91612 IDA at Work Armenia: Laying the Foundations for Sustainable Development O ver the past two decades since the collapse of the Soviet Union, Armenia’s economic transformation has been pro- found. The economy today is market oriented and highly receptive to trade, capital, and technological innovation. From the late 1990s to 2008, gross domestic product (GDP) expanded by double digits, and Armenia now ranks as a lower middle-income country. As a result of sustained growth, ambitious reforms, and external inflows of capital and remittances, poverty plunged from over 55 percent of the population at the start of the transition to less than 28 percent in 2009. The poverty impact of the World Bank Group’s activities in Armenia is difficult to underestimate. The International Develop- ment Association (IDA) has played a crucial role in reducing pov- erty by providing interest-free loans and grants for programs that boost economic growth, reduce inequalities and improve people’s living conditions. The large share of infrastructure projects (mostly in IDA-terms) helped not only to improve access to markets and reduce the associated costs and time, but also created new jobs and offered incomes to many employees. IDA investments in the health and education infrastructure made an additional contribution to the reduction of non-income poverty by easing the access to basic social services for the poor and vulnerable. Challenge The central challenge today for the government is to mitigate the economic and social impacts of the global crisis, which are likely to persist for some time, while persevering with the policy and insti- tutional reforms that will be essential for recovery and long-term development. In addition to confronting these challenges, Armenia needs to create new opportunities for objectives of addressing vulnerability (for the development in the post-crisis period. The short-term) and strengthening competitive- government has employed counter-cyclical ness for post-crisis growth (for the long-term). macroeconomic policies within prudent lim- In the context of the global economic crisis, its, including actions on both the monetary the World Bank has proposed a series of three and fiscal fronts, namely exchange rate annual operations to support Armenia’s stra- depreciation, scaling back and re-directing tegic objectives of addressing vulnerability public expenditure towards social protection to the current shocks by protecting the poor and rapid infrastructure operations aimed and supporting greater human capital devel- at safeguarding or creating employment. opment and improving competitiveness by The government has also been easing credit encouraging better governance and fostering constraints on small and medium-sized enter- a more favorable investment climate. prises (SMEs) by providing credit lines through banks. Armenia was one of the first two countries that benefitted from a special fast track Armenia has avoided the temptation to facility set up by the World Bank Group to adopt a protectionist stance, as this would help the world’s poorest countries cope with undermine economic recovery and growth the impact of the financial crisis. The World in the post-crisis period. Moving forward, Bank’s Board of Executive Directors has Armenia needs to address the fiscal consoli- approved a package of three operations—the dation challenge, since the limited tax base Lifeline Roads Improvement Project (LRIP), and escalated tax burden necessitate fiscal the Additional Financing for the Social adjustments for the medium to long term. Investment Fund (ASIF), and the Additional Bolstering financial stability is also key. Due Financing for the Rural Enterprise and Small to major reforms over the past decade, the Scale Commercial Agriculture Development liquidity and solvency of Armenia’s banking Project (RESCAD)—which helped Armenia system were strong at the start of the crisis. mitigate the impacts of crisis on the country’s This strength needs to be maintained through economy and the well-being of its population. flexible monetary and exchange rate policy, Investments included infrastructure (drinking facilitating bank restructuring if needed, water, gasification, anti-hail stations, irriga- enhancing banking supervision, and broaden- tion and sewerage) and income generation ing the reach of financial intermediation. (agricultural machinery, rural bus service, Strengthening preparedness for natural disas- milk collection coolers, flour mills). ters and climate change is another critical issue. Armenia is exposed to the impact of Results climate change through intensified droughts, but also landslides and hailstorms that affect IDA’s impact in Armenia has been felt across rural communities and agriculture. many sectors: Approach ▪▪3 Two dam safety credits (totaling to US$33. million) helped to bring 71 irrigation dams The Bank’s new Country Partnership Strategy in need of intervention to international (CPS) has been anchored on the two strategic safety standards and reduced the risk of 2 dam failure and flooding for about 500,000 ▪▪Rural development projects have strength- people living downstream. ened applied agricultural research from 400 small farms; extended rural finance ▪▪A total of 160 km of lifeline roads have been (in total US$36.5 million for two credit rehabilitated with creation of over 12,000 projects) to over 17,500 under-served rural