28991 WORLD BANK COUNTRY ASSISTANCE STRATEGY FOR THE REPUBLIC OF ARMENIA JUNE 30,2004 CURRENCY EOUIVALENTS (Exchange Rate Effective April 26,2004) Currency Unit = Dram Dram1000 = US$1.81 US$1 = 552Dram GOVERNMENTFISCALYEAR January 1to December 31 WEIGHTS AND MEASURES Metric System ABBREVIATIONSAND ACRONYM AAA Analytical & Advisory Services NGO Non-Governmental Organization ADA Armenian Development Agency N SS National Statistical Service BEEPS Business Environment and Enterprise OED Operations Evaluation Department o f Performance Survey the World Bank CAS Country Assistance Strategy OSCE Organization for Security and CEM Country Economic Memorandum Cooperation inEurope CIS Commonwealth o f Independent States PER Public Expenditure Review CPPR Country Portfolio Performance Review PRGF Poverty Reduction and GrowthFacility DFID UKDepartmentfor InternationalDevelopment PRSC Poverty Reduction Support Credit ESW Economic and Sector Work PRSP Poverty Reduction Strategy Paper FDI Foreign Direct Investment SAC Structural Adjustment Credit FSU Former Soviet Union SIL Specific Investment Loan GDP Gross Domestic Product SME Small- and Medium-size Enterprise GTZ Gesellschaft fur Technische Zuzammenarbeit TA Technical Assistance (German Overseas Development Agency) TBD To be determined IBRD International Bank for Reconstruction and UNDP UnitedNations DevelopmentProgramme Development UNHCR UnitedNations HighCommissioner for IFC International Finance Corporation Refugees ICR Implementation Completion Report UNIDO UnitedNations Industrial Development IDA International Development Association Organisation ILCS Integrated LivingConditions Survey USAID UnitedStates Agency for International IMF International Monetary Fund Development JSA Joint Staff Assessment USDA UnitedStates Department ofAgriculture LIL Learning and Innovation Loan WUA Water Users' Association (for irrigation) WBI World Bank Institute MIGA Multilateral Investment Guarantee Agency WTO World Trade Organization The WorldBankGroup Vice President: Shigeo Katsu Country Director: Donna M.Dowsett-Coirolo Table of Contents 1 Economic Management ................................................................................................................... Introduction ..................................................................................................................................... 2 2.1 Transformation since Independence...................................................................................... 2 2.2 Current Economic Management ............................................................................................ 3 2.3 The Economic Outlook.......................................................................................................... 4 Poverty............................................................................................................................................. 5 3.1 Poverty Trends....................................................................................................................... 5 3.2 Millennium Development Goals ........................................................................................... 7 Lessons from Previous CASs .......................................................................................................... 8 4.1 The CAS CompletionReport ................................................................................................ 8 4.2 9 Results Achieved................................................................................................................. OED's Country Assistance Evaluation.................................................................................. 4.3 10 Government Program .................................................................................................................... 11 Bank Strategy ................................................................................................................................ 11 6.1 Goal One: Promoteprivate sector ledeconomic growth..................................................... 13 6.2 Goal Two: Make growth morepro-poor ............................................................................. 15 6.3 Goal Three: Reduce non-incomepoverty............................................................................ 17 6.4 Resource Levels and Triggers ............................................................................................. 19 6.5 Summary of Work Program ............................................................................................... -20 6.6 Specific Issues ..................................................................................................................... 22 6.6.1 22 Cross-cutting themes ................................................................................................... The PRSCs................................................................................................................... 6.6.2 23 6.6.3 Sequencing................................................................................................................... 24 6.7 25 6.8 Partnerships ......................................................................................................................... Other World Bank Group Support....................................................................................... 26 6.9 Risks o fthe strategy ............................................................................................................ 28 Table 1: Real GDP growth 1994-2003 .............................................................................................. 2 Table 2: 3 Macroeconomic Trends and Baseline Projections............................................................... Armenia: Export performance 1995 to 2003 ....................................................................... Table 3: 4 Table 4: Poverty Rates ...................................................................................................................... 5 Table 5: Income and Consumption Inequality................................................................................... 6 Table 6: Unemployment Rates .......................................................................................................... 7 Table 7: Likelihood ofMeeting MillenniumDevelopment Goals .................................................... 8 Table 8: Summary of Results Matrix............................................................................................... 12 Table 9: Armenia CAS Triggers...................................................................................................... 20 Table 10: Proposed Work Program ................................................................................................... 21 Table of Contents (continued) Annex 1: Country Assistance Strategy Results Matrix ..................................................................... 31 Annex 2: FY02-04 CAS CompletionReport .................................................................................... 37 Annex 3: Proposed WBI Program FY05-08 ..................................................................................... 62 Annex 4: Partnerships ....................................................................................................................... 64 Annex 5: Core Labor Standards........................................................................................................ 65 Annex 6: Matching Development Priorities o f Government and Bank ............................................ 66 Annex 7: PRSP Policies and Investments......................................................................................... 67 Annex 8: Country at a Glance ........................................................................................................... 71 Annex 9: IMF- IDARelations........................................................................................................... 73 Annex 10: Bank Portfolio Performance and Management ................................................................. 77 Annex 11: Bank Group Program Summary ........................................................................................ 78 Annex 12: Summary ofNon-Lending Services .................................................................................. 79 Annex 13: Social Indicators ................................................................................................................ 80 Annex 14: Key Economic Indicators .................................................................................................. 81 Annex 15: Key Exposure Indicators ................................................................................................... 83 Annex 16: Operations Portfolio .......................................................................................................... 84 Executive Summary 1. Context. Armenia is a small, landlockedcountry with few natural resources ina historically volatile part o f the world. The country experienced a major economic contraction at the end o f the 1980s when the effects o f a massive earthquake were amplified by the break up o f the Soviet Union and the costs o f the conflict with Azerbaijan over Nagorno-Karabagh. Over the last ten years, the Government has shown a strong track record on economic management and reform, and has made good use o f the high levels o f official donor support it has received. Armenia had the highest IDA performance recordinthe ECA region in2003. .. 11. EconomicPerformance. The economy hasrecovered well from the post-1988 collapse, with economic growth reaching 14% in2003. At the beginningo f the recovery, growth was concentrated in a narrow set of industries, but, since 2000, the base has begun to broaden. Although poverty remains widespread, it has been falling since the late 1990s. Extreme poverty has fallen more than overall poverty, but the rate o f improvement inboth measures has lagged behind economic growth. Most o f the reductions in poverty have been seen in Yerevan, with poverty in other urban areas falling less rapidly, and inrural areas remainingstagnant. ... 111. Areas that require further attention. Despite this substantial progress, there are some key issues that need to be addressedif strong growth i s to continue, and poverty reduction i s to accelerate. The climatefor private sector development needs to improvefurther. While Armenia has one o f the most liberal business environments inthe FSU, the public sector needs to become more o f an asset -- rather than an administrative and financial cost -- to the private sector. A larger share of the population needs to benefit from economic growth. With strong economic growth expected to continue, more attention i s needed to increasing jobs, stimulat- ingthe rural economy, andimproving the social protectionsystems. The entire population needs better access to basic services. After independence basic services, including education and healthcare, deteriorated sharply, and the Government needs to persist inits efforts to improve their quality and efficiency. iv. Government Program. In October 2003, the Government published an ambitious yet realistic Poverty Reduction Strategy Paper, which lays out its plan for reducing poverty and inequality, and furthering human development. The policies and actions proposed can be grouped into five categories: (i) promoting sustainable economic growth through macro-economic stability and private sector development; (ii) enhancing human development and improving social safety nets; (iii)implementingprudentfiscalpolicies; (iv) improvingpublic infrastructure; and(v) improving core public sector functions. v. IDA Strategy and Results. From the range o f interventionsproposed inthe PRSP, the CAS focuses on three areas which best fit the Bank Group's comparative advantage and complement the activities o f other donors. In each area, the CAS takes as its starting point long-term country goals, and on that basis defines specific results that can be achieved over the FY05-08 CAS period: Promote private sector led economic growth. Achieving this goal will require better public services, measured by an improvement in business perceptions o f government policies and corruption, and by a strengthening o f thejudicial system, measured by the level o f satisfaction o f court users. IDA will also help Armenia strengthen the financial system, measured by an increase in the ratio o f loans to GDP, and improve communications infrastructure, measured by an increase inthe number o ftelecoms licensesissued. 0 Make growth more pro-poor. Achieving this goal will require accelerated job creation, measured initially by a fall inthe share o f the informal economy inGDP. It will also require a stronger rural economy, measured by an increase in value-added per hectare. Improvements inthe social protection system will be measured by an increase inuser satisfaction. Overall, the interventions inthis category will contribute to a reduction inextreme poverty. 0 Reduce non-income poverty. Achieving this goal will require better access to education, healthcare and basic infrastructure services. Education outcomes will be measured by the extent to which children stay in the education system. Health outcomes will be measured by service use among sick people in rural areas, and in the bottom consumption quintile. Improvements in access to basic infrastructure services will be measured by the share o f the population with drinkingwater 24 hours a day. vi. IDA Instruments and Cases to Achieve the Results. IDA will support these goals through the on-going and proposed portfolio, and through AAA services, includingprogrammatic lending and advisory work to be conducted jointly with the government throughout the CAS period. Armenia became a HighCase performer duringthe FY02-FY04CAS period. It will enter the up-coming CAS inaBase Case, which assumes a continuationo fcurrent goodperformance, and includes IDAlending o f US$170 million over four years. If the improvements in public sector management accelerate, Armenia will move into a High Case o f US$220 million, providing additional resources for structural and public sector reform. It i s possible that Armenia's creditworthiness may improve towards the end o f the upcoming CAS period, in which case IBRD funds might be available for additional investments in infrastructure. If Armenia i s unable to continue its current good performance, it will move into a L o w Case, which would restrict new investment operations to those that directly protect the most vulnerable, and would make available IDA lending o fUS$90 million over four years. vii. Risks. Political change in the Caucasus region could affect Armenia negatively or positively. Likewise, exogenous economic shocks -- such as sudden changes in the prices o f oil or other key commodities -- could also have significant costs or benefits. Within Armenia, political consensus for reform could weaken, undermining progress inkey sectors and possibly macroeconomic stability. A deceleration in improvements in tax revenues and/or slower growth could increase the projected financing gap to the extent that expected adjustment lending and donor funding would be insufficient to cover it. In addition, the country remains vulnerable to earthquakes and other natural disasters. IDA aims to mitigate these risks through extensive analytical work and dialogue and, in some cases, investments. If,however, the situation deteriorates to the extent that implementation o f the proposed strategy becomes difficult, IDA will consult the Board on a revised strategy. viii. Monitoring and Evaluation for Results. IDA will monitor the effectiveness o f its support both at the project level and at the level o f the overall assistance program. The success o f the CAS program will be measured against the expected CAS results, which are derived from PRSP targets. IDA will use the results framework in its Portfolio Reviews, and will consult with civil society on CAS progress as part o f the Government's regular PRSP consultations. At the mid-point of the CAS period, IDA will review the indicators and targets to assess progress in implementing the assistance program, and adjust the strategy as necessary. .. -11- WORLD BANKCOUNTRY ASSISTANCE STRATEGY FOR THE REPUBLIC OFARMENIA 1. Introduction 1. Armenia i s located in the Caucasus Region, neighboring Georgia, Azerbaijan, Iran, and Tur- key. With a GNP per capita o f US$910 in2003, Armenia ranks inthe lower middle-income group o f countries. Emigration and declining fertility has reduced its population, which was 3.8 million ten years ago, to about 3.1 million today. Because Armenia i s small, landlocked and mountainous, with few natural resources, it faces economic disadvantages compared with many of its neighbors. These disadvantages have, however, been off-set to some extent by the country's high levels o f human capital, an active diaspora, and high levels o f remittances and external assistance (which averaged 11% o f GDP over the last five years). Armenia is vulnerable to a wide range o f external shocks arising from its location in a historically volatile geo-political environment, and its susceptibility to natural disasters, such as earthquakes, droughts, frosts, hailstorms, and floods. 2. Armenia achieved independence from the Soviet Union in 1991, and since then the economy has changed profoundly. Heavy industry collapsed as the Soviet Union broke up, and i s gradually being replaced by services, light industry, and construction. As this economic transformation has taken hold, GDP growth has accelerated from 3.3% in 1999 to 13.9% in 2003. The Government's forceful steps to create a more favorable business environment and improve public institutions helped accelerate growth rates. Membership o f international bodies such as the WTO and the Council o f Europe have added impetus to maintaining and deepening reforms. Barring any destabilizing economic shock, the prospects for GDP and export growth remain favorable. 3. The major challenge for the Government during this CAS period will be to create the condi- tions that will allow growth to benefit a much larger share o f the Armenia population. While overall poverty fell from 56% o f the population in 1998/99 to 49% in2002, and extreme poverty from 26% to 17%, a more rapid improvement might have been expected from the rapid GDP growth. The 2003 PRSP emphasizes the Government's commitment to equitable growth and sustained poverty reduc- tion across the whole country. When the World Bank's Executive Board discussed the PRSP, and associated Joint Staff Assessment, in December 2003, it concluded that the PRSP provides a sound basis for IDA concessional assistance. This CAS i s accordingly based on the PRSP's priorities. 4. Armenia has had a relatively stable political situation over the past few years, with strong support for reforms from both the executive and legislative branches. Presidential and legislative elections in early 2003 resulted inre-election o f President Kocharian and coalition within Parliament, which continues to support the PRSP and medium-term agenda. However, the electoral process itself was criticized at the time, and opposition parties have since stepped up demands for a nationwide referendum o f confidence, which has been rejected by the Parliament. While the overall environment i s still supportive, there will clearly be a heightenedneed for consensus buildingto support the reform program inthe years ahead. -1- 2. Economic Management 2.I Transformationsince Independence 5. Armenia's transformation from a centrally planned Soviet system to a successful market economy has had three major phases. 6. The first phase, lasting for the first two years after Armenia's 1991 declaration o f independ- ence, was marked by a contraction in GDP o f 50%. While GDP fell in all FSU economies after the break-up o f the Soviet Union, the situation in Armenia was particularly severe, exacerbated by a heavy dependence on uncompetitive Soviet heavy industry, by the after-effects o f the 1988 earthquake, and by the direct and indirect costs o f the conflict over Nagorno-Karabagh. The full impact o f this economic contraction was alleviated to some degree by farm privatization, which took place at this time, and allowed subsistence agriculture to act as a safety net, absorbing many o f the displaced workers. Farm output rose to over 50% o f a sharply reduced GDP by 1993. 7. The second phase of the transformation to a market economy began in 1994, and was marked by a successful stabilization and structural reform program. The program focused initially on fiscal and monetary policies designed to deal with hyper-inflation (which reached 5000% in 1994), and uncontrolled fiscal spending (the budget deficit reached 56% o f GDP in 1993). Stabilization was accompanied by liberalization o f trade and prices, privatization o f small and medium enterprises, and the creation o f the basic legal and administrative framework for a market economy. These reforms -- and other positive factors such as the ceasefire over Nagorno-Karabagh -- fostered sustained economic expansion (see Table 1). Growth averaged 5.5% in 1994-2000, and the composition o f GDP changed considerably, with agriculture declining again in relative terms, and the construction and trade sectors growing rapidly. Table 1: Real GDP growth 1994-2003 (percent change over the previous year) 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 GDP 5.4 6.9 5.9 3.3 7.2 3.3 6.0 9.6 12.9 13.9 Of which: Industry 9.6 2.6 1.1 1.3 -2.2 5.2 6.4 3.8 14.2 15.4 Agriculture 3.1 4.0 2.0 -4.5 12.9 1.3 -2.3 11.6 4.4 4.3 Construction 5.7 -5.8 25.2 3.9 10.6 7.7 28.4 14.5 47.0 44.4 Trans/Com"n -4.1 9.6 17.1 9.2 1.4 0.8 -0.6 16.0 6.0 10.1 Trade 60.2 73.0 12.5 5.0 6.7 9.8 8.3 15.5 15.2 8.2 Other services -2.2 -2.2 14.6 3.2 2.6 4.5 9.1 5.3 7.2 7.5 Source: National Statistical Service (NSS) 8. The third phase began in mid-2000, and saw an increased government focus on improving the overall business environment, and the supporting framework for investment. This contributed to rapid growth rates, with GDP expanding by almost 13% in 2002, and 14% in 2003. Much o f this growth was driven by construction, and by exports o f polished diamonds. Nonetheless the sectoral base o f the economy has begun to broaden, with total exports excluding diamonds increasing rapidly (Table 2). Industrial output in particular i s starting to grow again, but, unlike in Soviet times, it i s now concentrated in light and medium-sized manufacturing and a growing agro-processing sector. -2- To some degree, the restricted borders with Turkey and Azerbaijan give a greater comparative advantage to goods with a high ratio o f value to volume or weight. Table 2: Armenia: Export performance 1995 to 2003 These restrictions cost an esti- 1995 1996 1997 1998 19992000 20012002 2003 mated 10-18% o f GDP in 2003, Totalmerchandiseexports(US$m) 270 290 232 220 232 300 342 505 678 either directly (e.g. through higher GrowthRate (%) 25.8 7.2 -19.9 -5.2 5.1 29.7 13.8 47.8 34.2 transport costs), or indirectly (e.g. Exportsw/oDiamonds(US$m) 200 156 185 173 148 202 256 307 n/a through a higher perceived risk Growth Rate(%) -21.8 18.6 -6.3 -14.8 36.5 26.9 19.9 n/a premiumfor foreigninvestment). Trade Deficit (% GDP) 31.4 30.6 25.1 20.4 21.1 Source: NSS 2.2 Current conomic Management 9. Macroeconomic management remains sound. Fiscal balances continue to be sustainable, with a budget deficit of 1.5% of GDP in 2003 (below the target of 2.2%, inpart because of undermns on projected expenditures). Nonetheless, government revenues remainlow by CIS standards, amounting to less than 15% o f GDP. The Government i s committed to improving tax collection, and reforms introduced at the end o f 2003 seem to be having an impact, with tax revenue inthe first three months o f 2004 18% higher than inthe same period in2003. 10. The principal short-term macroeconomic concern has been inflation, which rose to a relatively high8.6 percent bythe end of 2003. However, the maincausewas a suddenincrease inthe prices of imported wheat flour and cereals, with monetary policy playing at most a minor role. By April 2004, the 12-month rate o f inflation had fallen to 7.8 percent, and the Armenian Dram remained broadly stable. 11. The Government has sharply reduced the once burdensome quasi-fiscal deficit. Most o f this improvement came from the privatization o f the electricity distribution companies, which has turned an energy sector deficit o f 2% o f GDP in 2000 into a surplus now. Inaddition the water supply and irrigation sectors are, with IDA support for management contracts and decentralization, reducingtheir deficits from a combined 1%o f GDP in2001 to a projected 0.4 percent o f GDP in2004. 