2006–2008 MEDIUM–TERM PUBLIC EXPENDITURE FRAMEWORK
CONTENTS
INTRODUCTION 6
Objective and Tasks 6
Medium-Term Public Expenditure Planning Approaches 8
Organizational Bases for Developing the MTEF 2006-2008 8
Reforms Aimed at Improvement of Medium-Term Expenditure Planning 9
PART A. FISCAL POLICY 11
CHAPTER 1. STRATEGIC AND MEDIUM-TERM PRIORITIES AND THEIR IMPLEMENTATION 12
STRATEGIC AND MEDIUM-TERM PRIORITIES 12
OBJECTIVES OF MEDIUM-TERM EXPENDITURE FRAMEWORK 12
FISCAL PRINCIPLES AND INDICATORS 13
Long-Term Fiscal Principles 13
Short-Term and Medium-Term Fiscal Indicators 13
CHAPTER 2. MACRO-ECONOMIC FRAMEWORK OF MTEF 2006-2008 14
REAL SECTOR 15
Gross Domestic Product by Sectors of Economy 15
Gross Domestic Product by Expenditure Components 16
Consumer Prices 17
EXTERNAL SECTOR 17
Export 18
Import 18
Factor Revenues and Transfers 18
Current Account 19
CHAPTER 3. REVENUE POLICY AND FORECASTING OF 20
STATE BUDGETS 2006-2008 20
MAIN CHARACTERISTICS OF REVENUE POLICY OF STATE BUDGETS 2006-2008 20
STATE BUDGET REVENUE FORECAST FOR 2006-2008 23
CHAPTER 4. BUDGET FRAMEWORK 29
STATE BUDGET DEFICIT 29
PUBLIC DEBT 31
External Public Debt 31
Internal Public Debt 34
PROPOSED CHANGES IN RESOURCE AND EXPENDITURE PACKAGE OF STATE BUDGETS FOR 2006-2008 36
FORECAST OF STATE BUDGET EXPENDITURE OVER 2006-2008, BY CONSOLIDATED GROUPS OF FUNCTIONAL CLASSIFICATION 38
FORECAST OF STATE BUDGET EXPENDITURE OVER 2006-2008, BY MAIN ARTICLES OF ECONOMIC CLASSIFICATION 45
FISCAL RISKS OF MTEF 2006-2008 47
Sources of Risks 47
Possible Outcomes and Adjustment Trends 48
PART B. STRATEGY OF EXPENDITURE POLICY 50
CHAPTER 5. EXPENDITURE PRIORITIES OF STATE BUDGETS 2006-2008 51
CHAPTER 6. PUBLIC ADMINISTRATION SYSTEM 54
6.1 SITUATIONAL OVERVIEW 54
6.2 OBJECTIVES, PRIORITIES, AND EXPENDITURE DRIVERS OVER MTEF PERIOD 57
6.2.1 Objectives 57
6.2.2 Priorities 57
6.2.3 Expenditure drivers 58
6.3 EXPENDITURE COMMITMENTS 59
6.4 EXTERNALLY FINANCED PROGRAMS 62
CHAPTER 7. EDUCATION AND SCIENCE 63
7.1 EDUCATION 63
7.1.1 SITUATIONAL OVERVIEW 63
7.1.2 OBJECTIVES, PRIORITIES, AND EXPENDITURE DRIVERS OVER MTEF PERIOD 72
7.1.2.1 Objectives 72
7.1.2.2 Priorities 78
7.1.2.3 Expenditure Drivers 80
7.1.3 EXPENDITURE COMMITMENTS 82
7.1.4 EXTERNALLY FINANCED PROGRAMS 87
7.2 SCIENCE 94
7.2.1 SITUATIONAL OVERVIEW 94
7.2.2 OBJECTIVES, PRIORITIES, AND EXPENDITURE DRIVERS OVER MTEF PERIOD 96
7.2.2.1 Objectives 96
7.2.2.2 Priorities 96
7.2.2.3 Expenditure Drivers 97
7.2.3 EXPENDITURE COMMITMENTS 97
CHAPTER 8. HEALTH CARE 99
8.1 SITUATIONAL OVERVIEW 99
8.2 OBJECTIVES, PRIORITIES, AND EXPENDITURE DRIVERS OVER MTEF PERIOD 103
8.2.1 Objectives 103
8.2.2 Priorities 105
8.2.3 Expenditure Drivers 109
8.3 EXPENDITURE COMMITMENTS 110
8.4 EXTERNALLY FINANCED PROGRAMS 117
CHAPTER 9. SOCIAL INSURANCE AND SOCIAL SECURITY 119
9.1 SITUATIONAL OVERVIEW 119
9.2 OBJECTIVES, PRIORITIES, AND EXPENDITURE DRIVERS OVER MTEF PERIOD 133
9.2.1 Objectives 133
9.2.2 Priorities 133
9.2.3 Expenditure drivers 134
9.3 EXPENDITURE COMMITMENTS 135
9.4 EXTERNALLY FINANCED PROGRAMS 144
CHAPTER 10. CULTURE, INFORMATION, AND SPORTS 150
10.1 CULTURE 150
10.1.1 SITUATIONAL OVERVIEW 150
10.1.2. OBJECTIVES, PRIORITIES, AND EXPENDITURE DRIVERS OVER MTEF PERIOD 159
10.1.2.1 Objectives 159
10.1.2.2 Priorities 161
10.1.2.2 Expenditure Drivers 162