person-months of employment in the most enterprises and farms; helped community affected rural areas. groups implement proposals aimed at improving competitiveness; strengthened ▪▪Community-based economic development veterinary services; and piloted provision with around 165 subprojects supporting of extension services by private providers. priority development and investment plans in 141 village communities have been sup- ▪▪the The urban heating project has fostered ported through RESCAD. use of safe, affordable and clean heat supply for urban multi-apartment build- ▪▪A total of 156 community infrastructure ings and schools. By providing heating for micro-projects are already completed some 106 schools, IDA has enabled many under ASIF and have created 406,150 schools in remote areas to eliminate idle person days of employment and US$6.59 school days throughout the winter season. million in wage income. Also, 8,200 urban poor households finally received clean heating. ▪▪With support from IDA, the government initiated reforms in the irrigation sector, ▪▪IDA project financing and policy advice including establishment of 44 Water Users have helped Armenia shift from public to Associations (WUAs). The Armenian experi- private sector management of Yerevan’s ence in this regard is considered one of the water supply system. The government most successful in the Commonwealth of adopted a management contract and later Independent States (CIS) as well as in the fully transferred the system to a long-term Europe and Central Asia region. So far, the private lease operator. Metering is nearly irrigated area increased by about 16 percent universal, collections have quadrupled (from 112,000 ha in 2004 to 130,000 ha in from a low base of only 20 percent, service 2009) and areas with high value added irri- has improved since the duration of water gated crops increased by about 20 percent supply has increased to 21.5 hours from (from 55 percent to 75 percent of irrigated 17.4 hours, and energy consumption has hectares cultivated over the number of been reduced from 119 MWh at baseline all irrigated hectares), contributing to an to 24 MWh now (exceeding end of project increase of the farm income by 30 percent target: 50 MWh). on average. In addition, cost recovery rate of all Operation and Maintenance (O&M) ▪▪Rehabilitation and private management expenses over O&M needs increased from 8 of water systems was supported outside percent in 2001 to 45.2 percent in 2009, at the capital city, including the cost of the the same time the quantity of electricity management contract, monitoring of consumed per ha (kWh/ha) decreased from contractor performance commitments, 2,240.8 kWh/ha to 1,712,7 kWh/ha. and financing of essential investments in 3 the service areas of the two largest water poverty in particular; it achieved a bet- utilities of the country. ter targeting performance in 2009, about 61 percent of the resources went to the ▪▪Through the IDA-supported health reforms bottom quintile, making it one of the (three credits totaling US$51 million), the well-targeted programs in the region. allocation of public resources to health About 70 percent of the resources also rose from 1.2 percent in 2003 to 1.6 accrued to the poor in 2009 compared to percent in 2010 (with high GDP growth, only 48 percent in 2007. these increases have actually produced • There has been improved administration a substantial jump in absolute levels of of pensions and those social assistance expenditure). The gap in access of the poor programs that have not been folded into to the basic health system has improved: the TSA. for the period from 2006 to 2008, the dif- • Up-to-date labor information has ference in utilization of essential health improved the functioning of a network services between richest and poorest quin- of employment offices. tiles of population decreased from 25.8 to • A community-driven development pro- 21.9 percentage points. Informal payments gram managed by the ASIF has helped for the essential health services have been to engage the poorest populations in reduced from 60 percent in 2005 to 50.9 tackling local issues. percent in 2008. Life expectancy, an indi- • A well-trained, competent National Sta- cator of overall health status, rose from tistical Service able to use international 66.4 years in 2000 to 73 years in 2009. best practice in monitoring and analyzing trends in household poverty has provided ▪▪IDA assistance to Armenia has helped to important inputs into social protection design and strengthen a basic social protec- planning and implementation. tion system. The household surveys reveal the following results: IDA Contribution • Overall, social protection programs have covered 97 percent of the poorest 20 As of December 31, 2009, the IDA/IBRD port- percent of the population and 82 per- folio of active projects in Armenia consists of cent of the poor in 2009, an increase of sixteen projects with a total commitment of 14 percentage points from the coverage US$429.9 million of which US$172.3 million is rate in 2007. Although not an anti-poverty undisbursed (twelve IDA credits, including a program, pensions cover a significantly Global Environment Facility (GEF) operation. large share of the poor (75 percent) and three IBRD loans, and a Geothermal Energy the extreme poor (91 percent), both Development Program (Geofund) Project). significant improvements over