12. Despite this overall fiscal progress, public revenue management and generation still fall short of what is needed for Armenia to deliver public services commensurate with its rapidly rising GDP. The budget preparation process i s insufficiently strategic, and the links between the annual budgets, the MTEF and the PRSP also needto be stronger. Likewise, the line ministries need to play a more active role in budget formulation and to share accountability for budget outcomes. Local governments have insufficient financial management andbudgeting capacity, and lack transparency. 13. On the revenue side, administration o f VAT, personal income and payroll taxes, and especially customs, need to be greatly strengthened if Armenia's revenue potential i s to be realized. Low tax collection i s a result o f governance shortcomings, a large informal economy, and an unnecessarily complicated tax system, with excessive numbers o f specific exemptions and a highly complex corporate tax structure. 14. The investment climate continues to improve. Progress in trade and price liberalization, increased investments in infrastructure, privatization or closure o f most state-owned enterprises, and -3- efforts to streamline government regulation, have enhanced the business environment to the extent that the latest Heritage Foundation Index o f Economic Freedom ranks Armenia highest among the CIS countries, and above even some OECD countries. 15. An important challenge for future private sector growth will be to strengthen Armenia's under-developed financial sector. Commercial bank lending, as measured by the stock o f debt outstanding, has actually fallen by 11% from December 2000 to March 2004. While deposits have increased significantly, the resultingextra liquidity has not yet found its way into lending to corporate clients. Inpart this i s because of the time it has taken to purge insolvent banks from the system -- it was only in 2003 that the banking system as a whole became profitable. Furthermore, a significant volume o f diaspora funding for investment activity is not channeled through the banking system. 2.3 The conomic Outlook 16. The medium-term growth prospects for Armenia are positive, bolstered by continuing sound economic management and the growing dynamism o f export sectors, including light industry and agro-processing. Official donor support i s likely to remain strong, and recent positive developments inGeorgia should also benefit Armenia. The baseline macroeconomic projections shown inTable 3 reflect a convergence of World Bank, IMFand PRSPprojections and estimates, and are conservative. Table 3: Macroeconomic Trends and Baseline Projections Actual Est. Projected 1999 2000 2001 2002 2003 2004 2005 2006 2007 I npercent Real GDP growth rate 3.3 6.0 9.6 12.9 13.9 6.8 5.7 5.7 5.7 Consumer price index 2.0 0.4 2.9 2.0 8.6 3.0 3.O 3.0 3.O Growth exports goods & services 6.5 16.6 20.8 19.3 28.2 9.3 10.3 7.8 7.3 Growthimports goods & services -8.1 5.1 1.2 13.2 26.2 6.7 6.7 6.1 5.9 As percent of GDP State budgetrevenue 19.3 16.7 17.1 19.2 18.0 16.6 17.3 17.6 17.3 State budget expenditure 26.5 22.9 20.8 20.1 19.3 18.7 19.8 19.7 19.7 Fiscalbalance, accrual basis -7.2 -6.2 -3.7 -0.9 -1.3 -2.1 -2.5 -2.1 -2.4 Current account balance -16.6 -14.6 -9.5 -6.3 -6.7 -6.4 -6.6 -6.7 -6.0 CIA balance, ex. transfers -21.7 -19.9 -12.9 -8.6 -7.3 -7.2 -6.6 -6.7 -6.6 Foreign direct investment 6.6 5.5 3.3 4.7 4.3 3.2 3.2 3.0 2.8 External debt 46.3 44.0 41.4 43.3 39.3 37.5 35.5 33.8 30.3 I n percent NPViexports G&S (a) 143.3 119.7 108.8 96.3 48.6 46.4 42.6 39.5 37.0 NPV/fiscal revenue (b) 167.1 176.4 176.8 181.2 105.5 94.5 86.2 77.4 75.0 TDS/exports 23.7 11.3 13.7 9.3 13.2 8.6 7.2 6.9 5.7 TDS/fiscal revenue (b) 17.8 11.5 14.6 13.0 37.8 22.7 18.6 17.0 13.6 Total debt out'g/disbursed ($m)(`) 855.0 840.4 877.7 1025.0 1097.7 1133.4 1172.8 1213.8 1181.2 (a) Three year movingaverage centeredon the precedingyear is used for the denominator. (b) CentralGovemment revenue excludinggrants. (c) Includesgovernment and govemment guaranteedmediumand long-termdebt Sources: For data: PRSP and IMF tables. For projections: RMSMXpreliminary projections, IMF and PRSP tables -4- 17. Armenia's external debt i s manageable, and i s expected to continue to decline over the medium term. The country's external debt profile improved considerably in April 2003, when an agreement with Russia to implement a debt-for-equity swap went into effect. Russian enterprises acquired equity in several major state-owned enterprises in Armenia in exchange for US$94 million o f government debt. This, in addition to the in-kindrepayment o f the US$12 million outstanding to Turkmenistan, helped to eliminate the most expensive part o f Armenia's external debt burden, and thereby improved the country's external debt indicators. By the end o f 2003, government and government-guaranteed external debt was 39% o f GDP, with about 80% from multilateral conces- sional sources, o fwhich IDA accounted for 60%. 18. The PRSP projections o f firmly secured financing leave an unsecured gap o f about US$50 million a year for 2004-08 (after projected IDA disbursements for investment projects).' IDA adjustment lending would fill about $15 million a year o f this gap in the Base Case, and about $20 million inthe HighCase (see Section 6.4 below), leaving a residual financing need o f $30-35 million. This remaining gap i s not, however, o f immediate concern, since the Government's projections take into account only firmly identified sources o f financing -- the projections assume grants o f only $20- 25 million a year in 2004-07, considerably less than the actual volume o f grant assistance in 2003. Funding from the U S Government's Millennium Challenge Account, which Armenia recently qualified for, could also provide significant additional finance for Armenia's investment needs. 3. Poverty 3.1 Poverty Trends 19. Inthe 1980s, poverty inSoviet Armenia is reported to have beenvirtually non-existent. The end o f the decade, however, saw pov- erty increase sharply as the 1988 earth- Table 4: Poverty Rates quake, the break-up o f the Soviet Extreme Poverty Overall Poverty Union, and the Nagorno-Karabagh war (below $14 a month) (below $21a month) cost many people their livelihoods. The Incidence Gap Severity Incidence Gap Severity war also brought an influx o f refugees, Total adding to the ranks o f the poor. 98/99 26.1% 5.8% 1.9% 56.3% 17.1% 7.0% 2002 17.0% 3.2% 1.0% 49.3% 12.5% 4.5% 20. Although economic growth Yerevan resumed in the mid 1990s, poverty did 98/99 29.6% 6.6% 2.1% 58.7% 18.8% 7.8% 2002 16.5% 3.1% 1.0% 45.4% 11.8% 4.3% not begin to fall until the end o f that Other urban decade. By 2002, all measures of 98/99 34.5% 8.2% 2.9% 66.5% 21.6% 9.4% poverty and extreme poverty had 2002 21.1% 4.1% 1.3% 59.8% 15.5% 5.7% declined compared to their levels in Rural 1998/99 (Table 4),2 Extreme poverty 98/99 18.0% 3.5% 1.1% 47.7% 13.0% 4.9% fell considerably faster than did overall 2002 14.4% 2.6% 0.7% 44.7% 11.0% 3.8% poverty. Note: Consumption i s measured per adult equivalent. Poverty indicators are computed usingthe 1999 minimumfood basket. Source: ILCS 1998/99-2002. 1IfGDPgrowthand/or therevenuecollectionrateare slower than expected, the expectedfinancinggap will grow. The incidence o fpoverty is the share o fpoor people inthe population; the poverty gap indicates how far below the poverty line poor households are; and the severity o fpoverty captures inequality among the poor. -5- Gini coefficient3 o f 0.45 is one of the highest in the FSU. Table 5: Income and Inequality, measured by surveys of consumption, however, appears Consumption Inequality to be much lower (a Gini coefficient o f 0.27), although relatively 98/99 2002 stagnant (Table 5). These large differences betweenthe income and consumption inequality measures may be caused by measurement Gini income 0.64 0.45 errors. Gini consmption o.30 o.27 Source: ILCS 2001 and 2002 rates remain high despite the accelerating GDP growth. New job creation has yet to compensate for the volume o f labor shedding, Table 6: which has taken place as a result o f the sharp transition process. Unemployment Rates According to the household surveys, which are based on self-reporting, (percent of labor force) unemployment overall was 29% in 2002, down only 2 percentage 2001 2002 points from 2001, with most o f the decline being in Yerevan, where . Total 31 29 unemployment fell by 7 percentage points between2001 and 2002 (see Urban 39 35 Table 6).4 Official data gives substantially lower rates than the Yerevan 38 31 household survey, as many unemployedpeople do not register with the Other urban 41 40 Labor Office. Rural 17 20 Source: ILCS 2001 and 2002 24. Social transfers represent the third largest source o f income (after labor income and remittances) for Armenia's poorest households, and the family poverty benefit in particular has proved to be an effective mechanism for reaching the poor -- for each percent o f GDP spent on the family poverty benefit, extreme poverty falls by 3.4 percentage points, and overall poverty by 2.4 percentage point^.^ In2002, the Government reduced spending on poverty benefits by one-third o f a percent o f GDP, resulting in an 11% fall in the number o f beneficiaries, and a 15% decline in the average monthly benefit. This may have slowed improvements in poverty between 2001 and 2002. In2004, however, poverty benefits were restored to their former levels and social assistance arrears were cleared, which may have a positive impact on poverty in2004. The Ginicoefficient i s a measure o finequality, with 0 indicating complete equality ofconsumptionor income, and 1 indicating complete inequality. Individuals are definedas unemployed ifthey didnot work inthe week of the survey, were actively looking for ajob and were willing to start work immediately ifajob became available. World Bank Poverty Assessment 2004. -6- 25. The health o f the Armenian population deteriorated after the economic collapse, but since 2000 there have been indications that conditions are starting to improve. While data problems make definite conclusions difficult, Government figures indicate that under-five mortality fell from 25 per 1,000 live births to 19 per 100,000 between2001 and 2003.6 These trends mask a significant differ- ence betweenrural and urban areas, with rural infant and child mortality rates exceeding urban rates by 47 percent and 22 percent, respectively, during the 1990s. The Government has embarked on a reform programto increase public expenditure on healthcare, improve its targeting, and reduce excess hospital capacity. 26. Access to basic education i s good, with a net enrollment rate o f 92% in2001. Incontrast, the net enrollment rate in secondary schools i s only 61%' and even lower for the poorest quintile (52%). Boys are particularly likely to drop out because o f problems both o f supply (poor quality o f teaching), and demand (low expectations o fjobs aAer completing education). The Government i s working to improve the quality o f education, and has begunto make expenditure more efficient, for example by consolidating underutilized schools to improve their effectiveness. Overall public expenditures on education are also rising (by 45% between 1997 and 2001), but they are still low by FSUstandards. Highquality textbooks are now available to all at a reasonable cost, and 40% of schools now have some managerial and financial autonomy. 3.2Millennium Development Goals 27. Armenia has already met the gender MDG, and i s likely to meet the poverty and education goals, andpossibly also the environment goal (see Table 7 below). The health goals, however, appear less likely to be met by the target year o f 2015, with child mortality still more than twice the goal, TB rates increasing, and maternal mortality remaining a serious problem. IDA i s continuing to support Armenia's efforts to meet and exceed the MDGs, with particular emphasis, both in the current portfolio and in the proposed PRSCs, on the health goals. In addition, IDA i s continuing to help finance improvements throughout Armenia in drinking water and sanitation systems, as well as in natural resource management, rural development, and energy reform. 28. A recent exercise to assess the costs ofmeetingthe MDGsestimated that Armenia would need about US$25 million per year inaddition to the currently proposed allocation for the four-year period 2005-08 to cover the costs o f public expenditures that would be required to meet the MDGs. This assumes that Armenia would receive U S 3 5 million annually from private foundations and other donors. 6Other sources indicate higher figures, but also show positive trends. -`I - Table 7: Likelihood of Meeting Millennium Development Goals Goals Target Status Likelihood of achievinggoal by 2015 Eradication of extreme 13% o f population living 17% in2002 Likely poverty inextreme poverty (baseline year 1998/99) Achieve universal primary 100% enrollment 92% for grades Likely education 1-8 in2001 Promote gender equality Girls' enrollment equal to Girls' enroll- Already met and empower women boys' inprimary and sec- ment exceeds ondary education boys' Reduce child mortality* 7.9/1000 live births 18.8 ** Unlikely Improve matemal health* 1O/lOO,OOO live births 55 in2000 Unclear Combat HIV/AIDS, and Halt and beginto reverse HIV/AIDS rates Unlikely other infectious diseases the spread by 2015 reasonably con- stant, but TB cases continue to increase*** Ensure environmental Reverse loss of environ- Possible sustainability mental resources; increase accessto improvedwater and sanitation; improve lives o f slum dwellers. * Armenia has an average o f only 25,000 births a year. The rate per 100,000 live births therefore fluctuates widely, making it impossible to detemne a trend. Inaddition, Armenia has child and matemal mortality rates that are low for its income level, which make the MDG targets unrealistic, since they require reducing MMR by 75% and child mortality by 66% over 15 years, which would give Armenia rates better than those in most high-income countries. Therefore, if Armenia manages to bring its child and maternal mortality rates up to those o f high-income countries, the country will be considered to have met the targets. ** UNICEF's *** HIV/AIDS TransMONEE database. Other sources give much higher figures. data from UNAIDS, TB data from Ministry of Health 4. Lessons from Previous CASs 4.1 The CAS Completion Report 29. The FY02-04 CAS focused on promotingprivate sector development, improvingpublic sector management, and enhancing human development, and was broadly successful in supporting these goals. The Completion Report for the FY02-04 CAS (Annex 2) highlightsthe following lessons: 0 The FY02-04 CAS objectives were appropriate, and should be broadly continued. However, given the continuing disparity between overall growth rates and poverty reduction, this CAS pays more explicit attention to ensuringbroad access to the benefits of growth. -8- 0 The best results were achieved when IDA was able to exploit the synergies between well- sequenced analytical work and lending (both investment and adjustment), and when it was able to leverage trust funds and other donors' support. This CAS thus pays close attention to the sequencing of initiatives, and ensuring that support for reform will be based on good analytical underpinnings. 0 A strong, high caliber multi-sector team in the Yerevan Country Office was important in designing appropriate interventions, and maintaining a high level o f dialogue with senior officials. Moving portfolio management and some task management responsibilities to the Country Office also helped improve portfolio performance. Both trends will continue under this CAS. 0 The outcome indicators for the FY02-04 CAS should have been linked more clearly to IDA interventions in order to facilitate evaluation o f CAS performance. This CAS consequently links all targets to the associated interventions, and indicators in the results matrix (Annex 1) will be usedas amanagement tool throughout CAS implementation. 0 The FY02-04 CAS was not realistic enough about staff availability and programming. Though the total number o f activities and lendingvolume were delivered roughly as planned, there was some slippage due to lack o f timely availability o fkey staff. Bank management will pay explicit attention to staffprogrammingduringimplementation o fthis CAS. 0 The CAS consultation process was extensive, and largely coincided with the even more thorough Government-led consultation process for the PRSP. The Government i s committed to continue consultations throughout PRSP implementation, and IDA will participate in that process. Consultations on this CAS have also been coordinated with PRSP discussions, and focused on the most effective way for IDA to support Armenia's PRSP priorities. 4.2 OEDS Country Assistance &ahation 30. The World Bank's Operations EvaluationDepartment prepared an independent assessment o f the role o f World Bank Group's assistance to Armenia between 1993 and 2002.7 The report found that the substantial levels o f assistance was well used: 86% o f the projects reviewed had satisfactory outcomes, with high relevance, substantial institutional development impact and excellent linkages between analytical work and lending, as well as mutually supportive investment and adjustment operations. OED found that IDA lending should have focused earlier and more intensively on improving the business climate and public sector management. The evaluation also concluded that Armenia needed to strengthen its aid coordination capacity. The report recommended: (a) preparing a strategy for an eventual transition to IBRD lending; (b) continuing to focus on improving the environment for private sector development; and (c) following through on support for public sector reform. Management agreed with each o f the recommendations and has incorporated them centrally into this Country Assistance Strategy. ~ ~ 7CountryAssistance Evaluation, March 2004 -9- 4.3 Results Achieved 31. The Bank's assistance over the FY02-04 CAS period has, in active cooperation with other development partners, had a tangible impact on the ground in a number o f areas. A few examples are: 0 The business environment. The support provided through Structural Adjustment Credits (SACS) IV and V, as well as other instruments, helped produce a measurable improvement in the business environment. For example, the number o f steps necessary to register an enterprise has been cut by one third, and Government inspections have been reduced by half, significantly improving the business environment. Businesses' perceptions o f all fields o f regulatory and tax-related obstacles have improved since 2000, as reported inregular business surveys. 0 The energy and water sectors. IDA helped lay the framework for the privatization of the energy distribution companies, which, while it occurred later than expected, has now eliminated the once heavy burden o f energy distribution on the budget (2% o f GDP in 2001). IDA also helped increase the efficiency of the power utilities with the result that almost the entire population now has uninterrupted electricity supply, and tariff collection i s close to 100%. With support from IDA, drinkingwater services inYerevan have improved markedly. In2001, only 10%ofthe city's populationhadwater for 12hours per day, whereas byMarch 2004, half o f the populationhad 24 hour service. 0 Governance. Civil service reform has begun under a new law, which IDA advised on. In addition, IDA has helped bring government and civil society organizations draft an Anti- Corruption Strategy, which was adopted and launched by the PresidentinJanuary 2004. 0 Rural development. IDA has assisted inrehabilitating 4,000 km of irrigation canals, which have increased the productivity o f some 140,000 hectares o f agricultural land, 74% o f all irrigated land inthe country. In addition, some 760 km o f roads are maintained on a routine basis under IDA-assisted projects. IDA has also improved the lives o f some 674,000 people through small community projects supporting improvement o f schools, local potable water systems, small irrigation systems, and rural health facilities. Education and health. With IDA assistance, the Government has taken steps to make the healthcare more responsive to the needs o f the poor. It has designed, and i s about to implement, a major reform strategy to rationalize excess facilities that will free up funds for increased spending on essential services. It has set up a system o f family doctors, and i s shifting more public spending to primary healthcare. To improve education outcomes, IDA has helpedthe Government begin a major reform program to increase efficiency and improve the quality o f education. Forty percent of schools now have some managerial and financial autonomy, and parents are increasingly involved in school management. With the support o f an IDA credit, highquality textbooks are now available inall schools at reasonable cost. 0 Social protection. IDA has helped the Government design and implement a family benefit system, which is an effective and well-targeted means to support poor households. IDA has helped the Government clear its arrears and improve social insurance, social welfare and employment services. With support from IDA, the Government has drafted a new Labor Code to facilitatejob creation and a more flexible labor market. -10- 5. Government Program 32. In October 2003 the Government published its Poverty Reduction Strategy Paper (PRSP), which promotes the goals of: (i) reducing poverty; (ii) lowering inequality; and (iii) improvinghuman development.* The World Bank-IMF Joint Staff Assessment (JSA) o f the PRSP concluded that the strategy was a significant achievement in the Government's effort to foster growth and reduce poverty, and endorsed its analysis and recommendations.' The JSA concluded that the PRSP was prepared through a broad participatory process, was based on a comprehensive analysis o f poverty, contained a sound diagnosis o f needed short- and long-term reforms and investments, and used realistic costing and financing assumptions. The JSA recommended additional work on monitoring and evaluation, further prioritization o f proposed interventions, and close integration o f the PRSP with the Medium-Term Expenditure Framework and the annual budgets. 33. The PRSP sees growth and poverty reduction coming primarily from a more dynamic and competitive private sector, with the Government's role focusing on promoting a better business climate, improving the level and efficiency o f social sector expenditures, and reducing waste and corruption. The PRSP also identifies infrastructure investments (including in health) as having an especially highreturn. 34. The policies and actions proposed inthe PRSP canbe grouped into five categories: (i) promot- ing sustainable economic growth through macroeconomic stability and private sector development; (ii)enhancing human development and improving social safety nets; (iii) implementing prudent fiscal policies; (iv) improving public infrastructure; and (v) improving core public sector functions. Table 1 inAnnex 7 dividesthepolicy actions (p1-p186as described inAnnex 7 ofthe PRSP) among the three PRSP goals, and Table 2 inthe same annex groups them into the five themes identifiedinthe JSA. 6. Bank Strategy From the broad range o f interventions proposed in the PRSP, the CAS focuses on three areas which best fit the Bank Group's comparative advantage and complement the activities o f other donors: (i) promoting private sector growth by strengthening the financial sector, improving public sector management, and reducing infrastructure bottlenecks; (ii)making growth more pro-poor by improving the labor market, promoting a more dynamic rural economy, and making social assistance more effective; and (iii) reducing non-income poverty through better health, education and basic services. The main results that this CAS aims for, and the strategies for achieving them, are shown in the summary results matrix, Table 8 below. Annex 1 provides a more detailed version, with additional baselines and targets for use during CAS implementation. 