Statement by Eugene Miagkov at the Board meeting of August 26, 1997

International Bank for Reconstruction and Development International Development Association 87191 International Finance Corportation Multilateral Investment Guarantee Agency FOR OFFICIAL USE ONLY CONFIDENTIAL EDS97-321 August26, 1997 Board Meeting of August 26,1997 Statement by Eugene Miagkov ARMENIA: Country Assistance Strategy First of all, I would like to commend the Government of Armenia (GOA) which has managed to sustain macroeconomic stability and deepen structural reforms despite extremely harsh external environment and difficult social conditions. I also would like to commend the Bank's staff for preparing a concise and well balanced Country Assistance Strategy for Armenia. We appreciate the fact that it supports the objectives of GOA program in three crucial areas: consolidating macroeconomic stability and maintaining external creditworthiness, accelerating the development of the private sector and laying the basis for sustained growth and ensuring the social sustainability of the reform process. We are pleased to note a positive supply response to the reform program which creates resource base for subsequent improvement in social indicators and poverty alleviation. We also believe that economic recovery in Armenia and neighboring countries will contribute to the progress toward resolution of the regional conflicts. We believe that the reform agenda as described in the Country Program Matrix rightly identify Armenia's pressing needs. Further efforts to maintain and consolidate macroeconomic stability are absolutely necessary to mobilize resources for investment and reduce the unsustainable level of current account deficit. But, taking into account a rather limited scope for further budgetary tightening and revenue mobilization, we believe that in the medium term Armenia will not be able to dramatically increase domestic savings. Deepening of structural reforms and capital market development are necessary to facilitate private sector led growth. We agree with the conclusion by the CAS that a long-term solution to Armenia's infrastructure bottlenecks will require a strong private sector involvement. However in the near future the needs for financing critical rehabilitation investments in infrastructure as well as in other areas will exceed the private sector capacities. Therefore a substantial public investment program will be also necessary. Unfortunately, the CAS practically does not address this issue of public investment. Notwithstanding recent achievements, socio-economic situation remains fragile. Real incomes and living standards are extremely low. This creates a risk of degradation of highly skilled human capital which is the most valuable productive asset of the country. This fact is This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  2 recovery of private investment is necessary to ensure the medium-term sustainability of current growth rates" (p.3). Although further progress on privatization and financial sector reform is necessary to assure the broad based supply response, we also believe that the Bank's focus on creating the enabling environment is not sufficient and there is a need for a more direct support of investment activities in strategic sectors. It is extremely important with regard to the fact that in medium term Armenia can rely mostly on foreign sources in financing its economic growth. We believe that the Bank can explore ways to increase investment and income generating components of its lending program as well as to enhance catalytic and demonstration effects of its projects. As we see it, the Bank's ability to meet Armenia's investment financing needs is limited by IDA lending and budgetary constraints. Does it mean that the Bank's response to the country needs is not adequate? What exactly is meant by the sentence that "to deliver the proposed lending and non-lending program within this budget envelope ... the Bank will have to exploit the synergy between supervision of ongoing projects and the preparation of new activities" (p. 15)? The CAS document eludes to other IFI such as IFC, EBRD and MIGA which are expected to become "the main vehicles for direct private sector support". To what extent those institutions are prepared to fill the existing investment gap? Are "the selectivity" and the Bank's comparative advantage" imposed by resource constraints? We firmly endorse the CAS emphasis on social sustainability of the reform process. While we agree that sustained economic growth is a key prerequisite for poverty reduction, we also think that the Bank should be aware that the transitional poverty can become a structural one. We fully share that "ensuring access to basic education and health services for poor households is essential to an equitable distribution of the benefits of ... growth" ( p. 6). At the same time, given the necessity to preserve Armenia's significant potential in financial services and high technology activities, it is clear that higher education and science/technology should be protected from degradation. In conclusion. While we support the main thrust of the CAS and proposed lending program, we, nevertheless, believe that the Bank, building upon Armenia's strong macroeconomic and structural reforms record, could be more responsive to the country's pressing investment needs. We also hope that Armenia's continued strong reform performance will bring about a sustainable economic growth and marked improvement in living standards of the population.