pre-crisis The projects address needs in various sec- coverage rates. tors including roads, energy, education, • The family benefit (TSA) program has health, irrigation, rural development, public been well targeted and has played administration, and judiciary. The Bank also a major role over the last decade in provided programmatic poverty and Public reducing poverty generally and extreme Expenditure Review (PER) support, including 4 support to the government in preparing a These consultative efforts helped promote Public Expenditure Financial Accountability dialogue and build consensus on medium and (PEFA), as well as financial sector advisory longer-term strategic goals. They also pro- technical assistance. duced a framework within which Armenia’s partners could support national development Since the start of transition in 1991, IDA has priorities. A number of donors (Japan, the provided about US$1.2 billion to Armenia to United Kingdom, Netherlands, Sweden and support 51 projects. Armenia consistently the European Union (EU)) have channeled ranks among the top performing countries grant resources through Trust Funds managed in IDA’s portfolio, measured by the IDA through IDA. Partnership with the Interna- Performance-Based Allocation system. In tional Monetary Fund (IMF) has been close in 2008, Armenia also became eligible to begin the area of economic advice and policy-based borrowing from the International Bank for lending. IDA and the Asian Development Bank Reconstruction and Development (IBRD) and (ADB) coordinate their transport, water and in March 2009 arranged an initial loan from policy-based lending. The European Bank for IBRD to support SMEs facing credit constraints Reconstruction and Development (EBRD) has due to the global financial crisis. IBRD eligi- co-financed IDA’s renewable energy project bility is a sign of Armenia’s development suc- with US$7 million and the two agencies main- cess. The Country Partnership Strategy (CPS) tain a close relationship in water, financial provided for new IDA/IBRD lending of US$545 and private sector development. The EU and million over fiscal years 2009-12. The CPS was IDA have provided complementary support to frontloaded for both IDA and IBRD financing Armenia on judicial modernization through with the aim of mitigating the impact of the a grant from the Netherlands government in financial and economic crisis. the amount of US$4.9 million; from Germany in municipal infrastructure and SME devel- Partners opment; the U.S. Agency for International Development in the financial sector, tax Over the years, many donors have decen- administration, social protection, and SME tralized greater responsibility to their local development; and the Millennium Challenge country or regional offices. The Bank’s Corporation in irrigation. The Netherlands Regional Director for the South Caucasus has also co-financed IDA policy-based lend- is now located in Georgia, and the Country ing; and the Russian Federation has provided Manager in Armenia participates in or chairs additional financing to help Armenia to miti- local donor meetings on a wide range of top- gate impacts of the global economic crisis. ics. IDA also joined forces with the United The major reason for the successful results of Nations Development Programme (UNDP) and World Bank support, however, has been the other donors to support the government and close cooperation with the Armenian govern- local stakeholders as they prepared Armenia’s ment. “The World Bank has been a reliable first Poverty Reduction Strategy Papers (PRSP) and trusted partner in our efforts to build a and the follow-on Sustainable Development more diversified and competitive economy,” Strategy. according to Armenia’s Prime Minister in February 2009. 5 Moving Forward infrastructure; improving competitiveness through the sustainable use of energy and In view of the global economic crisis, IDA/IBRD natural resources; and improving public sec- will continue supporting the government’s tor efficiency and effectiveness. two strategic objectives of (i) mitigating Armenia’s vulnerability to the shocks and (ii) Beneficiaries strengthening competitiveness for post-crisis recovery and growth over the medium term. For Rima Avanesyan, 68, a single pensioner living To mitigate vulnerability, the Bank’s further in an old hostel in a Yerevan suburb, the gas heater support will be centered on managing the has been a long-awaited gift. “I had no heating whatsoever in the past. As a pensioner I couldn’t impact of the crisis by maintaining a sound afford the high cost of electrical heating—the only macroeconomic and fiscal framework while time I used it was to cook food or make tea, no protecting the poor; and strengthening the more. Now I use my gas heater when I need it, and management of education, health, and social it has so far cost me about 4,000 drams (US$10) a protection programs. To strengthen competi- month. I am very grateful for this. And, you know— tiveness for recovery and growth, the Bank the attention and nice treatment I received from the project people [Renewable Resources and Energy will assist the government in improving eco- Efficiency Fund] means a lot more to me—they nomic competition and the business climate; have warmed my heart just like this heater warms strengthening the regulatory environment in my apartment.” Last updated September 2010. http://www.worldbank.org/ida 6