Armenia - Institution Building Loan Project

Document of The World Bank )'OR OmCIAL USE ONLY Report No. P-6014-AM MEORANDUM AND REOION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPEN TO THE ExCUTIVE DIECTORS ON A PROPOSED LOAN IN AN AMOUNT EQUIVAUET TO US$12.0 MILTION TO THE REPUBLIC OF ARMENA FOR AN INSTITUTION BUILDING PROJECT MARCH 8, 1993 N i KN('V .;ii ' T Y Ji 11tC ' t- OT - IJ - A T Ti it' e: ] NFv- 1rT''TET t; Lu tiL 1,]t\ ,iJ} A'sthor: HALL f Ex.t. :.22l4fi"- ij<>,:m..;; ~.'.:tJi This document has a restricted distribution and may be used by recpients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EOUIVALEN1S Currency Unit - Ruble (R) EXCHANGE RATES: RUBLES PER $ (End of Period) Dec. 1991 169.2 Jun. 1992 144.0 Dec. 1992 400.0 WEIGHTS AND MEASURES Metric System ABBREVIATIONS AND ACRONYMS ICB = International Competitive Bidding MOE = Ministry of the Economy MOF = Ministry of Finance MOJ = Ministry of Justice MOL = Ministry of Labor and Social Protion NBA = National Bank of Armenia ARMENIAN FISCAL YEAR January 1 to December 31  FOR OMCIAl USE ONLY REPUBLIC OF ARMENIA INSTITUTION BUILDINGLOAN Loan and Proliet Summary Borrower: Government of the Republic of Armenia Loan Amount: $12.0 million Terms: Twenty years, including a five year grace period, at the IBRD standard variable interest rate. Project Duration: lInplementation will start April 1993 and last until April 1996 Project Objectives: Assist the Armenian government to strengthen the institutional basis for economic reform through institution building programs in four functional areas: (a) economic management, (b) resource mobilization, (c) enterprise reform, and (d) financial sector reform. Financing Plan: Loca Foreign Total (US$ thousands) Government $500 - $500 IBRD -- $12,000 $12,000 EC $1,000 $1,000 USAXID - $3,700 $3,700 TOTAL: $500 $16,700 $17,200 Economic Rate of Return: not applicable Staff Appraisal Report: not applicable IBRD No. 23943R This document has a restricted distribution and viay be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  MEMORANDUM OF RECOMMENDATION OF THE PRESIENT OF THE INENATIONAL BANK FOR RECONSTRUCTION AND DEVELOPET TO TH EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE REPUBLIC OF ARMENIA FO1R AN INSIITUTILON BUIDING POIECT 1. I submit for your approval the following memorandum and r'commendation on a proposed loan to the Republic of Armenia for the eqQivalent of US$12,000,000 to help finance institution building activities. The loan would be at the IBRD's standard variable int.erest rate repayable over 20 years including a grace period of five years. 2. Iahrognd. Formal contacts between the World Bank and the Republic of Armenia (hereinafter referred to as Armenia) began in February 1992, and the country joined the IBRD in September 1992. An economic report, entitled 'Armenia, Country Economic Memorandum" (Report No. 11412-AM), will be distributed to the Board in March 1993. 3. To facilitate the design and implementation of reforms, establish the institutional framework for the effective management of a private market economy, develop a framework for coordination of teehnical assistance, and so that Armenia can reap the full benefit of economic liberalization when the country's external environment stabilizes, the government has requested the World Bank's support to develop and help finance an Institution Building Project. The proposed operation responds to that request. It would constitute the first operation by the World Bank in Armenia. 4. Armenia is at a critical juncture. In 1990 a democratic revolution swept to power a reform- minded government and parliament which are now proceeding with implementation of far-reaching reforms. Meanwhile, however, the economy has contracted severely given the disruptions due to the dissolution of the FSU, the war over Nagorno-Karabakh and instability in Georgia. This has added to the considerable suffering due to the 1988 earthquake which left hundreds of thousands of people homeless. The legacy of the earthquake remains today as 10% of the population, or two-thirds of those made homeless by the earthquake, still live in temporary, rudimentary housing. The earthquake destroyed enterprises, work-places and other buildings as well, representing as much as 40% of the country's manufacturing capacity, and in the largest city in the earthquake zone, Gumri, which has a population of 250,000, unemployment still stands at 75%. In surrounding towns and villages unemployment is even higher. Neither sufficient housing or industry has been rebuilt in which people could live or work as the reconstruction effort also ceased with the dissolution of the FSU. 5. Tensions between concerns for stability, the population's welfare and the commitment on the paf! of the authorities to enable the development of a private market economy are compounding the difficulties of economic management. The Armenian economy remains heavily constrained by the legacy of central planning and an uneconomic and deteriorating capital stock. Its structure still mainly corresponds to the centrally determined pattern of production and trade, having a large industrial sector and a relatively small services sector. Agriculture has been relatively less important given the country's mountainous terrain and limited supply of arable land. The country's industrial production capability relied in the past on a close association with the other Soviet republics. Armenia's role in the USSR economy was to process intermediate goods and materials from other republics and to supply a wide range of consumer and non-specialized producer goods. To survive, the industry was dependent on two conditions: artificially low prices for energy and other raw materials and equally low transport costs which did not  . - ,' tr X ;' - rnr ms the .~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ )k -'~~~~~~~ . t. r~ : * C J zs- d ~aAt,'rgflrn sf the -. '4 r' 1 . ., . - .U 4., ?iLF' QVVt tsrS.