Armenia’s fiscal framework includes an MTEF, an annual budget, and fiscal rules. The framework faces limitations in countercyclicality, flexibility, complexity, coverage, monitoring and enforcement, and transparency. Despite the 2018 reforms strengthening the fiscal rules, limitations persist: rules are somewhat procyclical and complex, ex-post enforcement is not legally binding, coverage is restricted to central government, and operational flexibility is limited. Armenia’s fiscal rules have served the country well, but further improvements could be considered. Drawing on international best practices, the paper recommends upgrading fiscal rules to improve countercyclicality, simplify design, broaden coverage, and strengthen transparency and enforcement. Proposed reforms include consolidating expenditure rules, formalizing escape clauses, expanding coverage, and empowering independent oversight.
The 2018 reforms aimed to strengthen countercyclicality but gains have been limited. Fiscal policy was consistently procyclical in good times during 2010-17 and remained procyclical ex-ante and ex-post as growth rebounded and reached peak levels during 2022-24. The fiscal rules are inherently procyclical and may incentivize unrealistic planning. Enforcement of fiscal rules is not legally binding, and the escape clause lacks clarity and specificity about potential trigger events and procedural details.
Armenia’s fiscal rules provide flexibility through an escape clause and a reserve fund, but there are key limitations. The escape clause lacks clarity and specificity, and the reserve fund is used more like a tool for discretionary spending. The complexity of the fiscal rules reduces their effectiveness and ease of communication. The coverage of fiscal rules in Armenia is limited to central government and does not cover subnational governments, SOEs, PPPs, and contingent liabilities.
Independent monitoring, compliance, and enforcement of fiscal rules have been lacking. The authorities have made progress enhancing the transparency and reporting of the fiscal framework, but major gaps remain, including limited institutional coverage. International comparison shows that Armenia’s fiscal rule strength initially remained below peers’ average but caught up with the 2018 reforms. However, deviations from the debt rule limit have been in line with the overall trend in its peer group, but smaller deviations were experienced for the balanced budget rule. Compared to peers, Armenia’s fiscal rule shows limited countercyclical features and has considerable room for improvement.
The paper recommends several policy options for Armenia. Improving countercyclicality and escape clauses could be achieved by upgrading the expenditure rule, redesigning the balanced budget rule, and strengthening the escape clause. Simplifying the design of fiscal rules could be achieved by consolidating separate rules into an “all inclusive” or a more streamlined expenditure rule. Enhancing transparency and broadening coverage could be achieved by adequately reporting compliance with fiscal rules, enhancing the standardization of debt reduction plans, and expanding the coverage of fiscal rules to include off-budget entities and contingent liabilities. Strengthening the oversight and enforcement of fiscal rules could be achieved by establishing an independent fiscal council or enhancing the mandate of existing oversight bodies.