10.1.3 EXPENDITURE COMMITMENTS 163
10.2 TELEVISION AND RADIO 173
10.2.1 SITUATIONAL OVERVIEW 173
10.2.2 OBJECTIVES, PRIORITIES, AND EXPENDITURE DRIVERS OVER MTEF PERIOD 177
10.2.2.1 Objectives 177
10.2.2.2 Priorities 177
10.2.2.3 Expenditure Drivers 179
10.2.3 EXPENDITURE COMMITMENTS 179
10.2.4 REVENUES OF STATE-OWNED COMPANIES (EXCLUDING STATE BUDGET ALLOCATIONS) 181
10.3 PHYSICAL TRAINING AND SPORTS 184
10.3.1 SITUATIONAL OVERVIEW 184
10.3.2 OBJECTIVES, PRIORITIES, AND EXPENDITURE DRIVERS OVER MTEF PERIOD 186
10.3.2.1 Objectives 186
10.3.2.2 Priorities 186
10.3.2.3 Expenditure Drivers 188
10.3.3 EXPENDITURE COMMITMENTS 188
CHAPTER 11. AGRICULTURE 194
11.1 SITUATIONAL OVERVIEW 194
11.2 OBJECTIVES, PRIORITIES, AND EXPENDITURE DRIVERS OVER MTEF PERIOD 196
11.2.1 Objectives 196
11.2.2 Priorities 196
11.2.3 Expenditure drivers 198
11.3. EXPENDITURE COMMITMENTS 198
CHAPTER 12. NATURAL ENVIRONMENT PROTECTION 216
12.1 SITUATIONAL OVERVIEW 216
12.2 OBJECTIVES, PRIORITIES, AND EXPENDITURE DRIVERS OVER MTEF PERIOD 221
12.2.1 Objectives 221
12.2.2 Priorities 222
12.2.3 Expenditure Drivers 223
12.3 EXPENDITURE COMMITMENTS 223
12.4 EXTERNALLY FINANCED PROGRAMS 226
12.5. NEW PROGRAMS 226
CHAPTER 13. TRANSPORT AND COMMUNICATIONS 232
13.1 SITUATIONAL OVERVIEW 232
13.2 OBJECTIVES, PRIORITIES, AND EXPENDITURE DRIVERS OVER MTEF PERIOD 234
13.2.1 Objectives 234
13.2.2 Priorities 235
13.2.3 Expenditure Drivers 235
13.3 EXPENDITURE COMMITMENTS 235
CHAPTER 14. WATER ECONOMY 238
14.1 SITUATIONAL OVERVIEW 238
14.2 OBJECTIVES, PRIORITIES, AND EXPENDITURE DRIVERS OVER MTEF PERIOD 243
14.2.1 Objectives 243
14.2.2 Priorities 243
14.2.3 Expenditure drivers 243
14.3 EXPENDITURE COMMITMENTS 244
14.4 EXTERNALLY FINANCED PROGRAMS 247
CHAPTER 15. ENERGY 255
15.1 SITUATIONAL OVERVIEW 255
15.2 OBJECTIVES, PRIORITIES, AND EXPENDITURE DRIVERS OVER MTEF PERIOD 255
15.2.1 Objectives 255
15.2.2 Priorities 255
15.3 EXPENDITURE COMMITMENTS 255
CHAPTER 16. MEDIUM-TERM PUBLIC EXPENDITURE POLICY IN OTHER SECTORS 258
16.1 TRADE AND ECONOMIC DEVELOPMENT 258
16.1.1 SITUATIONAL OVERVIEW 258
16.1.2 OBJECTIVES, PRIORITIES, AND EXPENDITURE DRIVERS OVER MTEF PERIOD 260
16.1.3 EXPENDITURE COMMITMENTS 262
16.2 REAL ESTATE CADASTRE 265
16.2.1 SITUATIONAL OVERVIEW 265
16.2.2 OBJECTIVES, PRIORITIES, AND EXPENDITURE DRIVERS OVER MTEF PERIOD 272
16.2.3 EXPENDITURE COMMITMENTS 273
16.2.4 EXTERNALLY FINANCED PROGRAMS 274
16.3 STATISTICS 277
16.3.1 SITUATIONAL OVERVIEW 277
16.3.2 OBJECTIVES, PRIORITIES, AND EXPENDITURE DRIVERS OVER MTEF PERIOD 279
16.3.3 EXPENDITURE COMMITMENTS 280
CHAPTER 17. PUBLIC CAPITAL EXPENDITURE FRAMEWORK FOR 2006-2008 282
17.1 BASIC PRINCIPLES FOR DEVELOPING PUBLIC CAPITAL EXPENDITURE FRAMEWORK 282
17.2 MAIN DEVELOPMENTS OVER 2000-2005 285
17.3 NEED FOR PUBLIC CAPITAL EXPENDITURE 288
17.4 PRINCIPLES FOR DEVELOPING CAPITAL EXPENDITURE FRAMEWORK 289
17.5 PUBLIC CAPITAL EXPENDITURE FRAMEWORK FOR 2006-2008 290
17.6 PUBLIC CAPITAL EXPENDITURE OVER 2006-2008, BY SECTORS 291
INTRODUCTION
