliberate move to charge car owners with an average load of 30 000 thousand dram that they were required to pay for third party risk insurance.

Following just six months after the system had been introduced, the overwhelming majority of Armenian citizens - that is 75 percent of the population – welcomed the new system. We are convinced that this will be the case with the pension system, too. Our citizens will appreciate the introduction of the mandatory funded system in the Republic of Armenia.

Dear citizens, dear members of Parliament, dear Mr. Speaker, this is not an easy decision for us since we realize that it is bound to create certain difficulties for our people. We think of the future generations as it will take 23 years for the first beneficiaries to draw upon their today’s savings. But assuming political responsibility, we do believe that the time has come for action and we must introduce this system as soon as possible to overcome the retirement crisis that will await us ahead, if we do not abandon the principle of solidarity of generations.

At the same time, I wish to point out that the heated discussions going on in society over this issue are demonstrating that our citizens are not just discontent: they are also raising numerous queries before the Government.

Yesterday I met with a group of young IT specialists who used to actively criticize the concept. The debate took us two and a half hour, during which we came to better understand what issues concerned our citizens and answered their questions.

But there is one thing I am extremely pleased with: we can see civil society strengthening from day o day. In only four years this reform will double the power of civil society, because we are building up a medium of responsible citizens.

275 thousand citizens need to decide in which funded scheme they wish to participate. Each month 275 thousand citizens will monitor the Government, because we have a duty to redouble their savings.

Every day 275 thousand citizens will monitor the operator managing the Pension Fund to control the interest received on their savings, see the efficiency in the management of their funds and demand that their assets be the government’s focus.

We are forming a qualitatively new environment, new citizens who will be responsible for their decisions, and this means that civil society will go strengthening over time.
Either the Government should learn to work in a new environment, because civil society means some distrust for any binding instrument. Generally speaking, the institute of coercion should be handled very cautiously and seriously. I am extremely happy that the climate we have in the Republic of Armenia provides the guarantee that the system will be effective and will serve the interests of our people.

Dear Colleagues, MPs, Distinguished President of the National Assembly,

Let me thank you once again on behalf of the Government of the Republic of Armenia for interested discussions. Thank you.