8Paras 23 and 34 of the PRSP Executive Summary, and Section 2, Chapter 3. Report 27133-AM -11- Table 8: Summary of Results Matrix Goal One: Promote private sectc led economic growth Long-term country goals PrincipalProblems Outcomesthat IDAwill influenceinCAS period Privatesector con- a) Public institutions lack motivated a) Government agencies provide better services, tinues to grow, and staff and transparent procedures; measured by: (i) improvement inbusiness per- becomesmore di- governance i s weak; judicial system ceptions o f government policies; (ii)improve- verse. does not reliably enforce decisions. ment inbusiness perceptions o f crime and 0 Diversify sectoral b) Financial services under-developed, corruption as obstacles to company growth; and composition o f the with sluggishcredit growth, high (iii)improvement incourt users' satisfaction private sector interest rate spreads, unreliable debt withjudicial performance and services. (PRSP Table 6.2). recovery, and weak corporate gov- b) Financial systemintermediatesanincreasing 0 Increase export ernance o f the banking sector. volume o f investment capital. Measuredby the volume from 30% c) Highcost and unreliable infrastruc- loans/GDP ratio increasing from 6% in2003 o f GDP in2003 to ture, especially telecommunications. c) Communications infrastructureless o f a con- 32% in2009 straint to private sector development. Measured (PRSP Table 6.1). by increase intelecom licenses issued; other indicators tbd at CAS mid-term. Goal Two: Make Growth More Pro-Poor ~ Long-term countrygoals PrincipalProblems Outcomesthat IDA will influenceinCAS period A larger share of a) Slow growth informal sector a) Reduction inshare o f informal economy. the population employment b) Rural economy more productive. Measuredby benefits from eco- b) Stagnant rural economy. increase invalue-added per hectare from nomicgrowth and c) Administration o f social protection US$1,370 in2003. the vulnerable are transfers couldbe improved. c) More effective social transfers. Measuredby adequately pro- d) Poverty i s pervasive, despite strong increase inuser satisfaction with social protec- tected. economic growth. tion system. d) Reduction inextreme consumption poverty from 17% in2002. Goal Three: Reduce Non-Income Poverty Long-term country goals PrincipalProblems Outcomesthat IDAwill influenceinCASperiod Population has a) Education, particularly at secondary a) More children stay inthe education system. adequate access levels, o f poor quality. Measuredby increase innet secondary enroll- to basic services b) Financing ofthe healthcare system ment rates from 0.61 in2001. (health,education, skewed towards the better off. b) Moreofthe population has access to healthcare water, wastewater c) Poor financial condition o f utilities, system. Measuredby share o f those who are treatment,heat, constraining infrastructure invest- sick and who use healthcare services rising in transport) ments and service improvements. bottom consumption quintile from 22% in2001, and inthe total rural population from 26%. c) Population has better access to basic infrastruc- ture services. Measuredby share o fpopulation connected to piped water with 24 hour a day ser- vice increasing from 22% in2003. -12- 6.I Goal One: Promote private sector led economicgrowth 35. Long-term strategic goal. The Government regards the private sector as the main driver o f the economic growth needed for employment creation and poverty reduction. The C A S aims to help improve the environment for private sector growth, with an emphasis on facilitating economic diversification (both interms o f the number of sectors and the number o f enterprises). 36. Principal constraints. Although the business climate has improved greatly in the past few years, three areas will require continued close attention over the CAS period: (a) A weak public sector constrains private sector entrepreneurship. Despite the improvements in the business climate, interactions with the public sector can often be a time- consuming and unproductive burden on enterprises. Surveys indicate that business perceptions ofpublic sector performance worsened somewhat between 2001and 2003. Public agencies at central and local levels tend to lack motivated staff and transparent procedures. Fiscal revenues are low and budget systems, while improved, need to become more efficient and transparent. Furthermore, public procurement remains opaque to potential bidders. The judicial system is not yet completely independent, suffers from long backlogs, does not reliably enforce its decisions, and has outdated procedures to manage courtrooms and integrate new legislation. Petty corruption is commonplace, corporate accounting standards vary considerably, and some sectors of the economy are dominated by powerful businesses with close links to the Government, which restricts competition and raises prices. (b) The financial sector remainsunderdeveloped. Armenia has made progress inconsolidating its banks (which dominate the financial sector) mainly through increases in minimum capital requirements. Banking assets, deposits and credit have increased somewhat, but the banking system remains small compared to the size o f the economy, and still suffers from low public confidence. The sector suffers from inefficiencies, weak corporate governance, and poorly developed mechanisms for enforcing secured transactions, including a difficult debt recovery process. The insurance sector, even in comparison with other CIS countries, remains small and other financial services, such as credit bureaus and mortgages, are not available. (c) The high cost and/or unreliability of key infrastructure hinder growth. While much of Armenia's highway system i s in good condition, many rural roads have not been maintained. This restricts farmers' ability to market their crops and stifles the off-farm rural economy. In addition, Armenia's restricted borders with Turkey and Azerbaijan have increased the costs of external trade. However, the area where Armenia is at the largest comparative disadvantage is telecommunications. A long-term monopoly license to ArmenTel has contributed to highcost and low quality telecommunications, with restricted coverage in rural areas and a limited range of services (corporate networks and internet access are particularly problematic). 37. Results achievable in CAS period. The CAS proposes a range of interventions to help the Government overcome these constraints, with the degree of success measured by progress towards the results identified below: (a) Government agencies providebetter services. Improvements in the performance of public sector agencies will be measured by whether and at what rate business perceptions of -13- government policies and corruption improve (from a base o f 2.98 and 2.84, respectively, in 2003 on a 4-point scale where 1 indicates no obstacle). Improvements in the judicial system will be measured by an increase in court users' satisfaction with judicial performance and services. Several intermediate indicators are essential to achieving an improvement o f this score (see the Results Matrix, Annex 1). The current portfolio contributes to these results through the FY04 Public Sector Reform Credit, which tackles civil service reform, public procurement, e-government, and local government reform. Results relating to the judicial system will be achieved through the FYOl Judicial Reform Project. Future lending, advisory and analytical activities will also contribute. The series o f PRSCs and the PRSC Technical Assistance credit", are likely to tackle tax reform, increased transparency o f the budget process at central and local levels, and application o f accounting standards amongst other things. An FY07 Public Sector Project in the High Case would address a broad range of problems and thus contribute to further achievement o f these and related results. Inthe AAA program, the follow-up to the Country Financial Accountability Assessment will help resolve budget and auditing issues; financial sector advisory services will help improve corporate governance, as will IDFs on public procurement and competition policy. WBI's planned capacity-building program for local governments and training for civil servants will complement the efforts o f the Public Sector Reform Credit. The Programmatic Public Expenditure Reviews, and the Country Economic Memorandum, will help diagnose problems and monitor outcomes, and the regular business surveys will help monitor results. (b) The financial system intermediates an increasing share of investment capital, as meas- uredby the loans to GDP ratio increasing from 6% in2003. IDA will influence this result by supporting improvements in banking regulation and banking supervision, supporting development and modernization o f the financial infrastructure including the payments system and credit informationbureaus. It will also support efforts to develop the non-bank financial sector and the overall business environment, such as improving creditors' rights. IDA'Swill provide this support through advisory services and analytical work (such as the Financial Sector Advisory Notes and the C E M on pro-poor growth) carefully sequenced with programmatic support to reforms through the series o f PRSCs. These new initiatives will leverage reforms supported by the recently completed SAC V and on-going advisory and capacity building activities. IDA will also support anti-money laundering and combating the financing o f terrorism by helpingthe Government adopt comprehensive legislation, establish a FinancialIntelligenceUnit, and train government and financial institutionofficials. (c) Communications infrastructure is less of a constraint to private sector development. Progress in removing infrastructure bottlenecks will be measured by the increase (from a current baseline o f 1) in the number o f telecoms licenses issued in the CAS period, and by indicators relating to transport, which will be developed during the CAS period. Ongoing work to address these issues includes the FYOO Transport Project; PPIAF grants to strengthen the multi-sector utility regulator and to assess telecommunications in rural areas; and a regional study on rural infrastructure. The proposed portfolio includes PRSC support for the telecoms sector, a renewable energy project, a third Social Investment Fund, and an FY07 InfrastructureProject. loThe Government intends to mobilize grant resources to fund technical assistance for key elements o f the reform agenda to be supported by the PRSCs. Depending on the extent o f the grant support, the PRSC TA credit may be reduced or even dropped. -14- 6.2 Goal Two: Make growth more pro-poor 38. Long-term strategic goal. The PRSP puts a major emphasis on ensuring that a larger share o f the population benefits from economic growth. The CAS program accordingly has a focus on helping make the benefits o f growth more widely available by improving formal sector jobs and stimulating the rural economy. For those who are not yet able to share in these benefits, the CAS focuses on improving social protection. 39. Principal constraints. Three obstacles to ensuring that the poor benefit more from Arme- nia's rapid economic growth will require close attention duringthe CAS period. (a) Job creation has been sluggish and the informal sector is large. The economy is not creating enough formal sector jobs, because firms appear to have expanded by exploiting under-utilized capital rather than increasing employment, and because governance problems help sustain a highinformal economy. Furthermore, labor skills are not always a good match for the jobs that are available (see Section 6.3 below). These structural problems are in themselves a major obstacle to fostering pro-poor growth, but even where there i s a potential match between a job vacancy and an appropriately qualified person, deficiencies in the information systems available to employers andjob seekers often prevent the match actually beingmade. Very few agencies effectivelylink employers withpotentialemployees. (b) Rural livelihoods have stagnated. Although there are some dynamic developments in agriculture overall, the livelihoods o f the rural poor have stagnated over the past few years. Agriculture supports around 25% o f the country's population, having absorbed the bulk o f labor displaced by the economic contraction of the 1990s. Production, however, remains mostly at subsistence levels, with farmers relying on barter much more than cash transactions to dispose o f the small surpluses they do produce. Most farming i s low intensity (both capital and labor), so underemployment in rural areas i s pervasive. Some areas o f the country are simply not viable for agriculture over the long term, but, even in the fertile areas, there is limited farm specialization and intensification. Market infrastructure i s lacking (road conditions are poor, there are no wholesale markets, and few cold or dry stores); marketing institutions are underdeveloped; and machinery and input supplies are poorly organized. Land holdings are small, and, as land markets have recently been established, consolidation i s only just beginning. Farmers will need additional support to improve management of irrigation systems, and agriculture remains vulnerable to natural disasters. Although a growing number o f successful agro-processing enterprises have emerged, and tourism i s developing in some parts o f the country, most rural areas provide few opportunities for work outside agriculture. (c) The social protection system could be more efficient. Social protection has improved markedly in the past few years, with most benefits now well targeted and no arrears in payments to beneficiaries - indeed the 2001 Household Survey showed that transfers accounted for 15% o f the income o f the poorest quintile. Nonetheless further improvements inefficiency and effectiveness could produce marked benefits for the poorest: administration of many benefits needs to be more efficient to reduce waste and delays; the poverty benefit needs to reach more o f the poor, particularly in rural areas; knowledge o f the benefit system and clarity about its rules needto improve so more eligible beneficiaries register; and the level -15- o f pensions needs to be increased, since average pensions have fallen relative to average wages from 33% in 1996to 21% in2003." 40. Results achievable in CAS period. The CAS proposes to help the Government overcome these constraints through an integrated series o f analytical work, capacity building, programmatic and investment lendingdesignedto achieve the following measurableresults: (a) The importance of the informalsector in the economy declines. According to the PRSP, the informal sector accounts for an estimated 45% o f the total economy, and the goal i s for this to fall over the CAS period. As formal sector employment grows, people will move away from informal sector jobs, gaining legal status, benefits, job security. The change will also benefit Armenia's investment climate and fiscal revenues. The current portfolio contributes to this goal through the FY04 Public Sector Reform Credit and the FYOl Judicial Reform Credit, coordinated with capacity building work on anti-corruption and procurement as well as advisory work to improve corporate governance. Inthe future portfolio, the PRSCs and PRSC TA will influence this objective, as will the Country Economic Memorandum, the Programmatic Poverty Assessments, the Programmatic Public Expenditure Reviews and the Labor Market Study. The FY04 Social Protection Administration Project will help strengthen the regional employment agencies, which link applicants and potential employers. (b) The rural economy is more productive. Since a viable agricultural sector is key to a dynamic off-farm economy, the indicator o f a more productive rural sector will be an increase o f value-added per hectare from US$1,370 in 2003. On-going work towards this outcome includes the FY98 Agricultural Reform Support Credit, the FY99 Title Registration Project, the FY99 Irrigation Dam Safety, and the FY02 Irrigation Development project, as well as studies on rural productivity and on rural infrastructure. The FY04 Health and Education projects are addressing the quality o f rural services, and the Trans Caucasus Tourism Initiative i s helping promote the off-farm economy in select rural areas. Proposed new interventions include the FY05 Rural Development Project, with a second rural operation in FY08. The FY08 Project could include substantial support for irrigation andor for land titling work, and its scope will be clarified in the CAS Progress Report. Advisory support to the telecoms sector will help improve services inrural areas, and the FY07 InfrastructureProject i s likely to improve keyrural infrastructure, including roads. (c) Social transfers are more effective. The effectiveness o f social transfers will be measured by improvement inthe satisfaction of users with the social protection system from a baseline to be determined. A prerequisite for improvements in this measure will be better tax collection so that more funds are available for transfers, including the family poverty benefit. The FY04 Social Protection Administration Project i s the primary tool to affect this result. The proposed PRSCs and PRSC TA, as well as a WBI program to support pensions administration will support these objectives, and analytical work in the Programmatic Public Expenditure Reviews, the Country Economic Memorandum and Programmatic Poverty Assessments will also help achieve the goal. "Incontrast, theaveragenotionalpensionasashareofaveragewages was25% inGeorgia, 32% inAzerbaijanand37% inRussia. -16- (d) Extreme consumption poverty falls. The goal is for extreme consumption poverty to decline from 17% in 2002. Many interventions in the on-going and future portfolios contribute to this goal. Because it i s not yet clear why economic growth has not led to deeper reductions inpoverty, analytical work to address this issue (the Labor Market Study, the CEM on pro-poor growth and the Programmatic Poverty Assessments) will be a major element o f the CAS work program. Additional results and measures may be developed in the CAS Progress Report in the light o f the conclusions o f those studies. The PRSCs and PRSC TA will be major IDA vehicles for influencing these results, but many on-going and future interventions will also contribute. 6.3 Goal Three: Reduce non-income poverty 41. Long-term strategic goal. The PRSP and this CAS focus on the need to increase the well- being o f the poor by improving their access to affordable healthcare, education, drinking water, sanitation and heating. 42. Principal problems. Although essential reforms in healthcare, education and infrastructure have begun, and basic services in some parts o f the country have improved significantly, they still do not come close to meetingthe needs o f a rapidly growing and modernizingeconomy. (a) Poor quality education. The education system does not meet the country's new needs. Armenia's public expenditures on education are very low (among the lowest inthe FSU), and available resources are not usedefficiently -- for example the school system has not adapted to the decline in Armenia's population since independence, resulting in an excessively high teachedpupil ratio. Furthermore, the school curriculum i s not properly equipping children for the labor market, since the curriculum has not yet been fully revised to meet the needs o f a market economy. Facilities are inadequate and teachers are not properly skilled or motivated. (b) Unaffordable health care. The healthcare system does not generally provide affordable services, nor are they o f adequate quality. Public expenditures on healthcare are low and poorly targeted, with the excessively large hospital network absorbing more than half o f public health expenditures. As a consequence primary health care i s starved o f funds, with unofficial side-payments large and frequent (half o f all households using healthcare services report making unofficial payments). The need for such unofficial payments i s an important reason that only 22% o f the poor report usingthe healthcare system when they are sick. Staff are not properly skilled or motivated, school buildings have been inadequately maintained, and much o f the equipment i s outdated. (c) Lack ofinvestmentin infrastructure. The poor financial condition o f many o f the country's utilities has precluded adequate investment ininfrastructure. Few people have 24-hour supply of drinking water, and even fewer have adequate wastewater services. An increasing number o f water supply pipelines fail to comply with sanitary standards, leading to emerging outbreaks o f water-borne diseases. Since 2002, Yerevan has seen improvements in water availability and quality, but further improvements are required. Other parts o f Armenia have seen almost no progress. Performance o f the electricity utilities has improved substantially, with collections rising and tariffs increasing. These higher tariffs may make it difficult for some o f the poorest consumers to afford these services. Many Armenians suffer during the -17- harsh winters, since it i s difficult for them to heat their houses adequately. People are forced to use inefficient and expensive electricity, or wood, which is scarce in Armenia. The poor are particularly likely to burn wood, often in apartment buildings without proper stoves and chimneys, which causes health problems. Transport is a major constraint in rural areas, leading to difficulties gaining access to agricultural and labor markets, as well as to health facilities and schools, particularly in winter. Furthermore, problems with vehicle licensing and road safety lead to unduly highnumbers o f traffic deaths. 43. Results achievable in CAS period. The CAS proposes to help overcome these constraints through an integrated series o f interventions designed to achieve the following measurable results: (a) M o r e children stay in the educationsystem. This would be measured by an increase inthe net secondary enrollment rate from 0.61.12 The FY04 Education Quality and Relevance Credit is the primary vehicle to influence this indicator in IDA'Scurrent portfolio. Activities in the future, such as the PRSCs and PRSC TA will also contribute. The proposed Social Investment Fund I11will rehabilitate some school buildings, and the proposed urban heating project will help modernize heating systems in selected schools. The programmatic Public Expenditure Reviews (PERs) will identify relevant issues and propose solutions. (b) More of the population uses healthcare services. Better access to healthcare will be measuredby an increase inthe share o fthe sick who use healthcare services, from 22% for the bottom consumption quintile, and from 26% in2001 inthe entire rural population. The FY04 Health System Modernization Project will contribute to improvements inthis indicator backed upbythe proposedPRSCs and PRSC TA. Public healthwill also benefit from other proposed interventions: the FY05 Yerevan Water and Sanitation Project, the FY06 Urban Heating Project, and, if it improves transport in remote areas, the FY07 Infrastructure Project should improve access to healthcare facilities. The programmatic PERs will identify issues and propose solutions relating to healthcare spending. (c) The population has better access to basic infrastructure. This will be measured by the share o f the population connected to 24-hour piped water increasing from 22% in 2003, and by the share o f households with gas-based heating systems increasing by 20% from a baseline to be determined. In the on-going portfolio, the FY98 Municipal Development and FY04 Armenia Water projects will contribute to improving drinking water services, and a PPIAF grant is supporting the multi-utilityregulator. Proposed new interventions include the FY06 Urban Heating, the FY05 Yerevan Water and Wastewater, and the FY07 Infrastructure Pr0je~ts.l~A poverty and social impact assessment, associated with the PRSCs, will assess the impacts o n the poor o f utility tariff increases, and suggest potential mitigation mechanisms. Inaddition, IDA will work with the Government to seek co-financing for work on road safety and vehicle licensing. 12Source: Education, Poverty and Economic Activity Survey, 2001 l3 Giventhat diaspora donors and the US-funded Millennium Challenge Account are likely to provide substantial resources for infrastructure, the scope o f the FY07 Infrastructure Project and potential support for road safety will be determined once spendingplans for those expected resources have been finalized. -18- 6.4 Resource Levels and Trbgers 44. Since the early 1990s, Armenia has benefited from a high level o f international assistance. Over the last five years, official donor assistance and remittances represented 11% o f GDP, with bilateral donors accounting for about 60% o f this assistance. Of the remaining 40% o f aid provided bymultilateral donors, IDAprovidedabout two-thirds, and the EuropeanUniona fifth.14 Substantial unofficial assistance has also been available, mainly from diaspora sources. One US-based foundation has beenparticularlyprominent, providing support averaging 6% o f GDP for the last three years.15 45. I t i s not yet clear whether high levels o f donor assistance from existing sources will continue over the CAS period. However, Armenia will have access to a new source o f investment finance -- the MillenniumChallenge Account -- beingestablished by the U S Government. The CAS projections assume that Armenia will continue to enjoy strong donor support, possibly declining as the country's per capita income increases, and that IDAwill remainan important source o f assistance. 46. Although it i s currently not creditworthy for IBRD lending, Armenia could potentially become so towards the end o f the CAS period. This would require good macroeconomic performance, continued political stability, sustained progress in economic, fiscal and financial reform, improve- ments in the business and financial climate leading to steady private sector growth, and reduced reliance on preferred creditors to satisfy financing needs. Armenia's progress towards IBRD eligibil- ity will be monitored over the CAS period, and an update, with specific creditworthiness benchmarks, provided at the time o f the CAS Progress Report. Preparing the way for IBRDlendingi s particularly important given Armenia's rapidly rising per capita income, which could lead to it being given blend (of IDA and IBRD) status inthe next CAS period. 