After a year marked by significant procedural reforms, 2025 promises to bring pivotal changes in Armenia’s tax code and other important legislation. We sat down with Vahe Hovhannisyan, the Minister of Finance of the Republic of Armenia to explore what these changes mean for the Armenian citizens and the country’s economic future in general.
Interview : Nazareth Seferian
Photo : RA Ministry of Finance
Mr. Hovhannisyan, let’s start with a look back on 2024. What do you consider to be the most significant achievements of your ministry over the past year?
— Our biggest achievement comes as part of our mid-term cost reduction program—we have managed to eliminate 150 billion AMD in costs for 2025. This is a key exercise that we are undertaking against inefficient allocations. You can imagine the amount of analysis involved and the negotiations with the relevant state body around each budget cut! We also advanced in strengthening our ministry’s institutional framework, though such changes are usually not very visible to the general public, especially given that the Ministry of Finance does not provide direct services to everyday citizens. So, all developments that we implement enhance the general efficiency of the government. We’ve made some progress on this front and, since this is a very challenging task, any small progress can be considered a big success.
We are also changing our approach to the state budget—it is no longer going to be a one-year document, but rather a three-year budget. We will approve it for the first year along with an indicative budget for the next two years.
Could you walk us through the key financial reforms your ministry is currently implementing?
— First, I would highlight our governance reforms in public finance. Here again, our main beneficiaries are among state bodies, without directly involving the general public. The first thing to mention here is a new law on public procurement. The key objective is to make government costs more efficient and clarify the tender process for participants. We are also working to make it more inclusive since we know that many suppliers are reluctant to participate due to bureaucracy and inflexibility on the part of the State. Having more diversity in our supplier pool is to the benefit of the State. So, we are going to decentralize public procurement to a certain extent and make it more flexible. In addition to a greater degree of decision-making power at the local level, we will increase accountability, so that we can cover any corruption risks that may be hidden there.
Our next reform package focuses on budget processes. Once again, the general public will benefit indirectly. We’re introducing capital carry-over capability. Until now, our budget system was strictly calendar-year based—when a year ends, the budget closes and becomes unavailable. With each new year, we start with a new budget. This created major issues. For instance, when capital costs planned for the current year weren’t completed in time, there was no allocation for them in the following year’s budget. Making these payments in the new year required extensive paperwork and reallocation, causing difficulties at multiple levels. We’re now making it possible to use the current year’s resources to cover costs in the following year, which streamlines these processes and brings them closer to reality.
We are also changing our approach to the state budget—it is no longer going to be a one-year document, but rather a three-year budget. We will approve it for the first year along with an indicative budget for the next two years. This is important because it connects the budget to our mid-term mindset and approach. We used to have a mid-term cost reduction program approved at the end of June each year, which was out of sync with the budget approval. So, we will now be able to show costs in the budget that are planned over several years. The budget must be a real, practical document, not something that is cut off from reality.
Finally, we’ve significantly enhanced our analytical and research capabilities, an area where we have invested considerable effort. While the public will see these results indirectly, we can now analyze and consult on reforms proposed by other government departments. In a way, we have become the government’s think tank and can help improve the quality of decision-making at this level.
In addition to all this, we are also working on our external communication, meeting the public’s need for accessible information.
There is an increased presence of international businesses and relocated companies in Armenia. How is this affecting our investment climate, and what opportunities and challenges does it present?
— There has been quite considerable capital inflow over the past year. Some of this is related to the situation in Ukraine, but we consider it our key task to continuously improve our investment climate and attract new investors to Armenia. We understand that this inflow, which started in 2022-23, must be maintained, otherwise, we will not be able to keep up the same rate of development. This investment has also helped us enhance our productivity as a whole. After all, these foreign investments do not just consist of money, they come in the form of people with knowledge and experience.
What is Armenia’s current strategy regarding foreign debt management, and how is the Ministry trying to balance foreign aid with domestic resources?
— Over the past years, we have put a lot of effort into increasing the share of our internal debt. Even though final indicators are not yet clear for this year, we already know that we’ve reached a ratio of approximately 48 to 52 percent between internal and foreign debt. Just to put this in context, it is worth noting that the share of internal debt stood at only 25% of our total debt in 2018-19. This means we are now better protected against currency exchange risks and, on the other hand, we are developing our capital markets and increasing liquidity in the market. But this raises the cost of capital—we see that bonds in Armenian Drams have higher percentages of return compared to those in US Dollars. However, if we hedged that US Dollar debt and added the cost of hedging to it, we would see that our debt in US Dollars would be much more expensive. Based on our need for foreign currency, we will pull this back a little next year and boost returns on US Dollar bonds by a few percentage points. But the general idea will be to maintain this tendency. However, everything depends on the structure of our economy. If we don’t have an export economy, we cannot substantially increase the share of our debt in Armenian Drams, we will always be dependent on foreign currency debt. So far, we have managed to increase the debt in Armenian Drams because we have had considerable inflows of foreign currency. By the way, we are seeing non-resident companies show a growing interest in buying Armenian Dram bonds. We want to increase this in the future.
We are seeing significant global trends in financial digitalization. How is Armenia positioning itself in this regard?