47. Armenia became a High Case performer during the 2002-2004 CAS period, having achieved the highest IDAperformance coefficient inthe ECA region. I t will enter the new CAS ina Base Case scenario for IDA support, which assumes a continuation of the existing good performance and provides IDA lending o f US$170 million. If Armenia makes further improvements inpublic sector management (see triggers inTable 9) it will move into the HighCase, which will support accelerated reforms o f the public sector through an additional Public Sector Modernization Credit, additional PRSC resources, and additional funding for rural development and infrastructure. IDA resources o f about US$220 million will become available in the High Case. In the unexpected event of deteriorating performance, a Low Case scenario would reduce IDA lending to about US$90 million. This will involve halting new PRSC lending, and restricting new investment operations to those that directly protect the most vulnerable. 48. The triggers for moving to the High Case are based mainly on the Government's ambitious targets for social sector spending and tax collections, and improvement in the performance o f public sector agencies. l4Source: World Bank Operations Evaluation Department, Country Assistance Evaluation, March 2004, Annex A. 15Source: International Monetary Fund, Staff Report o n the FifthReview under the Poverty Reduction and Growth Facility, March, 2004, p14. -19- Table 9: Armenia CAS Triggers Policy Area To Stay inthe Base Case Means of Verification Private Sector / Pro- Satisfactory implementationo f the Annual PRSP progress reports Poor Growth PRSP Non-IncomePoverty Maintain spendingon education, Macro monitoring health, social security and social insurance at no less than 40% o f total consolidated budget exDenditure Macro-Economic Satisfactory macro-economic Macro monitoring, including IMF Management management staffreports on the PRGF Governance Satisfactory implementation o f the Regular reports o f the Anti- National Anti-Corruption Strategy corruption Monitoring Group Portfolio Maintenance o f good portfolio Portfolio monitoring Derformance Policy Area Additional Actions to Move to the Means ofVerification High Case Macro-Economic Strongperformance inimproving the Macro monitoring Management tax/GDP ratio Public Sector Satisfactory progress with reform o f Supervision reports from FY04 Management the civil service and the health and Public Sector Modernization Credit, education sectors FY04 Education Quality and Relevance Credit and FY04 Health I SystemModernizationProject $9. Follow-on interventions to continue the reforms supported by the FY04 Health and Education xogrammatic credits are expected soon after the close o f this CAS period. If,however, implementa- :iono f the reforms proceeds faster than expected, and the appropriate institutional and policy changes .ire made, it may bepossible to accelerate processing o f these follow-on activities 50. CAS Progress Report. Since this Country Assistance Strategy covers four years and focuses on the results o f the overall program, it will be necessary to review progress towards those results at the mid-point o f CAS implementation. This review will allow a stocktaking o f Armenia's progress towards the intermediate and CAS outcomes, and refinement o f those outcomes and quantitative goals. It will also allow reformulation o f goals in light o f changing circumstances and new information. The Progress Report will be coordinated closely with the government's PRSP monitoringprocess as well as with IDA'Sportfolio review. 6.5Summary of Work Program 51. Table 10 below presents the proposed work program. Where the exact content and scope o f an IDA-supportedproject are yet to be determined, a lending range i s given, with a credit at the high end o f the scale for one operation necessitating a lower level for one o f the others. The overall focus o f the FY08 Rural Development I1andFY07 InfrastructureProjects has yet to be decided, and a more specific proposal will beprovided at the time o f the CAS Progress Report. -20- Table 10: Proposed Work Program Fiscal Lending Low Base High AAA Year Case Case Case $m' $m' $m' FY05 PRSCIPRSC TA* 20-253 20-25 20-25 CEM on Pro-Poor Growth Rural Development I 15-25 15-25 15-25 Rural Productivity Yerevan Water I1 20 20 Programmatic Poverty Assessment Programmatic Public Expenditure Review Private/Financial Sector Services Business Survey TA Support for Donor Coordination Total FY05 35-50 55-70 55-70 FY06 PRSC I1 20 25 Competition Policy IDF Social Inv. FundI11 15-25 15-25 15-25 Labor Market Dynamics Urban Heating 15 15 15 Programmatic Poverty Assessment Programmatic Public Expenditure Review Private/Financial Sector Services Business Survey TA Support for Donor Coordination Total FY06 30-40 50-60 55-65 FY07 PRSC I11 20 25 Public Procurement IDF Renewable Energy 5 5 Programmatic Poverty Assessment Public Sector I1 0 10-20 Programmatic PER Infrastructure 10-20 10-30 Private/Financial Sector Services Business Survey TA Support for Donor Coordination Total FY07 35-45 50-80 FYOS Rural Development I1 10-15 10-20 10-30 CPAR PRSC IV 15 Country Environment Assessment Programmatic Poverty Assessment Programmatic Public Expenditure Review Private/Financial Sector Services Business Survey TA ' This 1 Assumes SDRl=US$1.4 rangeincludes$5 millionof funding for PRSC-relatedtechnicalassistance; ifsufficientgrant financingis securedfor this purpose, the PRSCTA couldbereducedin size or evendropped(see footnote 10 on page 14). A first PRSCis projectedfor FY05 inthe Low Case onthe assumptionthat Armeniais unlikelyto drop-outofthe BaseCase so early inthe CAS period. ' Some IBRDfundingmaybepossibletowards the end ofthe CASperiod, ifArmeniabecomescreditworthy. 52. A carefully sequenced program of Analytical and Advisory Work (AAA) will provide the underpinnings for lendinganddialoguewith the Government andcivil society. The programincludes three types ofproducts: -21- Freestanding studies, such as those on rural productivity and labor markets, and the Country Economic Memorandum on pro-poor growth. 0 Programmatic analyticalwork, especially the PovertyAssessments and the Public Expenditure Reviews. Programmatic AAA will rest on ajoint work-program involving IDA, Government and other donors, andbe undertaken continuously to produce a series o fjoint, related products rather than one discrete report. This i s a new form o f partnership, which will be employed during this CAS period, with the goal of encouraging a steady building o f consensus over the A A A ' s conclusions, promoting broad ownership o f the recommendations and strengthening analytical capacity ingovernment agencies. 0 Advisory work, such as a series o f discussion notes on improving the institutional, legal and bureaucratic environment for the private and financial sectors. Further support for the Business Surveywould allow continuedmonitoring o f progress inimproving the environment for the private sector. 6.6 Specific Issues 6.6.1 The PRSCs 53. The program includes a sequence of three to four Poverty Reduction Strategy Credits (PRSCs) for FY05, 06 and 07 (and a fourth in FY08 in the High Case). These will support the PRSP objectives, and link closely with the IMF's Poverty Reduction and Growth Facilities. The PRSCs are likely to have three areas o f focus, with indicative content as follows: 0 Improvingthe environmentfor privatesector growth: - Governance, including anti-corruption policies and their implementation; making licensing, permitting and certification procedures more transparent; empowering citizens to be active inmaking institutions accountable; improvements inthe judiciary system; and strengthening government capacity to enforce environmentalprotectionlegislation. - Financial sector reforms, including payment system infrastructure; development of the insurance sector; improving corporate governance o f banks; improving court proceedings for debt recovery; enforcement o f bankruptcy legislation; and possibly development of a housing finance market. - Standards, metrology and consumer protection as well as improving legislation and enforcement o f intellectual property rights. 0 Improvingpublicsector financialmanagement: - Tax collection, includinganannualincrease intax collectionof0.4percentagepointsof GDP duringthe CAS period, to be achieved inpart through muchimproved administration o f VAT, personal income and payroll taxes, and, most importantly, customs. - Greaterbudgetaccountabilityincludingincreasedtransparencyofthebudgetingprocessat central and local levels; line ministry accountability for budget outcomes; increased use o f -22- internal and external audits; and a consolidated system o f financial reporting by state enterprises, includingpublic sector entities ineducation and health. - Morestrategic approachtobudgeting, includingintroductionofstrongerlinksbetweenthe annual budgets, the MTEF and the PRSP. Addressingpriority social sector issues: - A steadyincrease inexpenditure and/or efficiency ofspendingon education, healthand social security following targets set inthe PRSP. 6.6.2 Cross-cutting themes 54. The CAS will place major emphasis on learning and capacity building. Given Armenia's good track record making effective use o f IDA resources, this CAS puts significant emphasis on programmatic work, conducted collaboratively between IDA, Government and other donors continuously over the course o f CAS implementation. Complementing IDA'Splanned activities, the World Bank Institute (WBI) has developed a comprehensive work plan for additional capacity enhancement support (see paragraph 64 and Annex 3). The Institute will work with localpartners and NGOsto leverage their local knowledge and improve cost-effectiveness. 55. Armenia's capacity for povertymonitoringand analysis i s reasonably good, as the National Statistical Service (NSS) has conducted regular household surveys for a number o f years. Improvements could be made in a number o f areas: (i) strengthening the linkages between different household surveys; (ii) improving the measure o f household welfare by adjusting for regional prices and economies o f scale within households; (iii) updating questionnaires to reflect current policies (e.g. on social assistance) and provide better information (e.g. on employment and earnings); (iv) developing poverty maps as a policy tool; and (v) improving monitoring o f non-income dimensions o f poverty, particularly health, education and labor markets. The PRSP follow-up process i s helping the Government improve its capacity for monitoring and evaluation o f development results, and helpingthe Statistical Service better tailor its data for the needs o f policy evaluation. UNDP, in co- ordination with IDA, has a program to further develop that capacity. 56. Gender is integrated into many areas of the work program. The Programmatic Poverty Assessments will disaggregate all relevant data by gender. One o f the most important gender issues inArmenia is maternal health, since the country has relatively high rates of maternalmortality and abortion; the FY04 Health project addresses both o f these problems directly. Some issues, such as why so many boys drop out of secondary school, will be addressed under the FY04 Education Project. The proposed Labor Market Study will pay particular attention to differences in how men and women fare in the labor market, and the business survey may include a module to address the specific issues faced by women entrepreneurs. 57. Environmental issues are also well mainstreamed in the program. In addition to on-going work on natural resource management, and a proposed Country Environmental Assessment, many interventions will improve environmental conditions. The Renewable Energy Project aims to reduce Armenia's dependence on imported fossil fuels, and plans to leverage grant funding from GEF, the Prototype Carbon Fund and related instruments, as well as possibly from the EBRD, USAID and others. Other instruments likely to have a positive environmental impact include: the Urban Heating -23- project, which should reduce demand for fuelwood for heating; the Rural Development Project, which will assess the options for sustainable forestry, natural resource based income generation activities and for reducing Armenia's vulnerability to many natural disasters. The water supply and sanitation projects, together with any additional investment in irrigation (through the FY08 Rural Development I1or FY07 Infrastructure projects) will improve water resource management in line with guidance providedby the Water Resource Planprepared duringthe last CAS period. 58. Labor Standards. Armenia has a good record on core labor standards, including: (i) elimination o f all forms o f forced or compulsory labor; (ii) effective abolition o f formal use o f child labor; (iii) equal opportunity and non-discrimination in employment; and (iv) freedom o f association and the right to collective bargaining. Laws regulating trade unions and collective bargaining have substantially met the core labor standard goals, and the Confederation o f Trade Unions o f Armenia has negotiated agreements onjob security, salaries, pensions, and social assistance. Bindingcontracts between workers (with representation from grass-roots union organizations) and employers are common inlarge enterprises, but have not yet taken firm root insmaller enterprises. The Government o f Armenia does not yet comply with the minimum standards for the elimination o f trafficking in persons, but in 2003 i t acknowledged the need for increased action, and focused more law enforcement resources on the problem. 6.6.3 Sequencing 59. The CAS Completion Report (Annex 2) and OED's Country Assistance Evaluation (SecM2004-0090) both emphasize that appropriate sequencing between analytical work and investment/adjustment operations was an important factor in achieving successful outcomes. This CAS endeavors to continue that careful sequencing as follows: 0 The programmatic poverty assessments and PERs, the CEM, advisory work on the financial and private sectors, and the business environment surveys will feed into the PRSCs. Grants from the Institutional Development Fundto support procurement and financial accountability linkto related analyticalwork to form the basis for PRSC measures inthose areas. The labor market study and CEM on pro-poor growth will provide analytical input into PRSC initiatives to help make growth more pro-poor. The Country Environmental Assessment will comple- mentPRSC work on enforcement of environmentallegislation. 0 ESW on rural productivity and on rural infrastructure are beingundertaken ahead of design o f the FY05 Rural Development Project, so that the operation can build on a sound analytical footing, and benefit from strong government ownership o f the measures to be supported. The Rural Development Project will also benefit from practical lessons from the agricultural, land cadastre, irrigation and naturalresource management projects currently underway. 0 The public sector project (High Case) will build on experience o f several projects currently under implementation, IDF grants relating to public procurement, and WBI capacity building efforts. 0 The IDF to strengthen the multi-utility regulator will feed into PRSC work on telecoms, the ongoing and future investment projects for drinking water as well as the planned FY07 Renewable Energyand InfrastructureProjects. -24- 6.7 Other World Bank Group Support 60. The InternationalFinanceCorporation(IFC). IFC's heldportfolio inArmenia as of April 1, 2004 amounted to US$7.09 million. IFC made its first investment inArmenia inMarch 2001, a US$3.57 million quasi-equity investment for the renovation o f Hotel Armenia, and in August 2003, participatedina capital increase by investingan additional US$1.25 million. 61. IFC's strategy in Armenia focuses on the development o f small and medium sized enterprises (SMEs). In FY03, the Corporation supported the development o f the first privately-owned leasing company inArmenia by providing US$2.27 million in loan and equity finance to ACBA Leasing. It has also approved the SME Risk Capital Fund (US$5 million in equity and quasi-equity), which i s pending commitment. IFC's first investment in an Armenian bank, Armeconombank, i s pending circulation to the Board. It involves a $2 million loan for on-lending to SMEs and for residential mortgages, and includes an option to purchase equity. 62. The Corporation continues to actively explore further opportunities. It will continue to focus its efforts on financial intermediaries that can reach SMEs through a combination o f investment and tailored advisory work. In line with the World Bank Group's strategy for the financial sector, IFC will consider support to development o f housing finance and possibly insurance markets. IFC will continue to seek opportunities for small direct investments in export-oriented enterprises and high- impact projects in sectors where Armenia may have a comparative advantage, including the manufacturing, agribusiness, technology and miningsectors. 63. Armenia has been a member o f the MultilateralInvestment Guarantee Agency (MIGA) since 1995. Over that period, MIGA guarantees have facilitated approximately US$3.0 million o f FDIinto Armenia, through aproject inthe financial services sector. In2000, a $2.7 millionguarantee was issued to the Commercial Bank o f Greece for its equity investment in the establishment o f a subsidiary branch, International Commercial Black Sea Bank (Armenia) S.A., which will operate as a wholesale bank, focusing its activities in the areas o f project finance, trade finance, advisory work and privatization o f local companies. MIGA has also played a central role with the World Bank in implementing a loan, which finances a $1 million capacity-building program for the Government's FDIandtrade arm -- the Armenian DevelopmentAgency (ADA).Inadditionto direct support, MIGA also provides online information services that connect investors to current information on investment opportunities, business operating conditions, potential partners, and other resources, which currently contain over 90 documents relating to Armenia. Over this CAS period, MIGA will continue to respond to market demand inArmenia. 64. The World Bank Institute (WBI) has developed a detailed program to support CAS objectives (see Annex 3). WBI will buildknowledge and capacity relating to fiscal decentralization, pensionreform, utilities regulation, anti-corruption and training o f civil servants. It will also facilitate Armenian delegates participating periodically in regional initiatives that cover decentralization, pensionreforms andPRSP implementation. 65. Other services related to the World Bank Group are also active inArmenia, providing support relating to private sector development. The ForeignInvestmentAdvisory Service (FIAS) i s ajoint service o f the IFC and the World Bank. It has supported annual administrative and regulatory cost -25- surveys, as well as provided expert review o f key legislation. It i s working with the Government to build its capacity to conduct such studies in the future. In the future, FIAS is planning to continue this support inthe areas of administrative barriers to investment and competition policy. The Public- PrivateInfrastructureAdvisory Facility (PPIAF) is a multi-donor technical assistance facility that aims to promote best practices on issues related to private sector involvement in infrastructure in developing countries. Itplans to continue its current support for support for the multi-sector regulator and for development o ftelecommunications services inrural areas. 66. Armenia i s also eligible for support under two funds established by the World Bank that provide grant finance to help reduce global carbon emissions: the Community DevelopmentCarbon Fund and the BioCarbon Fund. The first finances small-scale projects that benefit local communities as they abate carbon emissions, while the second finances eligible afforestation and reforestation projects. The FY07 Renewable Energy Project has already been identified as having potential for carbon fund financing. Other opportunities will be explored during CAS implementation, particularly relating to sustainable forestry, land management, transport and waste management. 6.8Partnersh@s 67. A large numberof donors have extensive programs inArmenia, requiringactive management and coordination. The Government's role in managing and coordinating donors has weakened since the late 1990s, when the office inthe Ministry o f Finance and Economy designated to monitor donor activities began to play a less central role inthe process. Since preparation and implementationo f the PRSP, however, the Government has resumed a more active role. The PRSP process has helped clarify the Government's priorities, and the Ministry o f Finance and Economy i s increasingly usingit to attract financing for priority investments and activities. UNDP and IDA are helpingstrengthen this function. In the last few years, independently of the Government, donors have been meeting regularly to share information, coordinate plans and programs, and reduce duplication. Fourteen sector-specific Partner Groups have been established for this purpose, and an umbrella Donor Coordination Group meets on a monthly basis in Yerevan. These meetings will continue over the next few years, but will increasingly take their lead from the Government. Annex 4 on partnerships summarizes donor programs. 68. UNDP supports a broad range o f activities inArmenia, and works closely with IDA on many o f its programs. It has a major program helping the Government develop systems to monitor development results. Another key area o f focus i s improving delivery o f public services at central and local levels, including governance, judicial reform, local government strengthening and improvement o f social protection administration. UNDP also promotes support infrastructure for small and medium sized enterprises. In rural areas, it has a program to promote agro-based employment opportunities and agricultural services, as well as helping protect Armenia's biodiversity. UNDP programs help rehabilitate community infrastructure, build capacity for monitoring quality o f drinking water, and improve energy efficiency. In the area of healthcare, UNDP concentrates on improving access to HIV/AIDs prevention and treatment, and on helping communities and healthcare professionals get involved inthe policy-making process. -26- 69. EBRD concentrates on private sector development through a line of credit for SMEs, a Business Advisory Program, and trade facilitation. It may cooperate with IDA and GEF on the FY07 Renewable Energy Project. 70. UNICEF has important programs dealing with several aspects of child welfare. It is helping the Government develop effective mechanisms for registering births and infant deaths. I t has programs to improve administration o f juvenile justice; to establish local organizations responsible for child protection; to help youths who have been in orphanages and similar institutions integrate into society; and to promote policies relating to children and families at risk. Inthe education sector, UNICEF i s helping build capacity, improve learning materials, and make education more inclusive (including special education). For healthcare, UNICEF i s providing basic supplies to health posts, as well as promoting early intervention and early identificationo fchildhood disability. 71. USAID has a large program that focuses primarily on public sector management and private sector development. To improve central Government functions, USAID has a major program to improve tax and customs administration, and i s also helping to: strengthen the Armenian bar and judiciary; improve public sector accounting; improve the transparency o f national accounts, and strengthen the payment and accounting systems for healthcare. It also supports activities at the local government level, particularly to make local authorities more accessible to their citizens. U SAID has a major program to improve social assistance and social insurance. Inhealthcare, USAID i s working to refocus health services on family medicine and reproductive health, as well as providing equipment and pharmaceutical supply. U SAID has a community works program to rehabilitate community infrastructure and a school heating program, and i s promoting environmental protection in Armenia through a program to improve energy efficiency, helping develop renewable energy and supporting water resources management. USAID i s helping Armenia's private sector development improving access to finance and improving the capacity o f medium sized enterprises and i s currently designing a program o f additional support to private enterprise. The U S Department of Agriculture i s also active inrural Armenia, supporting extension and outreach to farmers, micro credit, support for agro- processing. Ineach o f these areas, IDA i s coordinating closely with USAID and USDA. 72. The European Union (EU) has a broad range o f activities inArmenia. It provides financial assistance for macro-economic management, as well as technical assistance to improve public administration, particularly tax and customs administration, and has detailed programs to help improve local government in two marzes (counties). The EU has a private sector development program. It also plays a major role in rural development through a food security program, and support to the Ministryo f Agriculture and the State Cadastre. Vocational education and training i s an important area o f EU focus, as i s promoting use o f technology in education. To improve environ- mental conditions, the EU i s helping to: develop hydropower; improve management o f municipal solid waste; disseminate environmental information; and establish regional environmentalcenters. 73. DFID focuses on major programs on public sector reform and on integrated regional development intwo marzes. It has supported both the PRSP and MTEF process, including through initiatives to develop marz levelpoverty reduction strategies inthe two poorest marzes. 74. GTZ concentrates on development of local governments and on promoting SMEs, including through credit lines. I t also has training and education programs for vocational education, improving agricultural knowledge and training bankers. To protect the environment, GTZ i s helping the -27- Government establish a protected area. KfW is, amongst other things, helping develop a local water and wastewater company, which currently operates intwelve cities and villages and serves more than 100,000 people. KfW is now beginningsimilar projects inother parts o fthe country. 75. UNHCR is helping the Government develop legislation adequate for the needs o f refugees. This includes training thejudiciary ininternationalrefugee law, systems for asylum and for acquiring citizenship. It i s also supporting social service, education and health measures that benefit refugees. IFAD has a program to promote on- and off-farm economic activity in rural areas, and the World Food Programme has several food-for-work and food-for-training activities, mostly in rural and vulnerable areas. It also has a school feeding program. FA0 i s helping the Government develop a national agricultural strategy and providing technical assistance to build capacity in the Ministry o f Agriculture and related organizations. It provides assistance to farmers afflicted by natural disasters, and also has a mountain areas program to help develop some o f the poorest and most isolatedareas o f the country. In addition, UNAIDS and the Global Fund are working to prevent the spread o f HIV/AIDS inArmenia. 76. The Netherlands has cofinanced the Structural Adjustment Credits, adding significantly to their impact through support totaling U S 4 4 million to date. The Netherlands has assisted with the PRSP process through Trust Fund financing executed by the World Bank. The Netherlands has also worked with IFC to support corporate governance reform, providing training to 80 percent o f Armenia's active corporations. 77. Japan has co-financed with IDA the Electricity Transmission and Distribution Project through a credit from the Overseas Economic Cooperation Fund (now part o f the Japan Bank for International Cooperation). Japan has also supported, through grants from the Ministry o f Foreign Affairs, roadmaintenance and culturalpreservation. The Japan-funded, World Bank-executed, Policy and Human Resources Development Fund(PHRD) grant program has provided support for structural adjustment, rural development and utility restructuring. 6.9 Risks of the strategy 78. The situation in and around Armenia could change in a number o f ways that would affect development inthe country both for better and for worse. i.PoliticalchangeintheCaucasusregion. Bothpositiveandnegativedevelopmentsinthe region are possible over the CAS period. IDA'SFY05 Country Economic Memorandum will analyze how Armenia can best prepare itself for possible improvements, including investments that would allow the economyto reap the fullest benefits from developments such as a normalizationo f trade relations. Although it i s not considered likely at this time, renewed instability in the Caucasus i s possible, and it would make implementation o f much o f the proposed strategy difficult. In this event, significant adjustments inthe work program would beunavoidable, andthe ExecutiveDirectorswouldbe consulted on a revised strategy. ii.Political consensus in Armenia. Armenia's very impressive reform track record has dependedon strong political consensus, both within and betweenthe executive and legislative branches. As discussed earlier, the domestic political context i s becoming more complicated, and this could affect reform momentumby reducing public, investor and/or donor confidence. -28- A deceleration in improvements in tax revenues and/or slower economic growth could increase the financing gap to the extent that expected levels o f IDA adjustment lending and donor funding could not cover it. The CAS program aims to mitigate this risk by outreach and knowledge activities, and encouraging active participationand dialogue with Government and civil society around the PRSP process generally, and on a range of specific reform priorities, includinghealth and education revitalization, local government development, strengthening o f governance and anti-corruption efforts, and improvements in social protection arrangements. iii.Exogenouseconomicshocks. AnydeclineinglobaldemandwouldlikelyhamperArmenia's export growth and reduce workers' remittances and perhaps diaspora assistance. An oil price shock would also affect the Armenian economy - every $5 increase inthe price of a barrel of oil increases Armenia's import bill by the equivalent o f 1 percent o f GDP. If exogenous shocks cause a major shift in Armenia's economic situation, IDA would revisit the prioritizationo f its lendingand AAA and amend the portfolio as necessary. iv. Unexpected natural resource shock, such as an earthquake, major drought, flood, landslide, or frost. IDA i s helping the Government reduce Armenia's vulnerability to natural disasters through the various ongoing and planned rural and natural resource management interventions, by ensuring that major construction financed by the Bank complies with earthquake-compatible building codes, and through a dam safety program that reinforces the country's important barrages. -29- -30- eL 3 c; 1 M I c +--- -r Y 4 a, 8 4 Y 8 4 a, a, 4 a, * a & w e- d 3 a Annex 2: FYO2-04 CAS Completion Report -37- Armenia 2001 CAS Completion Report Table of Contents Executive Summary....................................................................................................................... 39 Introduction................................................................................................................................................................. 41 Armenia's Objectives.................................................................................................................................................. 41 CAS Objectives........................................................................................................................................................... 42 Armenia's progress towards its goals.......................................................................................................................... 43 How IDA contributedto Armenia's progress ............................................................................................................. 46 IDA'Sperformance ..................................................................................................................................................... 50 Aidcoordination ......................................................................................................................................................... 52 Overall assessment of CAS performance.................................................................................................................... 52 Lessons for subsequent CAS design........................................................................................................................... 53 -38- Executive Summary Introduction In2001, IDA'Sboardapproved acountryassistancestrategy (CAS) for Armenia for the period FY2002-2004. This completionreport evaluates progress implementing that CAS. CAS Objectives The 2001 CAS hadthree broad objectives: (i) creatingjobs through private sector development; (ii) improving governance and public sector services; and (iii) rebuilding human capital. These objectives complemented the goals o f the Interim Poverty ReductionStrategy Paper, which was publishedshortly before the CAS. Country Outcomes Armenia has made substantial progress over the CAS period. The economy grew by 13% in2002 and 14% in2003, with increasinglydiverse sourcesofgrowth. Manufacturing exports grew by 50% over the period and Armenia increased exports to counties outside the CIS. According to surveys, the business environment -registration, licensing, inspections, customs clearances, tax requirementsand corruption -have improved since 2000. The number o f firms increasedby 15% between 2001 and 2003 and small and medium enterprise growth was about 7% per year duringthe CAS period. However, formal sector employment has not grown at the same rate as output. This i s because redundancies from state owned enterprises have continued, andbecausemany firms appear to have expanded by usingsurplus capital rather than hiringnew employees. Armenia has seen some progress inreducingpoverty, which fell from 55% in 1998/99 to 48% in2001. Between2001 and 2002, however, overall poverty increased slightly (poverty inYerevan continuedto fall, rural poverty remained stagnant andpoverty in other urban areas increased). The increase inpoverty inother urban areas i s puzzling. The stagnantpoverty situationinrural areas appears to be the result o fworsening domestic agricultural terms o f trade, with resultingdeclines inreturns to labor insome rural areas, since the agricultural labor force remains high. Subsistence farming still dominates, despite some commercial successes inagriculture, particularly inthe fertile Ararat valley. Over the CAS period, public sector services and governance both improved, although furtherprogress is still necessary. The Government completed the first stage ofcivil service reform andprepared andbegan implementing an anti-corruption strategy. The average pension increased by 30%, andpension arrears were cleared. Targeting o f social protectionschemes has improved and leakage i s low. The quasi-fiscaldeficit associated with the power sector (equivalent to 2% o f GDP) was eliminated andmost ofthe country now has uninterrupted power supply. By 2003, nearly halfo f the populationo fYerevan (close to one fifth o f the country's population) had at least 12 hours supply o f good quality water compared to only 10% in2001. By March 2004, half o f the city's populationhad service 24 hours per day. -39- Human capital has improved. Health outcomes are better, althoughthe improvement was not as great the 2001 CAS had targeted. Differencesbetween outcomes inurban and rural areas are marked. People are not usinghealth services, at least inpart because formal and informal payments can be unaffordably high. Social protectionmechanisms introducedin 1999,however, do appear to be helpingthe poor access healthcare to some extent. Participationinbasic education remains high,but children, especially boys, are dropping out o f secondary school. This i s a particular problem inrural areas and for poorer children. The Government i s working to improve the quality o f education. Public expenditure on both health and education has increasedbut remains low inboth sectors. IDAS contribution to country outcomes The 2001 CAS set a series o f outcome targets, all o fwhich have either beenmet or have seen substantial progress. Inmany cases, IDA interventions, often in a mutually supportive package of analytical work, investment andpolicy-basedlending, made direct contributions towards the country results discussed above. Measuringthe precise contribution o f IDA activities to those outcomes i s difficult, however, becausethe CAS didnot explain the mechanisms, and some indicators didnot fit the interventions. Evaluation of CASperformance IDA's performance was satisfactory. The focus o fthe CAS, the mix and design of interventions were all appropriate. The quality o f IDA's work appears to have been good, judging from internalreporting systems as well as OED and QAG reports. Many o f the products were not delivered at the time planned. Insome cases this was a deliberate decision inresponse to changing circumstances, but inother cases, delays resulted from key staffmembers not beingavailable at the right time. Lessons for future CAS design The areas o f focus andthe mix ofinterventions were appropriate and should be continued. Future work shouldperhaps put more effort into ensuringthat growth leads to as much employment andpoverty reductionas possible. Outcome indicators should be linkedmore clearly to IDA interventions and should be usedas amanagement tool throughout CAS implementation. Devolving responsibility for portfolio management to the country manager helped improve portfolio quality and should be continued. A strong multi-sectoral team with some task management responsibilitiesinthe country office was important for achievingresults and future work shouldbe designedto benefit from this team as much as possible. Duringimplementationo ffuture CASs, management needsto payparticular attention to ensuring availability o f key staff at the appropriate time. Consultations on the next CAS can benefit from recent discussions concerning the PRSP, allowing the CAS discussions to concentrate on how IDA canbest help the Government implement its poverty reductionpriorities. -40- Completion Report for IDA'S Country Assistance Strategy for Armenia FYO2-04 1. Introduction This document reviewsthe experience implementingthe InternationalDevelopment Association (1DA)'s Country Assistance Strategy (CAS) approved inApril 25,2001, (Report No. 22111-AM). The CAS covered financial years 2002-2004. 2. Armenia's Objectives The CAS intendedto support the following objectives stated inArmenia's Interim PovertyReductionStrategy Paper (March 2001, report No. 22131): 0 Sustainable and equitable economic growth drivenby a more dynamic private sector. The public actions proposed involved reducing administrative barriers to investment and entry, buildingeffective public-privateconsultative mechanisms and creating a levelplaying field for new and existing companies. 0 Public administrationreform and an anti-corruption program. Public actions included streamliningthe civil service and key regulatory agencies, advancing judicial reform and improving domestic revenue collection. Enhanced human development, Public actions included additional financing for school education, basic health and infrastructuremaintenance (assuming improvedutility revenues and savings from reduced subsidiesto utilities), and improvedtargeting o f social protectionand education expenditures. Neither the CAS nor the I-PRSP made an explicit linkto the MillenniumDevelopment Goals (MDGs), but the objectives overlapped with MDGtargets. The interventionsto promote the private sector, to improve public administration, and to reduce corruption were intendedto reduce extreme poverty, as were the proposed interventions to improve social protection. Interventionsto promote humandevelopment clearly help Armenia meet the goals relating to health and education. The CAS'Sproposed investments in natural resource management, water supply and urbanheatingwould all help Armenia meet the MDGrelating to environmentalsustainability. Armenia has already met Goal 3 on gender equality. Armenia's current status against the MDGtargets and the World Bank's evaluationo f the likelihood o f the country meetingthe goals are listed inTable 7 o f the FY05-08 Country Assistance Strategy. -41- 3. CAS Objectives The CAS aimedto help Armenia achieve results inthe following areas: 0 Privatesector development,through: o Improvingthe entrepreneurial climatebyreducingregulatory and administrative barriers to starting new and expanding existingbusinesses; improving the tax and customs administration; improving landmarkets; and strengtheningthe mechanisms for privatizationandbankruptcy. o Promotingthe private sector by improving local managerial capacity. o Direct support for foreign investment, by guaranteesand advice as well as IFC investments. Improvedgovernanceand publicsector services,through: o Strengthening public administrationby increasing the capacity for executive decision-making inGovernment; streamlining and modemizingthe civil service; makingthe civil service more accountable; improving public expenditure management; reforming intergovernmental finance; improving audit functions; and continuingreforms o fthejudicial system. o Improvingthe performance ofutilitiesby creating a single public services regulatorybody; shiftingmanagement o fwater companies to private operators; securing private financing for new investments inthe power sector; andpromoting gas rather than electricity as the primary source o fheating. o Improvingrural services by increasing cost-recovery inirrigation; improving property rights and land markets; andpromoting small credit associations. o Improvingnatural resource management byhelpingcommunities manage their watersheds; promoting environmentally sustainable farming practices; and improving managements o f forests andprotected areas. 0 Rebuildinghumancapital,through: o Educationby improving financing for primary and secondary education, increasing supplies o f textbooks; getting communities involved in schools; improving the quality o f teaching; making school budgetsmore transparent; improving the access o f the poor to schools; and improvingthe quality o f education. o Healthby improving access to healthservices especially for the poor; improving health financing to give greater priority to primary healthcare; rationalizingthe healthcare system; and helpingthe Government develop HIV/AIDS strategy. o SocialProtectionbyhelpingreformthe public pensionsystem; promoting better administration and targeting o fthe family benefit; developing the overall framework for social protection; and promotingpolicy reforms to create more flexible labor markets. -42- 4. Armenia's progress towards its goals The country made substantial progress towards these results, based on the following: Armenia 's economy grew strongly, driven by theprivate sector. Real GDP grew by 10% in2001, 13% in2002 and 15% inthe first ninemonths of2003, andthe basis o f the economy has begunto diversify. More than 70% o f GDP was generated by the private sector. Manufacturingexports grew bymore than 50% in two years, and Armenia has expanded its export markets beyondthose o f the CIS. The business climate has improved: firms' overall confidence inthe government and inthe business environment improved from an average o f 2.6 in2000 to 3.3 in2001(on a6 point scale, where 1=total lackofconfidence). Businesses report improvementsinbusiness registration, licensing, inspections and the tax system. New firm growthwas good: the stock of firms grew by 15% between2001 and 2003, and small and mediumenterprise growth was approximately 7% p.a. over the same period. Formal sector employment didnot match growth inoutput. Aggregate employment remains lower than it was in 1990although it did increase in2002 and2003. There aretwo reasonsfor this. First, themassivejob shedding from state owned enterprises has continuedto the present day. Second, business surveys indicate that new firms initially had surpluscapacity becauseinvestments neededto be o fa minimumeconomic scale. As domestic and export demand increased, companies usedthat surplus capacity and thenthey plus additional new entrants began to increase the demand for labor. Armenia has made someprogress in reducingpoverty. Poverty fell from 55% in 1998/99 to 48% in2001, with the sharpest drop seen inYerevan. Preliminary data indicate that between 2001 and 2002, this progress may have halted, as the overall poverty incidence appears to have increased slightly. Over the latter period, poverty appears to have continued falling inYerevan, to have remained stagnant inrural areas but to have increased inother urban areas. The 2002 results may be affected by government policies that caused the poverty family benefit to fall considerably in2002 (the number o fbeneficiaries fell by 11% and the average level o f benefitby 15%). These policies were reversed in2003 with expenditure returning to 2001 levels. Governance has improved. Between2000 and 2002, Business Environment and Enterprise Performance Surveys (BEEPS) indicate that Armenia has seen improvementsinpolitical stability, government effectiveness, regulatory quality, rule o f law, and control o f corruption. However, the country's ratings for voice and accountability fell over the same period. On all measures except political stability, Armenia performs better than the average for the CIS. Transparency International's CorruptionPerceptions Index rates Armenia as 78tho f 133 countries surveyed, the highest ranking inthe FSUapart from the Baltic countries and Belarus. FreedomHouseratedArmenia at 4/7 for political rights in2000, up from 3/7 in 1998, and rated Armenia at 4/7 inboth years for civil liberties. Annual business surveys similar to BEEPS also indicate improvementsingovernance. For example, the share o f firms reportingmaking bribes frequently declined from -43- 40% in 1999 to 14% in2002, and the average bribe as a share o f revenue declined from 4.2% to 1%over the same period. Civil service reform has begun. The Government passeda civil service law and similar laws for the diplomatic, tax, customs andpolice services. I t established a Civil Service Council to oversee management inline agencies. Inaddition, a law on remuneration o f civil servants was passed inJuly 2002, which requires, among other things, that all senior civil servants publicly declare their assets. With assistance from DFID, the Government has reviewedall central executive bodies and has reorganized and written charters for most ministries. Ithas also moved manyagenciesfrom direct central controlto lineministries, to clarify accountability and strengthen oversight. The first phase o freform i s thus complete, but substantial work remains to bringabout changes inthe actual functioning o f government institutions. Energy and water services have improved considerably. Water services have improved considerably, but the improvements have all been inYerevan (which accounts for almost 40% o f the country's population). By mid2003,39% o f the populationhad 24 hours supply and an additional 7% had it for at least 12 hours per day. This compares to only 10% o fYerevan's populationthat had 12-hour supplyin2001. Theutility is working more efficiently; 80 percent o fthe households have meters, and collections have risen from 33% o fbilledwater in the periodMay-July 2002 to 84% inthe sameperiod in2003.l6 Drinkingwater quality i s good; 98% o f the water supply inYerevan meets quality standards, but the deteriorating infrastructure i s beginningto compromise these standards. Inthe power sector, the whole country has benefitedfrom major improvements. Almost the entire populationnow has uninterruptedelectricity supply. Tariff collection has increased from 80% in2001 to 98% in2003. The quasi-fiscal deficit associatedwith the electricity sector (2% o f GDP in2001) has beeneffectively eliminated since the distribution company was privatized inNovember 2002. The EnergyRegulatoryCommissionhasbeentransformed to amulti-utility regulator, althoughthe agency needs to develop additional capacity. The Government adopted an UrbanHeating Strategy inSeptember 2002; it has removed some o f the barriers to sustainable heating services, and i s now piloting efficient and less polluting approaches to heating large apartment buildings.As a result o f increased electricity prices and improved collectionrates, 50,000 households switched to gas for heating, which i s more efficient and less polluting. Thecounty 's socialprotection system has improved. The Government has cleared its arrears, and the average pensionincreased by 30% between 2001 and 2003. Surveys indicate that targeting o f the socialprotectionschemes has improvedand that leakage i s low, although further improvements are still necessary. The Government has set up a personal identification system for all the Armenians (more than 250,000 people now have PINnumbers) for automating the social insurance, social welfare offices and employment services. Almost all people informal employment now make their social insurance contributions, with 16OECD Study on Consumer ProtectioninUrban Water Sector Reforms inArmenia -44- the number increasing by 100,000 between 2001 and 2003. The Government has begunto modernizethe pensionadministration system, settingup amanagement informationsystem with individual records for those covered by social insurance (contributors to the system) and their employers, as well as computerized records for current pensioners. They are expected to complete this modernization in2006. However, the pensionadministrationneeds additional humanresources capacity and improvedaccounting and administrative systems. To address labor market problems, the Government has prepared Draft Labor Code and developed a new systemfor training the unemployedto bettermatchthe labor supply and demand. 