— We have taken a big step in terms of digitalization for public finance management. We are introducing an enterprise resource planning (ERP) platform called Government Financial Management Information System or GFMIS. It is basically an information system similar to what large corporations have, where they bring together accounting, HR, and treasury, i.e. everything linked to finances. This is something that the Government of Armenia has considered since 2008, and we are finally ready to announce the pre-qualification tender. We expect to start introducing the GFMIS in 2025 and this will greatly improve the efficiency of the government.
We have taken a big step in terms of digitalization for public finance management. We are introducing an enterprise resource planning (ERP) platform called Government Financial Management Information System or GFMIS.
Could you outline your vision for Armenia’s financial sector development over the next five years?
— While we will continue to develop infrastructure, our focus will also shift to increasing the efficiency of the government, competitiveness, and the investment climate in Armenia. We will have a law on foreign direct investment next year and make some changes in corporate law, which will allow us to develop capital markets. All of this will make the country more competitive and conducive to investments. There’s significant untapped potential here, and we’re working hard to realize it. For instance, we’re making substantial investments in education, targeting both infrastructure and content. The World Bank’s recent Armenia Public Finance Review acknowledged our progress in this area. We recognize that attracting investment requires both a skilled workforce and a commitment to democratic principles.
Armenia is introducing a universal mandatory declaration for individuals from 2025. What are the main objectives of this reform, and how is it beneficial for the country?
— The first thing I would like to say is that there is a global philosophy behind this reform—it will allow citizens to feel like real participants in these processes, not just bystanders. On a more practical level, we have introduced a social credit system, where you can get tax rebates on some of the costs that you bear. When this system is fully established, it will be a fertile space for innovation. We are still cautious for now, so we have only introduced limited credits for healthcare (up to 50,000 AMD), and education (up to 100,000 AMD). But we expect a lot more in the future. We are still learning and understanding the expense patterns that exist in our population.
We need to communicate this better so that people understand the benefits of this system. This was an important reform that Armenia has aimed to launch for many years, and we have now decided to take the leap.
The upcoming changes to the tax code have been the subject of lots of discussion in the public. Could you comment on their implications for businesses and individuals in Armenia?
—Let’s start with a principle everyone in Armenia agrees on—we don’t want to have a shadow economy. Whenever someone does not pay taxes, it creates a sense of injustice among the rest of the population. A portion of the shadow economy existing in Armenia today comes from the revenue tax system, which has very limited requirements in terms of documentation. To tackle this, we have increased the revenue tax level on the one hand but, on the other hand, if the right documents are in place, the actual tax due to be paid can even be lower. At the same time, we plan to remove some categories of professional service from the revenue tax system. High-earning professionals like lawyers and accountants aren’t the targeted beneficiaries of this system as it was originally intended to function.
People will need time to adapt to this new system. Tax evasion happens when citizens do not see justice. We’re working to restore justice while improving government efficiency to ensure collected taxes are well utilized. However, if someone says that these higher taxes will make them less competitive, this means that they need to think about their productivity. Businesses and individuals must keep investing in their education and productivity so that they remain competitive. Moreover, we must be competitive both within Armenia and outside. After all, our goal is an export-driven economy targeting developed markets like Europe and the United States. If we can’t compete while paying 5% in tax, compared to European rates of 30%, then we need to seriously address our productivity levels.
This year marked the tenth anniversary of our signature pension reform, which changed the pay-as-you-go system to a multi-pillar defined contribution system based on individualized pension accounts.
Another key issue on citizens’ minds is the pension system and its stability. What steps is your ministry taking to ensure long-term sustainability?
— Sustainability of pension systems is a worldwide issue, which is mainly a result of demographic trends. At the end of the day, the long-term solution is to save more for retirement. Research shows that this happens only when you have the right government incentives. This year marked the tenth anniversary of our signature pension reform, which changed the pay-as-you-go system to a multi-pillar defined contribution system based on individualized pension accounts. In the new system, our employed population saves ten percent of their pre-tax salary, half of which is financed by the government. Government contributions are capped at 25,000 Armenian Drams per month, which makes sure that the government contributes less to higher salary works accounts. Government contributions constitute a short-term cost, that is actually an investment. In the long term, the government does not have to pay large pension bills, as people save on their own.
The pension funds also contribute significantly to capital markets development. The size of the funds is increasing at a rapid pace and has reached around 2.5 billion USD. Our law stipulates that they have to invest a minimum of 60 percent of their assets in Armenia, which creates a virtuous cycle for companies and projects which are transparent and want to tap the capital markets and pension funds.
What key message would you like to send to potential international investors about Armenia’s investment climate?
— When Armenia is mentioned in international bodies, the most important feature is our phenomenal ability to resist shocks. This resilience is crucial for investors, who find in Armenia a predictable, stable environment committed to continuous reform and improvement—particularly noteworthy given our region’s turbulence. The establishment of peace will unlock even greater potential. Finally, Armenia, with its democratic values, has managed to set itself apart from the rest of the region. We have many support programs in Armenia for investors that I sincerely believe are quite generous. So, this is the right time to invest in Armenia.
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