0 Human capital has improved. According to administrative data, between2001 and 2003, maternalmortality fell from 47 per 100,000 lives birthsto 34. Other sources give higher figures, but also show positive trends. Under five mortality fell from 25 per 1,000 live birthsto 16 over the same period. These figures mask a significant difference betweenrural and urban areas. According to survey data (ADHS2000), ruralinfant and early childhoodmortality rates exceeded urban rates by47 percent and 22 percent, respectively, duringthe 1990s. The healthcare systemhas improvedas the Government has increasedthe share o f spending allocated to primary healthcare and established a system o f family doctors. Substantial problems remain, however. Official and unofficial payments are high and becausethere i s no insurance mechanism, these costs often deter people from usingservices. Thepoverty family benefitdoes appear to have helpedsome people usehealthcare services, but on the whole use rates are low. The country still has excess hospital capacity andpublic spendingon the sector remains low. Participationinbasic education i s high, with a net enrollment rate o f 94% in2001, spread fairly evenly across quintiles. Secondary education, however, i s more problematic. Surveys indicate that the net enrollment rate insecondary education i s 61%, and i s lower for the poor (52% for the poorest quintile versus 64% for the richest). Public spending on education increasedby 45% between 1997 and 2001 butremains low. IDAhelpedensure that highquality textbooks are available to all at a reasonable cost, helped create some managerialand financial autonomy in 40% o f all schools and encouraged greater parent involvement inschools. It also helpedbeginconsolidation o funderutilized schools. 0 Rural areas have not grown as much as urban areas. Povertyrates inrural areas stagnatedbetween 1998/99 and 2001, while they dropped considerably inurban areas. There are few off-farm opportunities and subsistence farming still dominates (only 29% o f farming households had commercial surpluses in2001) indicatingthat agriculture i s still a basic safety net for many families. Domestic agricultural terms of trade worsened every year between 1997 and 2002 and agriculture's share o f GDP declined consistently over the same period. Since the size o f the agricultural workforce remainedconstant, returns to labor in some rural areas may have declined. While on average rural areas have stagnated, some sectors, particularly those located inthe fertile Ararat valley, have seen some progress. Agricultural exports increased from $220mn in 1998 to $354 million in 2001. Since 1999, agricultural exports have grown as a share o f exports, representing14% in2001. Landtitling is almost complete (the Governmentplans -45- to complete it in2004), and about 500,000 landtitle certificates have been issued to farmers. Transactions inthe land market are beginningto increase. For example, the number o fbusiness transactions with agricultural landplots increased from about 2,000 in2001 to more than 4,500 duringthe first 8 months o f 2003, Many irrigation systems are now more efficient and farmers are increasinglytaking over responsibility for managing and financing operations and maintenance o f their systems. Armenia's goodperformance means that the country has met all o f the triggers for moving to the highcase. However, becauseprivatization of electricity distribution took longer than expected (due mainly to changing market conditions rather than lack o f government commitment) it didnot meet them intime to develop a PRSC, the highcase deliverable, within the period. 5. How I D A contributed t o Armenia's progress The 2001 CAS contained a list o f indicators that it expected to influence and targets for meetingthem. Table 2 outlines the targets and the current status as well as the IDA instruments that affected each indicator. It shows that Armenia has met almost all o f the targets, with significant assistance from IDA interventions. Table 2: OutcomeIndicatorsfor CAS Period(FY02-04) Target in CurrentStatus 2003 Bankinstrumentthat affectedor helped 2001 CAS monitor outcome Poor as percent 48% (2001). Most interventions promoted investment and economic o f total growth: SAC IV (Ol), SAC V (03), SATAC I1(98) (see population below for specific areas o f support); AAA work inthe reduced from financial sector (03); Country Economic Memorandum 55% to 50%. (02); ESW o n Trade Facilitation (02). Sectoral interventions contributed to reducing corruption, improving fiscal management and services to the poor. The poverty update (02) and poverty assessment (04) helpedmonitor poverty outcomes. Regular payment No arrears. SAC IV (01) helpedimprove targeting o f family benefits. o f social The Public Expenditure Review (02) andAAA on social insurance and protection (03), highlightedproblems and potential social assistance solutions. IDF support to Treasury budgetary system (03) transfers. helped improve government financial management. At least 15% real Pensions rose by more SAC IV (01) supported the first phase o fpensionreform increase in than 30% and SAC V (03) helped continue reforms. SAC IV average supported privatization o f electricity distribution pensions. companies, which eliminated a quasi-fiscal deficit and freed up funds for increased spending on social protection, health and education, etc. -46- Target in Current Status2003 Bankinstrumentthat affectedor helped 2001 CAS monitor outcome Private sector Reduced average The time taken to register SAC IV(Ol), SAC V (03), SATAC I1(98) supported time for business a business fell on average new laws onbusiness registration and trademarks, registration. from 27 days in2000 to improvements inthe bankruptcy law and implementation 2 1days in2001 o f other specific actions to improve the business environment. Annual FIAS business surveys helped monitor results. Reduced In2000, importers needed SAC IV(Ol), SAC V (03), SATAC I1(98), included customs 8 days to clear customs, support for implementing actionplans to improve clearance time versus 5 days in2002. customs administration. Annual FIAS business surveys for importers. helpedmonitor results. Reduction and The time taken for SAC IV (Ol), SAC V (03), SATAC I1(98), included streamlining o f licensing fell from 24 support from improvements inthe licensing law and the licensing days in2000 to 19 in business inspection regime. Annual FIAS business requirements. 2001. surveys helped monitor results. Governance Greater reliance Ongoing. Judicial reformproject (01) is helping improve case on the judicial management, educate court personnel and develop a legal system to resolve information system for the public. SAC V (03), supported bankruptcy improvements inthe bankruptcy law. The Institutional cases. and Governance Review (IGR) workshop (01) helped buildconsensus for reform. Public Armenia's rankingfor rule Judicial reformproject (01) is helping improve perception o f o flawinBEEPS increased enforcement andpromote public awareness o f laws; SAC progress in slightlybetween2000 and IV(01) andSACV (03) supportedaseries ofspecific improving 2002, andthe BEEPS actions to reduce corruption and improve governance. governance, and rankingfor government AnIDFgrant (01) helpedthe Government develop its reducing effectivenessmore than anti-corruption strategy; Annual FIAS business surveys corruption. doubled over the same monitor results and an IGRworkshop (01) helpedbuild oeriod consensus for reform. Social Sectors Girls' school Girl's enrollment remains Education(98) improved conditions inschools for all enrollment higher thanboys. children. N o specific interventions were necessary. maintained at least the same level as boys. Real average Increasedby 30%. SAC IV and SACV (03) included provisions for Leacher salary up education financing, the PER (02) helped improve by 40%. expenditure management. Enrollment rates 100%. Net enrollment IIThe EducationProject (98) helped improve parent inelementary rate for grades 1.8 is 94%. involvement, create school boards. The Social :ducation at least Investment FundI1Project (00) helps poor communities 95%. rehabilitate schools. Maternal Rates improved (maternal SAC IV (01) supported rationalizationo f the health mortality mortality was 34.4 per sector thus freeing up funds for essential health services. -educed from 47 100,000 live births in The HealthProject (98) helped improve access to primary :o22 per 2002) but measurement is healthcare, including antenatal care. 100,000 live difficult irths. -47- Target in Current Status2003 Bankinstrumentthat affectedor helped 2001 CAS monitor outcome Increase or Rates maintained HealthProject (98) helpedimprove access to primary maintain share o f healthcare. fully immunized one year olds at 95% or more Reduce under-5 Continued improvement. HealthProject (98) helpedimprove access to primary mortality from Survey data give different healthcare. The Social Investment FundI1Project (00) 25 per 1,000 to figures from official data helped rehabilitate key services inpoor communities. 20 per 1,000 live although both show the births. same Dositive trends Quasi-fiscal cost The quasi-fiscal deficit SAC IV (01) supported privatization o f the electricity o f energy sector was 2% o f GDP in2001 distribution company and eliminated the quasi-fiscal reduced to a and has effectively been deficit. The Electricity Transmission and Distribution quarter its eliminated since Project (99) supported much o f the technical preparation. current level. November 2002 Resumption of Gas supply extended to an Energy T&D project and SACIV supported increased natural gas additional 50,000 tariffs and improved collection, giving incentives to supplyto households switch to gas. SAC V helped establish a single utility additional 40,000 regulator to ensure that the privatized distribution households. company complies with its license requirements. The UrbanHeating Strategy (03) proposed solutions for heating, particularly inlarge apartment buildings. Agriculture Completion o f Inprocess, mostly Title Registration Project (99) titling o f rural achieved. land -- all farm- ers have titles. 20% increase in Not available. In2000 The Irrigation Dam Safety (00) and the Irrigation Water User Armenia had no DevelopmentProject (02) bothhelped communities form Associations fhctioning Water Users water users associations and finance key rehabilitation o f receiving at least Associations (WUAs) and systems including major efficiency improvements. 5,000m3 o f no bulk water meters to irrigation water measure delivery. In2003 per hectare. 12 W A Sare functioning. Cost recovery in Currently irrigation Irrigation Development Project (02) helped water users irrigation water operation and associations become financially stable by improving cost supplyincreases maintenance cost recovery. Irrigation D a m Safety (02) helpedmake key recovery is 25.2%. systems less costly to operate. Decrease inpro- The State Water Municipal Development Project (98) financed some portion of Committee reports in system rehabilitation. Social InvestmentFundI1(00) drinkingwater 2003 that 4% o f the total rehabilitated drinking water systems inpoor with above population connected to communities. No projects for other urbanpopulations. allowable con- pipedwater is receiving [aminant levels water above allowable From 14%to 8% contaminationlevels. :urban), and From22% to 15% (rural). -48- Target in CurrentStatus 2003 Bankinstrumentthat affected or helped 2001 CAS monitor outcome For households 46% o f customers in Municipal Development Project (98) financed withpipedwater, Yerevan have at least 12 rehabilitationand institutionalreforms for drinkingwater increase in hours supply. Service inYerevanoutcomes. Noprojects for other urban number with at outside Yerevan has not populations, althoughthe Social Investment FundI1(00) least 12hrs improved. The average rehabilitated drinkingwater systems inpoor supply from 10% daily water supply was 8 communities. to 20% (urban) hours per day inurban and from 40% to areas and 14 inrural areas 55% (rural). in2003 (PRSP) EvaluatingIDA'Sspecific contributionto specific country outcomes i s difficult for several reasons: 0 The precise links between long-termgoals, outcomes that could be achieved duringthe CAS period, and the mechanisms bywhich IDAaimedto help Armenia meet those goals were not specified inthe 2001 CAS. 0 The indicatorswere not usedas a management tool duringCAS implementation. 0 Some indicators were not appropriate: one (quality o fwater inrural areas) was not associated with any IDAinterventions; another (girls' school enrollment rates) was never a problem; and another (share o f irrigation water users' associations receiving 5,000m3 water per hectare) was not measurable at the time. 0 The effects o f some plannedinterventions (e.g. the Natural Resources Management Project) were not captured inany indicators. Future CASs will endeavor to make the indicators and their baseline data clearly accepted byall involved, the links to the interventions more explicit andto usethe indicators as a management tool throughout CAS implementation. There were no severe exogenous shocks over the periodo fthe last CAS that affected the achievement o f those outcomes. The price o f wheat coming from Russia increased markedly inthe summer o f 2003 but didnot raise inflationrates or otherwise affect macroeconomic indicators. The severe frost inwinter o f 2002-2003 severely damaged wine and h i t crops for several agricultural areas but this does not seemto have affected the CAS outcomes. CAS implementation didnot have any unintended negative impacts that the team i s aware of. There was no unanticipated environmentaldamage; indeedthe irrigation, water supply, energyandnaturalresourcemanagement projects have contributedto environmentalimprovements byreducing wastage o f natural resources and helpingthe Government reorganize its environmental management system. The primary gender issue for women inArmenia relates to poor reproductivehealth behavior (over halfo f all pregnancies end inabortion). IDA interventions during the 2001 -49- CAS periodmade significant progress inimproving the healthand education systems in general, but have not yet included specific actions to improve women's reproductive healthbehavior, nor have they specifically addressedHIV/AIDS, inpart because other donors have programs inthese areas. A forthcoming study has assessed the problem o f reproductive health and will propose potential actions, some o fwhich will be followed up inthe FY04Healthproject. Changesinthe labormarket appearto havehit womenhard, as the female share o f employment fell inthe 1990s and the gender wage gap was 80% in 2000.17 Armenia also has two important male gender issues: excess male mortality (men have a life expectancy around ten years lower than that o fwomen) and boys dropping out o f secondary school, particularly inrural areas. The FY04 health and education projects include specific measuresto tackle this problem. 6. IDA's performance IDA'sperformance overallwas satisfactory. Inconsultations, government officials consistently state that they value their relationshipwith IDA highly. The 2002 client surveyindicates satisfaction with IDA, with a meanfavorability rating o f 7.8 on a scale o f 10. Staff continuity was good inmost sectors, with the possible exceptiono fpublic sector modernization. OED's CAE was released inlate December 2003 andbroadly confirms this assessment.'* Quality. The quality o f IDA'S products and services was generally good. Internal reporting systems (PSRs, CPPRs) indicate that the portfolio i s performing well. All projects are rated satisfactory and there are no problem projects. The disbursement ratio" i s satisfactory. At the end o f FY03 it was 20.2% compared to an ECA average o f 19.8%. The portfolio i s relatively young, with an average age o f 3.3 years. Sixtypercent o f projects are inthe first three years o f implementation with the remainder are inthe final stages o f implementation. ESW has mostlybeen well received by the Government and many o f the recommendations are beingimplemented. The team has produced four Implementation CompletionReports (ICRs) over the CAS implementationperiod, three o fwhich have beenreviewedby OED.*' Q A Ghas reviewed9 activities that are covered bythe 2001CAS, and all are ratedsatisfactory or above.21 "Armeniagenderprofile l8 The Executive Summary o f the C A E noted "the Bank's assistance has made a major contribution to the maintenance o f macroeconomic stability, which facilitated the economic recovery and growth." "..the Bank has had a significant impact through its AAA and lending inhelping to establish a new social benefit system, well targeted to the poor. The Bank has also had a major impact on improvements inthe efficiency o f the education sector and on the increased availability o f energy. Intransport and agriculture, the Bank's assistance has likewise made important contributions.. .but major problems were left unresolved." "The Bank's program had some success inprivate sector development.. .but muchremains to be done to improve the business environment, especially inthe promotion o f small and mediumjob-creating enterprises." "On balance.. ..OEDrates the outcome o f the Bank's assistance strategy as satisfactory." "The Bank's overall contribution to institutional development is rated as substantial." "Balancing the risks and benefits suggests that the sustainability o f the Bank's assistance program should be considered likely." l9Disbursements during the fiscal yearhndisbursedbalances at the beginningo f the fiscal year 2o SAC IV ICRratedthe outcome as satisfactory; OED has not yet reviewed. The Structural Adjustment Technical Assistance Credit I1rated the outcome as satisfactory; OED concurred. The Education Financing -50- Use of AAA work. IDA made good use o f analytical and advisory work duringthe CAS period. Strong analyticalwork complemented adjustment and investmentprojects particularly effectively inthe energy and education sectors. IDA'Sunderstanding o f poverty issues inArmenia i s relatively good, and the work i s well integrated into the program. The data are disaggregatedby gender, which allows the team to mainstream gender issues where relevant, andto follow upwhenparticular issues arise, such as the detailed analyticalwork on women's reproductive healthcurrently underway. The portfolio has also benefitedfrom thorough analytical work on the environment, which has been mainstreamed into many sectoral and capacity-buildinginterventions, such as water supplyand sanitation, energy, heating and irrigation. Capacity enhancement. The World Bank Institute(WBI) programwas relatively limited.WBIhas focused on a South Caucasusregionalprogramon fiscal decentralization and development o f local government capacity over the last two years, and on PRSPdialogues among the CIS-7 countries. They have recently started a training programonpensionreform that will complement the forthcoming FY04pensioncredit. Participants have generally ratedthe activities as very successful and relevant, but asked that activities be broadened and made more continuous. Deliveryof products.As Table 4 shows, bythe endo fFY04, the plannedlending programwill have been delivered. The 2001 CAS planned 10 new investment projects and, by the end of FY04, 10will have been delivered-- eight that were plannedinthe CAS and two that were not envisaged. One project (Urban Heating) has not yet been approved but the Government i s already piloting operations under a PPF. IDA delivered the planned number o fAAA activities proposed inthe 2001 CAS, though they covered a somewhat different mix o ftopic areas (see Table 5). Theprogram didhowever suffer from substantial slippage. Around halfo fthe activities were delivered at least one fiscal year later than planned. Some delays resulted from decisions deliberately taken inresponseto changing circumstances. For example, the Municipal Water and Wastewater project was moved from FY02 to FY04 because responsibility for the sector within the Government shifted, the Bank's policy changed, and country management wanted to assess progress implementingthe Municipal DevelopmentProject. Other delays, however, were causedby insufficient availability o f keyBank staff and/or staffturnover. This was aparticularproblem for the Public Sector ReformProject. Giventhe centrality o f improving public sector management to the 2001 CAS, delivering the relatedproject at the end o f the FY04, rather than inFY02 as planned, i s an important omission. and Management ReformProject rated the outcome as highly satisfactory; OED concurred. The Enterprise Development Project rated its outcome as satisfactory; OED ratedit as moderately unsatisfactory with unsatisfactory Bank performance and unlikely sustainability. They conclude that project design was poor. 21QESW: Water Resources Plan; QAE: Judicial ReformProject, SACIV, Natural Resources Management Project, HealthProject, Municipal Development Project, Dam Safety Project; QSA: Electricity Transmission and Distribution Project, Agricultural Reform Support Project. -51- The work o f different parts o f the World Bank Group has beenmutually complementary, though IDAhas dominated. The IFC has only a small program inArmenia, with two active projects and one fund, which has yet to be capitalized. The IFC has had difficulties findingindustrialinvestmentso f sufficient scale andhas only recentlybegunto find creditworthybanks to which it canmake significant line-of-credit investments. IDA i s working with MIGA on the ForeignInvestment and Export FacilitationProject, with MIGA leadingthe capacity buildingprogram, althoughMIGA does not yet have any active guarantees inArmenia. 7. Aid coordination Over the 1990s, Armenia hadreasonably highlevels o f official development assistance per capita at an average o fUS$16perpersonper year or around 11%o f GDP. IDAhas successfully worked with donors to maximize development impact inmany areas. A donor consultation process was established inthe CAS and followed up during implementation, including a Consultative Group meeting inFY02. Donor coordination has not been without difficulties, however. The ICR for the SATAC project concluded that betterdonor coordination at the outset would have allowed the borrower to leverage more grant funding, allowing IDA technical assistance to better complement that bilateral support by financing the use o f local consultants. The high availability of donor funds has causedparticular problems inareas, such as public sector modernization, that require substantial technical assistance. The Government was reluctant to borrow, when considerable grant financing i s available for these purposes. Cooperation with the IMFhas been excellent. Fundconditionalities blendedwell with those o f IDA.The IMFprogramhas been inline with I-PRSP and now with the recently publishedPRSP andremains broadly on track. 8. Overall assessment of CAS performance The teamjudges the CAS performance as satisfactory inthose areas where IDA influenced results directly. Armenia made significant progress towards all o f the planned CAS outcomes and IDAplayed a significant role inhelpingthe country achieve results. Although rural areas didnot progress at the same rate as urban areas, Armenia has seen some success, and IDAwas instrumentalinthose successes. Furthermore the improvementsinthe social assistanceprogramsprobably prevented actual worsening o f poverty inrural areas. Giventhe limited resources, it i s hardto assess what else IDA could have done to help inthe rural areas. Progress inrationalizing health and education infrastructurehas perhaps proceeded more slowly than envisaged. However, a stronger emphasis on this would possiblyhave detracted from the more immediateneeds of improving the quality and access to primary healthcare and forestalling any further declines inthe quality o fbasic education. IDA -52- was unable to help the Government forestall the growth o fprivate payments for healthcare, which i s a major reasonthat people, especially the poor, do not use health services. Recent evidence, however, indicates that the poverty family benefit has protected the poor and increased the probability that they will use healthcare services if they fall sick. IDA didnot help the Government develop a strategy to tackle HIV/AIDS as plannedinthe 2001 CAS, becauseUNAIDS and the Global Fundledthese initiatives. The delivery schedule proposed inthe 2001 CAS was over-optimistic about staff time availability, particularly for AAA work. This meant that many deliverables slipped one or more fiscal years. 9. Lessons for subsequent CAS design (a) The areas of focus inthe CAS were appropriateandthe mix ofinterventions supportedthe objectiveswell. Bothshouldbe continued.Giventhe substantial progress Armenia has made and the contributions that the IDAprogram made to that progress, the team concludes that IDA selected its goals appropriately. The activities all contributed to the desiredoutcomes and no activities were redundant. Givenresource and capacity constraints both inIDA and inthe Government, it i s hardto see what additional activities IDA should have undertaken. The future CAS will, however, need to pay explicit attention to ensuring that the benefits from economic growth have wider impact. (b) The best resultswere achievedwhen IDA was ableto exploitthe synergies betweenwell-sequencedanalyticalwork, investmentand adjustmentlending,and to leverage trust funds and donor activities. The chosen blend o fpolicy based and investment lendingworked well for the most part. Substantial levels o ftrust funding enabled the team to prepare projects and analyticalwork and maintaina substantive dialog. Other donors also had a vital role inachievingmany o f the CAS objectives, providing long-term technical assistance inareas that require sustained efforts. Duringthe 2001 CAS periodthis was particularly noticeable inthe energy sector, intax and customs reform, agricultural extension, Treasury implementation, civil service development, and macroeconomic and monetarypolicy formulation. These initiatives will needto be duplicated and perhaps intensified inthe forthcoming CAS. (c) The outcomeindicatorsfor the 2001 CAS should havebeenlinkedmore clearly to IDA interventionsto facilitateevaluationofCAS performance.FutureCASs will endeavor to make the indicators and their baseline data clearly accepted by all involved, the links to the interventions more explicit and to use the indicators as a management tool throughout CAS implementation. (d) Devolvingresponsibilityfor portfoliomanagementto the country manager and sometask managementresponsibilitiesto countryofficestaff improvedportfolio performanceconsiderably.The country manager and field office staffare close to the projects and the counterparts. For that reason, and becausethey work exclusively on Armenia rather than on several countries, they were able to focus on the Armenia -53- portfolio and remove obstacles to progress and highlightpotential problems before they materialized. (e) A strong team in the country office was important for achieving results. High caliber staff working as a multi-sectoralteam inYerevan, with some responsibility for task management, helpedprovide efficient quality services to the client and to maintain a good dialog with senior officials. Futurework should be designed to benefit from this team as much as possible (f)The CAS was not realistic enough about staff availability and programming. Manyo fthe interventions programmedinthe previous CAS were deliveredone or two fiscal years behindschedule, although the total number o f activities and lendingvolume remained roughly as planned. Many factors causedthis, some not within the control o f country team members. Insome cases, however, slippage was the result of key staff not beingavailable at the righttime. Duringpreparation andimplementation ofthe future CAS, management needs to pay explicit attention to advance staff planning to ensure that key people are available at the right time for key deliverables. (g) In a country experiencing rapid economic growth, it i s difficult to ensure that all geographic areas and segments of the populationbenefit equally. Clearly, some parts o f the country have progressed faster than others, but it i s far from clear what could have been done to avoid that, Indeed,without the improvements insocial assistanceprograms, the situation inlaggingregions would probablyhave been even worse. (h) Knowledgeand capacity gaps remain. Although IDA'Sinterventionstogether with those o f other donors were reasonably effective inaddressing capacity issues, much remains to be done. Armenia couldprobably have benefited from an expanded World Bank Institute (WBI) program for this purpose. The primary knowledge gaps relate to constraints to increasing on- and off-farm incomes inrural areas, and to the dynamics o f the labor market (this was identifiedinthe previous CAS, but dropped becauseo f staff availability). The latter would help IDA understand gender issues inthe labor force. IDA will tackle these issues inthe next CAS period. (i)TheCASconsultationprocesswasextensiveandcoincidedlargelywiththeeven more thorough government-led consultation process for the PRSP.The Government has committed to continue consultations throughout PRSP implementation, and IDA will be part o f that process. Therefore, consultations on future CASs can benefit from the PRSP consultations, can be more focused, and consider how IDA can best support the Government's PRSPpriorities. -54- 4 d a s ""0.Yx h 0 5 $ 0 * -E' + 0 a e, 4 * Table 4: PlannedBaseCase LendingProgramand Actual Deliveries Plannedin2001 CAS Status IDA IDA US$m US$m FY02 NaturalResourceManagement $10 Actual 8.3+ Municipal WatedWastewater 20 Movedto FY04 Private Sector DevelopmentII 5 IT Enterprise Incubator LIL 5.0 IrrigationDevelopment 24.9 ForeignInvestExport Fac'n LE 1.o SubtotalFY02 35 39.2 FY03 Public Sector Reform Project 10 Movedto FY04 IrrigationDevelopment 20 Movedto FY02 SAC V 40 Actual 40.0 SubtotalFY03 70 40.0 FY04 Health/Social Protection 15 Health 11" 19.0 UrbanHeat 10 Movedto FY07 Private SectorDevelopment111 10 Movedto FY06 Education I1 10 EducationQuality/Relevance 19.0 Public Sector Modernization 10.2 Ag.ReformSupport Supplement 1.7 Municipal WatedWastewater 23.0 Social ProtectionAdmin* 5.2 IrrigationDam Safety 11" 6.8 SubtotalFY04 45 84.8 TOTAL FYO2-04 150 164 t *Additionalfinancing o f US$5.1providedbyGEF To be presented to the Board along with this CAS -60- Table 5. Status of PlannedandActualNon-LendingServices Plannedin2001CAS Status as of November 2003 FY98 Childrens' Initiative IDF (for completion inFYO1) Completed FY02 FYOO Cultural Heritage IDF (for completion inFY02) CompletedFY02 Strengthen Statistical System IDF(for completion in CompletedFY03 FY02) FYOl CEM growth study Delivered FYO1 TradeFacilitation-Workshop DeliveredFY02 Anti-corruption IDF Supervision on-going Institution and GovernanceReview Workshop Delivered FYO1 RestructuringEducation Expenditures Delivered FYOO Water Resources Plan Delivered FY02 FY02 Poverty Study Poverty Update Delivered FY02 Country Financial Accountability Assessment Delivered FY04 Financial Sector TA Delivered FY03 Client Survey Delivered FY03 Procurement Assessment Delivered FY03 Public ExpenditureReview Delivered FY02 Poverty Study Poverty Update deliveredFY03 Child Welfare Note Delivered FY02 Social ProtectionNote Not yet delivered Urban Heat Strategy Delivered FY03 CGmeeting Delivered FY02 FY03 Labor Markets Dropped Strengthen Policy Capacity IDF Ongoing Social Protection Study Not yet delivered Anti-corruption strategy IDF Ongoing StrengtheningPolicy Capacity (Treasury) IDF Ongoing FSAP Follow-up delivered FY03 Public Procurement System IDF on- going FY04 Poverty assessment delivered FY04 Fiscal study. DeliveredFY04 Note: the schedules reportedinthe 2001 CAS inTable 4 and Annex 4 differ somewhat -61- Annex 3: Proposed WBI Program FY05-08 The World Bank Institute (WBI) i s the learning and capacity-building arm o f the World Bank Group, and supports the buildingo f institutionaland humancapacity inclient countries to fight poverty and reach development objectives. WBI activities for Armenia currently implementedor plannedformpart ofthe broader Caucasus or other regional programs: 0 As part o fthe Caucasusprogram, Armenianparticipants take part in(i) workshops on territorial and administrative decentralization and financial viability o f local self-governments. This ongoing support will be complemented by further activities on intergovernmental relations and urbanmanagement; and (ii) videoconferences onpensionreform options for current systems, with a proposed follow-up program onrelated implementation issues. Withinthe CIS-7 program, Armenia participates inperiodicalworkshops or videoconferences where various aspects o f the PRSP process are discussed among PRSP teams or other agencies from the seven selected countries. Duringthe implementationofthe CAS, WBIwill alignits activities withthe development objectives identifiedinthe CAS. This will be done through close collaboration with the Southern Caucasus Country Unit and other relevant ECA units with the aim to deliver client responsive and demand driven activities, possibly integrated incurrent and future Bank supported projects. Indoing so: 0 Efforts will be made to make activities broader andmore continuous. The events carried out to date are generally well received byparticipants, but oftenjudged to be too short and self- standing, and therefore not to have the desiredimpact or sustainability. Bypursuing additional local and regional partnerships with NGOs, civil society, Government and donors, a more sustained presence o f learning activities shouldbe sought. This could involve a greater number andvariety of learning events includingdistance learning andweb basedtraining courses, as well as locally sponsored workshops. Discussions to identifynational partners in Armenia that wouldjoin the GDLNnetwork will continue, with the aim o f having a suitable agency identifiedinthe early part o f the CAS period. 0 Priority will be given to sub-regional activities, either inthe South Caucasus or CIS-7 context. WBI activities duringthe CAS periodwill support boththe growth andpoverty alleviation related CAS goals. They include follow-up activities based on the current programinlocal government and fiscal decentralization for the South Caucasus, and the continuation o f the PRSP dialogues. The work on pensionreform will also continue. To the extent possible, depending on resource availability and a continuedgoodpolicy climate, WBI would consider becoming engaged inselective additional activities. Related to public management issues, this would include but not necessarily be limited to implementation o f the -62- Government's anti-corruption strategy, and support to the recently expanded utilities regulator (commission on natural monopolies). Further training o f civil servants inareas o f economics, finance andimpact analysis (including environmental) i s also desirable. To further support the private sector led growth goal, possible additional activities would include corporate governance programs in collaboration with local partners and support to the committee on competition policy. The preliminaryprogramofleaming activities that WBIwill deliver over the CAS periodi s presentedinTable 1. Actual leaming events will be carried out following the preparation of annual programs tailoredto the rest o f the Bank and other donor agencies, and definedincollaboration with the CMUand the Government. I Table 1:Armenia -tentative WBI program I Private sector Public sector Core program Local government and fiscal decentralization; PRSP dialogues; Pensionreform implementation Expandedprogramif Corporate governance; Anti-corruption strategy implementation; resources permit Support to the Utilities regulator support; committee on competition policy Civil servants training ineconomics, finance and policy impact analysis (includingenvironment) -63- Annex 4: Partnerships SECTOR /LEADNATIONAL AGENCY iPARTNERS Donor Coordination ;Ministryof Finance, PRSP Steering All donors lNGOs ....................................... ............................ ii......................................................................................................................................................................................... IHealth /Ministryof Health /USA1DIUNDPNVHOIUNICEFIUNHCR/ ..................... GTZIGlobal Fund bran iLincy FoundationlEUIUNDPIUSAlDI ................................................................................... .111..1/11.111111111llllllllllllllllllll,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,111,11,11111111111111.1..II ............... IFAD ,,,,,,,,,,,,,,....................................................... , IEducation ............................... ............................................................... ,,,,,,,,,,,,,....................................... !Ministryof Education and /UNICEFIEUIUNHCWFPIGTZ .......................................................................... ,. ........................ EUIFAONVFPIlFADIUSDNGTZI 11,11111.11111111111111111,il,III,11111111111111111111llllllllllllllllllll,,,,,,,, UNHCRlDFIDIUNDPIUSDNUSAlD Housing i . ~IMFIUSAIDIUSDNGTZIEBRD 11,11111111111111111llllllllllllll Financial Sector l,,,,,o,, ...................... ,,,,,,,,,,,,,,,,,, /Central BanWMinistryof Finance & ,,,,,,,,,,,,,,,,,,,,,,,.................... ,,............................................................................ *,*,,,*, ,,,,,,,,,,........................ ,,,,,,,,,,,,,,,,,,,,,,,,,,,.,,.......................................... ................................................................................ ,,,,,,,** hater R/IFADNVFPIKNV ,,/............................................ ,,,,,,,,,,,,,,,,,,,............................................ 1,1111,..................................................... ,.................... *,s,,*,, Social Protection /Ministryof Labor and Social Issues & J NDPIUNHCRlUSAlDIEU/ IUNICEFINGOs -64- Annex 5: Core Labor Standards 1. The Right of Association. The Constitution provides employees with the right to form and join trade unions, although it stipulates that the right to form associations, including political parties and trade unions, may be limited for those persons serving inthe armed services and law enforcement agencies. Inpractice, labor organization remained weak becauseo f highunemployment and the weak economy. The absence o f active unions and o f accurate employment data precluded a reliable estimate o f the percentage o f the workforce that i s unionized. Unions are free to affiliate with internationalorganizations; however, none had done so to date. 2. Labor Rights. Although the law provides for the right to organize and bargain collectively, collective bargaining does not occur in practice. Factory directorates generally set the pay scales without consultation with employees. Labor disputes are arbitrated in regular or economic courts. The Constitutionprovides for the right to strike; however, workers hadneither the financial resources to maintain a strike nor enforceable legal protection against retaliation, and existing unions play a relatively passive role. The standard legal workweek was 40 hours; however, many persons work multiplejobs in order to provide for basic necessities. The law provides for annual and sick leave; however, there were no mandated rest periods. Compensation for overtime work i s required; the amount depends on the position and type o f employment. 3. Forced, Bonded and Child Labor. The Constitutionand the law prohibit forced andbonded labor, including by children, and there have beenno reports that such practices occur. According to the law, 16 years i s the minimum age for employment. Children may work from the age o f 14 with the permission o f a medical commission and the relevant labor union board. The law i s enforced by local community councils, unemployment offices, and, as a final board o f appeal, the courts. The Government has not ratified ILO Convention 182 on the worst forms o f child labor. 4. Trafficking in Persons. Armenia is a country o f origin for international trafficking o f girls and women for prostitution. Trafficking appears to come from orphanages and from families who allegedlypress their daughters to sell themselves into prostitution. The Government o f Armenia does not yet comply with the minimum standards for the elimination o f trafficking. In2003, however, the Armenian Government acknowledged the need for increased action against trafficking, and has focused more law enforcement resources on the problem. A new inter-agency task force has coordinated public awareness efforts throughout the country, including pamphlet distribution at the borders. The Government's Refugee and Migration Service included information on trafficking in an edition o f its journal on legal migration, and houses an IOM-funded Migration Service Point with a hotline, allowing people to call or come in to ask about migration issues, including trafficking. The Office advertises the hotline in newspapers. In April 2003, Armenia amended its criminal code to include a specific criminal prohibition against trafficking for sexual exploitation. Before then, traffickers could be prosecuted under such articles as illicit seizure, falsification and selling of personal documents, extortion, bogus marriages and divorces, and coercion into sexual intercourse. The Government has instituted anti-corruption efforts in the Customs Committee and upgraded the technology at the borders to combat trafficking. In 2002, 26 criminal cases were brought against pimps, including four charges against traffickers involved inorganizing illegal border crossings with false documents. Subsequent figures are not yet available. -65- Annex 6: Matching Development Priorities of Government and Bank ssue Country Major issue Country Bank Reconciliationof country perform- priority priority and Bank priorities ance Poverty reduction Fair Poverty levels remainhigh, High High particularly outside Yerevan Economic policy Excellent Maintaininggood performance High High Public sector Fair-Good Administrative efficiency and Moderate High Ongoing dialogue, including corruption Public Sector Reform Credit Gender Good Low labor force participation; Low Moderate Diagnosis and dialogue reproductive health; boys through Labor Market study; dropping out ofsecondaryschool Health SystemModernization Project; Education Quality and Relevance Project; Business Surveys. Education Good Poor quality, low levels o f High High funding, efficiency ofresource use Health, nutrition & Good Quality, cost-efficiency High High lopulation Social protection Good Improveeffective-nesso fadmin- High High istration; reachmore eligible beneficiaries Rural development Fair-Good Access to markets; access to High ligh improvedinputs; degraded infrastructure (including irrigation); low quality social services. Environment Fair Depletioddegradation o f Moderate Iigh On-going dialogue incontext natural resources; vulnerability o f Natural Resource to natural disaster; capacity to Management Project; several implement environmental rural operations and PRSCs. safeguards Social development IFair-Good ICivil societv particiuation IModerate Iigh Dialogue incontext o f PRSP Financial sector Fair-Good Consolidation, better regulation Moderate Moderate Private sector Good- Administrative corruption High High Excellent Energy & mining Good Fiscal Moderate Moderate Infrastructure Good Water supply High High -66- Annex 7: PRSP Policies and Investments Table 1:Grouping of PlannedPRSPmeasuresby PRSPgoal PRSP Goal(Section2) PlannedMeasures(PRSPAnnex 9) Promotingprivate-sectorledgrowth: *P67 adopt anti corruption strategy *P68 preventprofits from illegal activities ***promoting a dynamic private sector *P71-72, p83, p85 Improve regulation and oversight o f improving public sector management businesses *P76-78 Simplify licensing requirements procedures reducing corruption *P79 privatize admin o f several professional qualifications *P81, p91-94 venture financing and credit expansion *P82 legislation on labor standards *P84 provide consulting services to SMEs eP88-90 reduce shadow economy *P95-101 simplify tax mechanisms 139-141 improve employment programs-P 1 Increase PRSP awareness oP4, p37-39, p5, p60, p73-75 increase involvement o f civil society indecision-making processes *P5-6, p181-186 introduce PRSP monitoring system *P8 create knowledge based institutions *P29-30, p32, p47-50, p53, p54-59, p143 public sector and civil service reforms incl. sub-national bodies *P31, 41-46 improve public sector budgeting and financial management *P33, p35-36 new technologies in public sector, including e- governance oP34, p107 increase public sector salaries *P61-66judicial reforms *P69-70 strengthening tax and customs administration and legislation*P2 maintain GDP growth o f 6% p.a. mP3 increase level o f investment *P80 accelerate bankruptcy o f loss making state enterprises *P164-170 improve environmental standards, charges and practices, including charging adequate fees and phasing out subsidies for use o f environmental resources *P175 finance road construction from fuel tax revenues *P177-178 energy transmission and coordination system and financial rehab o f energy system Makinggrowth morepro-poor: *P21, p l 7 4 Rural and community roads *P52 Make tariffs and duties charged by local governments ** reducing income inequality affordable reducing differences between urban *P87 micro finance to promote o f f farm income opportunities *P103-106, p108-112, 114-128, 130-138 Increase efficiency and rural areas o f andor increase levels o f family benefits, pensions, * reducing differences in access to assistance to vulnerable groups, andunemployed basic services *P113 reform systemo f complaints about benefits *P129 link minimumwage to poverty line *P176, p179 introduce local heating systems including support to apartment blocks -67- I*P9, p23 increase availability o f agricultural credit oP10, p17-20, p171-173 optimize land and water use *P11 create commodity markets *P12, p26 crop insurance *P13, p27-28 increase off farm income opportunities Q *P14-16, p23 improve land market *P22 promote farm cooperatives eP25 private extension services Reducingnon-incomepoverty eP142, p144 Increase public expenditures inhealth sector *P145, p147-149 improve quality o fhealthcare services *P146improve ambulance service *P150 consolidate hospitals -P153-160 increase quality and efficiency o f education system *P180 improve vocational education *P151-152 improve planning budgeting and oversight in healthcare institutions *P40 increase female participation ingovernment *P161-163 cultural preservation -68- Table 2: Groupingof PlannedPRSPmeasuresby theme identified inthe JSA Theme identifiedinthe JSA PlannedMeasures(PRSPAnnex 9) Sustainable Economic Growth *P2 maintain GDP growth o f 6% pa *P3 increase level o f investment *P80 accelerate bankruptcy o f loss making state enterprises *P71-72, p83, p85 Improve regulation and oversight o f businesses *P76-78 Simplify licensing requirements procedures eP79 privatize admin o f several professional qualifications *P81, p 91-94 venture financing and credit expansion *P82 legislationon labor standards *P84 provide consulting services to SMEs *P9, p23 increase availability o f agricultural credit *P11create commodity markets wP12, p26 crop insurance oP13, p27-28 increase off farm income opportunities *P22 promote farm cooperatives *P25 private extension services eP68 prevent profits from illegal activities -P87 micro finance to promote off farm income opportunities -139-14 1 improve employment programs Enhancing Human Development and *P151-152 improve planning budgeting and oversight in Safety Nets healthcare institutions -P103-106, p108-112, 114-128, 130-138 Increase efficiency o f andior increase levels o f family benefits, pensions, assistance to vulnerable groups, and unemployed *P113 reform systemo f complaints about benefits *P129 linkminimumwage to poverty line oP142, p144 Increase public expenditures inhealth sector eP14.5, p147-149 improve quality o f healthcare services *P146 improve ambulance service *P150 consolidate hospitals oP153-160 increase quality and efficiency o f education system *P180 improve vocational education Prudent Fiscal Policies *P95-101simplify tax mechanisms eP88-90 reduce shadow economy *P31, 4 1-46 improve public sector budgeting and financial management eP69-70 strengthening tax and customs administration and legislation *P52 Make tariffs and duties charged by local governments affordable [mproving Public Infrastructure *P175 finance road construction from fuel tax revenues ~P177-178energy transmission and coordination system and Financial rehab o f energy system P21, p174 Rural and community roads.pl76, p179 introduce local heating systems incl. support to apartment blocks -69- Improving Core Public Sector Func- *P67 adopt anti conuption strategy tions *P1Increase PRSP awareness *P5-6, p181-186 introduce PRSP monitoring system *P4, p37-39, p5, p60, p73-75 increase involvement o f civil society indecision-making processes *P8 create knowledge based institutions wP29-30, p32, p47-50, p53, p54-59, p143 public sector and civil service reforms incl. sub-national bodies wP33, p35-36 new technologies in public sector, including e- governance *P34, p107 increase public sector salaries *P40 increase female participation ingovernment *P61-66judicial reforms *P10, p17-20, p171-173 optimize land and water use *P14-16, p23 improve land market *P161-163 culturalpreservation *P164-170 improve environmental standards, charges and practices, including charging adequate fees and phasing out subsidies for use o f environmental resources -70- Annex 8: Country at a Glance Lo*.w- Illludle- liieonie 2411 1 3 3 0 3 x2 1 0 1 2 19 69 30 11 R 1 1 3 11 1 11 1 113 2002 P 4 ,a 2 19 8 3 2 14 2 6 R 13 46 5 9 0 2M24d h 3 O ? 15 B -71- 1982 1992 2001 2002 I%@.; 3 1 1 1 YlRd 40 2 3 -,4 .,0 16 3 16 ! ., T I 0 3 0 5 -II I 13 2G 1982 1992 2001 2002 220 362 50T 123 dY3 '?a 21 PA 331 8i: Wl 211 2ca t0 18: ~ 1982 1992 2001 2002 230 510 7co 384 9z 1111 .135 43s 4 IT .S? d.l P.9 1 ;I 1 8 201 1M 21: 1-51 16 ;3 334 m 0.3 r5g.1 63.1 1982 1992 2001 2002 959 1 1 N I 8 4R, 5jM 35 7.1 1 1 3 4 12 '33 s0 io0 .1 0 0 0 5 55 mi9 0 35 m0 3 4 '51 cj2 -72- Annex 9: IMF- IDA Relations Partnership in Armenia's DevelopmentStrategy 1. The IMF has taken the lead in assisting Armenia in enhancing macroeconomic stability and advancing reforms to sustain high rates o f economic growth. In this regard, the Fund has encouraged the authorities to pursue a prudent fiscal policy (including by increasing tax revenues and reducing domestic expenditure arrears), implement a number o f tax and expenditure measures, and proceed with key reforms on the banking and energy sectors. The IMF Board approved a new three-year program under the Fund's Poverty Reduction and Growth Facility (PRGF) inMay 2001. The fifth review was completed inMay 2004. The Government met all o f the program's quantitative and structural performance criteria at end-December 2003, as well as two o f the five structural benchmarks scheduled for implementation up to March 2004. 2. IDA has taken the lead in the policy dialogue on structural issues, focusing on: (i) strengthening public expenditure management; (ii) deepening and diversifying sources o f growth, (iii)protecting the environment; and (iv) reducing poverty. Table A below summarizes the division o f responsibility between the two institutions. In a number o f areas - for example the social sectors, rural development, environment, and infrastructure (other than energy) - IDA takes the lead in the dialogue and there i s no cross conditionality with the IMF-supported program. IDA is also leading the dialogue on private sector reform, and IDA analysis serves as inputs into the Fund program. In other areas - structural reform, private sector development, the financial sector, public expenditure management, and revenue and customs - both institutions work together. Finally, in areas like monetary policy the IMF takes the lead with little IDA involvement. Areas in which I D A leads and there is no direct IMF involvement 3. Areas in which IDA leads and there i s no direct IMF involvement include the social sectors, infrastructure and environment. In social investment and protection, IDA is focusing, through Social Investment Fund credits inparticular, on helpingto provide basic infrastructureto the poorest communities. Assistance has also been provided to the government in designing and implementing a family benefit system, which has become an effective and well-targeted means to support poor households. IDA i s preparing a Social Protection Administration Credit to improve the efficiency and effectiveness o f the delivery o f social protection benefits. A focus on the vulnerable will also be provided through a Labor Market Study and Programmatic Poverty Assessments. The Social Protection Administration Project will also help strengthen the regional employment agencies, which will allow the government to help qualified applicants find potential employers. IDA conducts periodic updates o f the Poverty Assessments based on household survey data. In education IDA has been helping the Government make the healthcare system more responsive to the needs o f the poor. An Education Quality and Relevance Project, along with proposed PRSCs and a PRSC TA, will help the Government improve enrollment rates and education quality. The Social Investment Fund credits support rehabilitation o f -73- school buildings, and a proposed urban heating project will help modernize heating systems inselected schools. 0 In health care IDA is helping improve access through a Health Systems Modernization Project. Public health will also benefit from other proposed IDA-supported projects: a Yerevan Water Project, an Urban Heatingproject, and possibly an InfrastructureProject if it includes improvements intransport inremote areas. Programmatic Public Expenditure Reviews will identifyissues relatingto healthcare spendingand propose solutions. 0 In rural development on-going IDA support includes an Agricultural Reform Support Credit, a Title Registration Project, an Irrigation Dam Safety and an Irrigation Development project, as well as studies on rural productivity and on rural infrastructure. The Health and Education projects are addressing the quality o f rural services, and a Trans-Caucasus Tourism Initiative i s helpingpromote the off-farm economy inselect rural areas. Other new interventions under preparation include a Rural Development Project. 0 IninfrastructureIDAis helpingimprove access throughthe Municipal Development and Armenia Water projects, which are contributing to improved drinking water services. Proposed new interventions include the Urban Heating Project, the second Yerevan Water Project, and the Infrastructure Project. 0 Inthe environment IDA is supporting work on natural resource management, and will support a Country Environment Assessment. In addition IDA will support a Renewable Energy Project to reduce Armenia's dependence on imported fossil fuels: the Urban Heating project, which will reduce demand for fuelwood for heating; the Rural Development Project which will assess the options for sustainable forest and natural resource based income generation activities; and the water supply projects, which together with any additionalinvestment inirrigation, will improve water resource management. Areas in which I D A leads and its analysis serves as input into theIMFprogram 0 IDA has been leading the dialogue on structural reforms through a series of five Structural Adjustment Credits, and will continue to provide support the proposed PRSCs. Institution building and technical assistance has been supported through a Structural Adjustment Technical Assistance Credit. 0 In private sector development IDA is supporting improvements in the business environment through a Public Sector Reform Credit and a Judicial Reform Project. The SACS and the proposed PRSCs and PRSC TA include support for tax reform and improvements inthe application o f accounting standards. IDA'SAnalytical and Advisory program includes financial sector advisory services that will help improve corporate governance, as will IDFs on public procurement and competition policy. Regular business surveys will help monitor results. 0 Improvement in the financial system will be assisted through advisory and analytical work (such as the Financial Sector Advisory Notes and the Country Economic Memorandum on pro-poor growth), sequenced with programmatic support to reforms through the series o f PRSCs. These interventions will promote an increase o f minimum capital requirements for the banking sector, establishment o f a credit bureau, as well as -74- new legislation relating to the banking sector. Inthe context o f the PRSCs, IDA will also provide support for anti-money laundering and combating the financing o f terrorism through support for the adoption o f comprehensive legislation, the establishment of a Financial Intelligence Unit, and the training o f government and financial institution officials. Public Sector Management. IDA is supporting improved public sector management through the Public Sector Reform Credit that tackles civil service reform, public procurement, and e-government, as well as through a Judicial Reform Project. A planned series o f PRSCs and the PRSC TA will tackle many related issues, including tax reform, increased transparency o f the budget process at central and local levels, and application o f accounting standards. A possible further Public Sector Project would also address problems inthis area. The Analytical and Advisory program supports these interventions through the Country Financial Accountability Assessment, and through financial sector advisory services. The Programmatic Public Expenditure Reviews, and the Country Economic Memorandum, will help diagnose problems and monitor outcomes, and the regular business surveys will help monitor results. Areas of shared responsibility 4. IDA andthe Fundhavebeenworkingjointly inthe following main areas: Poverty Reduction Strategy. Both institutions have been working closely with the Government to provide support to the development o f the PRSP, through seminars and workshops, direct staff input, and a multi-donor Trust Fund to support the work o f the PRSP secretariat. 0 BudgetPlanningand Execution. The annual Programmatic Public ExpenditureReviews will provide the underpinnings for systemic changes inexpenditure management, with the immediate aim being improved budget formulation. The IMF has been providing technical assistanceon Treasury reform withinthe Ministryo f Finance. 0 Financial Sector Reforms. The joint Financial Sector Assessment Program has supported: (i)strengthened banking and non-banking supervision; (ii)introduction o f international accounting standards; (iii) and consolidation o f banks through higher capital requirement ratios; and (iv) anti money-laundering legislation. The IMF has focused in particular onbanking supervision. Areas in which theIMF leads and its analysis serves as input into theI D Aprogram 0 Fiscal Framework. IMF takes the lead on annual budget negotiations and budget monitoring. The IMF's focus on prudent fiscal policy has served as a useful input into IDA'Swork onpublic expenditure management.. Areas in which theIMF leads and there is no direct IDA involvement 0 Monetary Framework.The IMF closely collaborates with the Central Bank inthe design and implementation o f a monetary program that aims at remonetization o f the economy, while keepinginflationlow and the exchange rate ofthe Dram stable. -75- 0 Economic Statistics, IMF technical assistance has been conducive to improvements in national accounts, price, monetary and government financial statistics. TABLE IDA-FUNDCOLLABORATION ARMENIA A. ON Area Specialized Advice from Specialized Advice Key Instruments Fund from IDA Macroeconomic Monetary policy, exchange Economic growth, IMF: PRGF performance criteria Framework/ rate, fiscal, and trade policies, PRSP-related expen- and benchmarks on monetary and Management economic statistics, selected diture allocations, fiscal targets and structural meas- tax, customs, and banking financial sector ures on fiscal and banking system sector reforms reforms, economic reform. statistics IDA: Macromonitoring; Trade and Transport Facilitation Project; Financial Sector Advisory Work; PRSC IMF: PRGFperformance criteria ~ Budget Budget formulation and Public expenditure execution, tax policy and reviews and budget on overall fiscal balance and reve- admmistration, customs, debt formulation, particu- nue collection. Monitoringof management, extra budgetary larly inthe areas o f budget execution. funds. social and infrastructure Bank: Public ExpenditureReview budget allocations, Updates; Support for PRSP Up- Country Procurement dates; PRSC Assessment, Country Financial Accountabil- ity Assessment Public Sector Public asset management, Civil service reforrq IMF: PRGF structuralperformance Reform quasi-fiscal deficits, selected anti-corruptionagenda, criteria and benchmarks on fiscal energy sector reforms, and tax decentralization. En- and energy sector areas. and customs components o f ergy sector reforms. IDA:Public Sector Management anti-conmtion agenda. Project SocialIPoverty Poverty analysis; re- IMF: PRGF forms ineducation, IDA: Support through IDA Credits health, social protec- for Education, Health and Social tion; support to com- Investment Funds, Social Protec- munity driven devel- tion. opment Private Sector Costs o f Doing Busi- IDA: Business Environment Study, Development ness Surveys. Support Labor Market Study, Private for improved legislation Sector Development Projects. andregulatory frame- work for private sector, and support for privati- zation and market liber- alization. Infrastructure Private sector partici- IDA: Support though ongoing pation ininfrastructure and proposed IDA Credits for Water Supply, Municipal Develop- ment, Roads, Transport and Energy -76- Annex 10: Bank Portfolio Performance and Management Selected Indicators* of Bank Portfolio performance and Management As of 04/14/2004 Indicator 2001 2002 2003 2004 PortfolioAssessment Number of Projects Under Implementation a 13 17 14 13 Average Implementation Period (years) 2.5 2.8 3.3 3.8 Percent of Problem Projects by Number 7.7 5.9 0.0 7.7 Percent of Problem Projects by Amount 11.2 6.8 0.0 8.9 Percent of Projects at Risk by Number a , d 7.7 5.9 0.0 15.4 Percent of Projects at Risk by Amount 11.2 6.8 0.0 11.1 Disbursement Ratio (%) e 20.1 24.1 20.2 24.7 Portfolio Management CPPR during the year (yesho) Supervision Resources (total US$) Average Supervision (US$/project) Since FY 80 Last Five Memorandum Item FYs Proj Eva1by OED by Number 15 9 Proj Eva1by OED by Amt (US$ millions) 466.5 231.4 % of OED Projects Rated U or HU by Number 13.3 11.I YOof OED Projects Rated U or HU by Amount 15.8 6.6 a. As shown in the Annual Report on Portfolio Performance (except for current FY). b. Average age of projects in the Bank's country portfolio. c. Percent of projects rated U or HU on development objectives (DO) and/or implementation progress (IP). d. As defined under the Portfolio Improvement Program. e. Ratio of disbursements during the year to the undisbursed balance of the Bank's portfolio *atthe beginning of the year: Investment projects only All indicators are for projects active in the Portfolio, with the exception of Disbursement Ratio, which includes all active projects as well as projects which exited during the fiscal year. -77- Annex 11: Bank Group Program Summary FY04 Lending, and ProposedIDA Base-CaseLendingProgramFYOS-OS Fiscal year Project US$(M) Strategic Rewards Implementation (H/M/L) Risks (H/M/L) 2004 EducationQuality and Relevance 19.0 H H Public Sector Modernization 10.2 H H Municipal Water and Wastewater 23.0 M M Health Systems Modernization 19.0 H H Social ProtectionAdministration 5.2 L L Ag. ReformSupport Supplement 1.7 L L Irrigation Dam Safety I1 6.8 M L Total 84.8 2005 PRSC I/PRSC TA 25 H H Rural DevelopmentI 15-25 H M Yerevan Water Ii 20 M L Total 60-70 2006 PRSC I1 20 H H Social InvestmentFundI11 15-25 M L UrbanHeating 15 M M Total 50-60 2007 PRSC I11 20 H H Renewable Energy 5 M M Infrastructure 10-20 M L Total 35-45 2008 Rural Development I1 10-20 H M Total 10-20 IFC and MIGA Program, FY 2001-2004 2001 2002 2003 2004 IFC approvals (US$m) 0.00 7.27 0.00 1.25 Sector (YO) Accommodation & Tourism 100 Collective Investment 69 Finance & Insurance 31 Total 0 100 0 100 Investment instrument (YO) Loans 28 Equity 55 50 Quasi-Equity 17 50 Other Total 0 100 0 100 ~MIGA guarantees(US$m) 2.70 2.70 2.70 2.70 -78- Annex 12: Summary of Non-Lending Services As of April 20,2004 Product Completion Cost Audience' Objectiveb (US$OOO) Recentcompletions PovertyAssessment FY04 183 KG,PD,PS Country Financial Accountability Assessment FY04 147 KG,PS,PD Country ProcurementAssessment Review FY03 152 KG,PS,PD Trade FacilitationDialogue FY03 38 PS UrbanHeating Strategy FY03 156 KG,PS,PD Banking Sector Advisory TA FY03 185 PS FSAP Follow-Up TA FY03 93 PS Underway SocialProtectionStudy FY04 50 KG,PS,PD Financial Sector TA FY04 82 KG,PS PovertyAssessment Follow-UpTA FY04 52 PS Anti-corruption (IDF) FY04 16 KG,PD,PS CFAA Follow Up On-going 16pa PS CPAR FollowUp On-going 16pa PS Country EconomicMemorandum FY05 182 KG,PS Rural Sector Strategy andAction Plan FY05 150 KG,PS TreasuryAction PlanandPilot (IDF) FY06 56 PS Public Procurement(IDF) FY07 45 PS Macro Monitoring On-going 88 pa KG,PS Planned Private/FinancialSector Services On-going 80-100 KG,PS Labor Market Dynamics FY06 150 KG,PS,PD ProgrammaticPoverty Assessments On-going 100pa KG,PS,PD ProgrammaticPublic ExpenditureReviews' On-going 80 pa KG,PS,PD Country EnvironmentAssessment FY08 150 KG,PS,PD Private/FinancialSector Services On-going 100pa KG,PS FIAS follow-~p On-going 10pa KG,PS Annual Business Survey On-going 20 pa KG,PS Competition Policy (IDF) FY08 45 PS Donor Coordination On-going 50 pa PS a. Govemment(G), donor (D), Bank (B), publicdissemination(P). b. Knowledge Generation(KG), public debate(PD), problem-solving(PS). c. Includes core diagnostic studies inFY08 (Poverty Assessment) andFY07 (Public ExpenditureReview) -79- Annex 13: Social Indicators Latest single year S a m e regionlincome group Europe B Lower- Central middle- 1970-75 1980-85 1996-2002 Asia income POPULATION Total population, mid-year (millions) 2.8 3.3 3.1 472.9 2,408.5 Growth rate (% annual average for period) 2.3 1.5 -1. I 0.0 0.9 Urban population (% of population) 63.0 66.6 67.4 63.6 49.4 Total fertility rate (births per woman) 2.8 2.5 1.2 1.6 2.1 POVERTY (% of population) National headcount index 53.7 Urban headcount index 60.4 Rural headcount index 44.8 INCOME GNI per capita (US$) 790 2,160 1,400 Consumer price index (1995-100) 153 Food price index (1995=100) 126 INCOMElCONSUMPTlON DISTRIBUTION Share of income or consumption Gini index 37.9 Lowest quintile (% of income or consumption) 6.7 Highest quintile (YOof income or consumption) 45.1 SOCIAL INDICATORS Public expenditure Health (% of GDP) 3.2 4.3 2.7 Education (% of GDP) 3.2 4.3 4.0 Social security and welfare (% of GDP) Net primary school enrollment rate (% of age group) Total 85 91 Male 85 92 Female 84 92 Access to an improved water source (% of population) Total 91 81 Urban 96 95 Rural 83 70 Immunization rate (% of children ages 12-23 months) Measles 91 93 78 DPT 94 92 84 Child malnutrition (% under 5 years) 3 9 Life expectancy at birth (years) Total 72 73 75 69 69 Male 69 71 71 64 67 Female 75 76 79 73 72 Mortality infant (per 1,000 live births) 24 22 30 31 32 Under 5 (per 1,000 live births) 80 35 37 40 Adult (15-59) Male (per 1,000 population) 187 158 223 317 212 Female (per 1,000 population) 99 85 106 137 131 Maternal (modeled, per 100,000 live births) 55 Births attended by skilled health staff (%) 97 Note: 0 or 0.0 means zero or less than half the unit shown. Net enrollment rate: break in series between 1997 cand 1998 due to change from ISCED76 to ISCED97. Immunization: refers to children ages 12-23 months who received vaccinations before one year of age. 2004 World Development Indicators CD-ROM, World Bank -80- Annex 14: Key Economic Indicators Actual Prel. Projected Indicator 1999 2000 2001 2002 2003 2004 2005 2006 2007 National accounts (as 'YOof GDP) Grossdomestic producta 100 100 100 100 100 100 100 100 100 Agriculture 29 26 28 26 24 24 23 23 23 Industry 32 35 33 37 41 41 41 42 43 Services 38 39 39 37 35 36 35 35 35 Total Consumption 111 109 101 97 94 94 93 92 92 Grossdomestic fixed investment 16 18 18 19 24 23 23 22 22 Govemment investment 5 3 4 4 4 Private investment 18 19 18 18 18 EXPOITS (GNFS)~ 21 23 25 30 32 32 33 32 32 Imports (GNFS) 50 51 46 47 50 49 48 47 46 Gross domestic savings -11 -9 -1 3 6 6 7 8 8 Grossnational savings' 2 4 I O 14 17 16 16 16 16 Memorandum items Gross domestic product 1845 1912 2118 2367 2797 3026 3307 3590 3900 (US$ million at current prices) GNIper capita (US$,Atlas method) 630 680 720 810 910 980 1050 1130 1230 Real annual growth rates (%, calculated from 1996prices) Gross domestic product at market prices 3.3 6.0 9.6 12.9 13.9 6.8 5.7 5.7 5.7 GrossDomestic Income 2.4 7.6 14.0 14.6 6.3 2.0 4.5 5.1 5.8 Real annual per capita growth rates (%, calculated from 1996prices) Gross domestic product at market prices 4.0 6.5 9.3 12.9 13.9 6.8 5.7 5.7 5.7 Total consumption 1.4 5.9 2.6 8.6 12.0 6.7 4.5 5.2 5.2 Private consumption 1.4 6.4 2.5 9.1 11.1 6.8 3.9 4.6 3.7 Balance of Payments (US$ ) Exports (GNFS)b 383 447 540 698 894 977 1077 1161 1246 Merchandise FOB 247 310 353 514 678 740 814 878 943 Imports (GNFS)~ 919 966 978 1107 1397 1490 1590 1687 1787 Merchandise FOB 721 773 773 883 1269 1355 1447 1536 1627 Resource balance -536 -519 -438 -409 -503 -513 -513 -526 -541 Net current transfers 174 188 174 173 193 206 185 180 200 Current account balance -307 -278 -201 -148 -187 -194 -217 -239 -236 Net private foreign direct investment 122 104 70 111 121 98 105 108 110 Long-term loans (net) 91 89 83 50 4 43 94 105 125 Official 69 97 59 68 2 50 74 73 65 Private 21 -7 24 -18 2 -6 20 32 60 Other capital (net incl mors&ommisstons) 99 102 64 50 42 27 40 50 50 Change in reservesd -4 -17 -16 -63 -49 26 -63 -64 -49 Memorandum items Resource balance (Oho f GDP) -29.0 -27.2 -20.7 -17.3 -18.0 -16.9 -15.5 -14.6 .13.9 Real annual growth rates ( YR96 pnces) Merchandise exports (FOB) 6.1 0.8 2.9 3.3 34.0 7.5 8.8 6.6 6.2 Primary 6.1 0.8 2.9 3.3 34.2 7.7 9.9 6.9 6.4 Manufactures 6.1 0.8 2.9 3.3 34.2 6.9 4.7 5.4 5.3 Merchandise imports (CIF) 6.1 0.8 2.9 3.3 28.6 5.7 5.4 4.8 4.7 -81- Armenia-KeyEconomicIndicators (Continued) Actual Prel. Projected Indicator 1999 2000 2001 2002 2003 2004 2005 2006 2007 Indicator Publicfinance (as Yoof GDP at market prices)' Current revenues 19.3 16.7 16.3 16.7 14.7 15.8 16.1 16.5 16.8 Current expenditures 17.6 16.3 16.0 16.2 13.7 14.6 14.7 14.9 14.7 Current account surplus(+) or deficit (-) 1.7 0.4 0.3 0.5 1.o 1.2 1.4 1.6 2.1 Capital expenditure 6.9 5.3 4.7 3.3 5.6 4.0 5.1 4.8 5.0 Foreign fmancing 3.1 2.4 3.5 3.1 2.2 Monetary indicators M2/GDP 11.1 14.7 14.6 15.6 14.4 15.2 16.1 18.2 19.2 GrowthofM2 (%) 14.0 38.6 13.6 23.0 10.4 16.3 15.5 23.1 15.5 Private sector credit growth / 96.7 15.1 -38.7 93.4 89.3 88.1 89.3 total credit growth (%) Price indices( YR96 =loo) Merchandise export price index 61.7 79.4 87.8 125.6 136.1 138.2 141.9 147.3 154.7 Merchandise import price index 73.3 79.3 76.5 83.3 87.9 88.7 90.8 94.1 98.7 Merchandise terms o f trade index 84.2 100.1 114.8 150.9 154.9 155.8 156.3 156.6 156.7 Real exchange rate (US$/LCU)' 116.0 109.0 99.0 88.8 72.0 70.9 69.8 69.1 68.8 Real interest rates Consumer price index (% change) 0.6 -0.8 3.1 1.1 4.6 3.0 3.0 3.0 3.0 GDP deflator (% change) 0.1 -1.5 4.1 2.3 4.7 3.0 3.0 3.0 3.0 a. GDP at factor cost b. "GNFS" denotes "goods and nonfactor services." c. Includes net unrequited transfers excluding official capital grants. d. Includes use o f IMF resources. e. Consolidated central government. f. "LCU" denotes"local currencyunits." An increase inUS$/LCU denotes appreciation. -82- Annex 15: Key Exposure Indicators Actual Prel. Projected Indicator 1999 2000 2001 2002 2003 2004 2005 2006 2007 Total debt outstanding and disbursed (TDO) (US$m)a 902 961 989 1051 1090 1133 1173 1214 1181 Net disbursements (US$m)a Total debt service (TDS) (US$m)a Debt and debt service indicators (%) TDOIXGS 183.4 171.6 151.4 124.5 106.6 102.3 96.9 93.6 85.2 TDOJGDP .. 39.0 37.5 35.5 33.8 30.3 TDS/XGS ConcessionaUTDO 50.8 55.9 .. IBRDexposure indicators (%) IBRDDSipublic DS 1.7 2.0 1.6 1.3 0.7 1.4 1.6 1.6 1.8 Preferred creditor DSipublic D S (%)' 64.0 78.8 52.1 69.3 28.8 90.1 83.4 82.6 80.3 IBRDDS/XGS 0.2 0.2 0.1 0.1 0.1 0.1 0.1 0.1 0.1 IBRD TDO (us$mld 9 8 7 9 8 7 7 6 6 Ofwhich present value o f guarantees (US$m) Share o f IBRDportfolio (%) IDA TDO (US$m)d 352 388 428 533 666 716 790 839 844 IFC CommittedPortfolio (US$m) Loans 0.0 0.0 0.0 0.0 2.0 2.0 4.0 6.0 8.0 Equityand quasi-equity /e 0.0 0.0 3.6 3.6 3.8 5.1 5.6 5.6 5.6 MIGA MIGA guarantees (USSm) 0.0 2.7 2.7 2.7 2.7 a. Includes public and publicly guaranteed debt, private nonguaranteed, use of IMFcredits and net short- term capital b. "XGS" denotes exports o f goods and services, including workers' remittances. c. Preferred creditors are defined as IBRD, IDA, the regional multilateral development banks, the IMF, and the Bank for International Settlements. d. Includes present value o fguarantees. e. Includes equity and quasi-equity types o f both loan and equity instruments. -83- Annex 16: Operations Portfolio Active Proiects Last PSR Supervision Rating Project ID Project Name Development Implementation Obiectives Prowess Fiscal Year PO35806 AGR REF SUPPORT S S 1998 PO74503 EDUC QUAL & RELEVANCE (APL #I) Not yet rated Not yet rated 2004 PO08276 ELEC TRANSM & DISTR S U 1999 PO44852 ENT INCUBATOR LIL S S 2002 PO76543 FIEF LIL S S 2002 PO64879 IRRIG DAM SAFETY S HS 1999 PO55022 IRRlG DEVT S S 2002 PO57838 JUDICIAL REFORM S S 2001 PO35805 MUN DEVT S S 1998 PO57847 NAT RES MGMT S S 2002 PO69917 NAT RES MGT (GEF) S # 2002 PO57952 SIF 2 S S 2000 PO57560 TITLE REG S S 1999 PO44829 TRANSPORT S S 2000 Closed Projects 17 IBRDADA * Total Disbursed (Active) 123 of which has been repaid 0 Total Disbursed (Closed) 519 of which has been repaid 3 Total Disbursed (Active + Closed) 641 of which has been repaid 3 Total Undisbursed (Active) 117 Total Undisbursed (Closed) 0 Total Undisbursed (Active + Closed) 117 -84-