Developments in the Armenian economy over recent years have been witnessing that the clarification of the scope of public intervention and the introduction of respective mechanisms may have an essential impact on the further development course of the country. This is true in respect of both mitigating the gaps in the market, and realizing the state regulatory function in terms of income redistribution. At the same time, at the current stage of economic development there is a more emphasized need for medium-term (as well as long-term) strategic planning. In particular, one of the prioritized tasks on the agenda for the Armenian authorities is the reduction of poverty in the country. As it is known, the Poverty Reduction Strategic Program has been developed and approved by the Government for this purpose since 2003, with the participation of different levels of governance and of a number of non-governmental organizations and independent experts. Integrating medium-term public expenditure planning into the budgeting process, the practice of which has been regularly applied since 2003, has an important role in the comprehensive solution to the problem.
In this relation, it should be mentioned that it is three years that the development of the medium-term public expenditure framework is legally recognized as a component of the general budgeting process implemented in accordance with the procedure defined by the law.
The political importance of the document has been emphasized by highlighting the medium-term public expenditure framework in the budgeting process. It is worth mentioning that comprehensive and coordinated medium-term public expenditure framework is to provide strategic framework for conducting negotiations to involve international financial assistance.
Objective and Tasks
Budgeting in the Republic of Armenia has been implemented, as a rule, on an annual basis. However, for a higher-quality definition of public expenditure policy, there is also need for considering the expected developments in the macroeconomic environment, the scope of available budgetary resources, and the expenditure needs of Government programs over the medium-term (and over the long-term, if possible). In terms of public expenditure management, budgets developed and executed on an annual basis have certain limitations. In particular, they are based on short-run macroeconomic forecasts; there is no clear-cut linkage between the implemented policies and the annual budgetary expenditure due to the timing inconsistency and, as a rule, supervision is focused not on the anticipated outcomes (and the quality of provided services), but on the amount of expenditure. The practice of including application and development of the medium-term public expenditure framework into the budgeting process appears to be a relevant instrument for improving the situation.
The main objective of the medium-term public expenditure framework is enhancement of the efficiency of the public expenditure management system.
In essence, the efficiency of the public expenditure management system could be assessed by means of three indicators:
(i) Overall fiscal discipline – The budget resource package should be clearly identified and comprehensively formulated; it should be formed prior to the allocation of expenditure to certain directions, and substantiated by sustainable medium-term macroeconomic forecasts. Allocation of expenditure should be accurately implemented within the framework of the above-mentioned budget resources, and their further execution should be carried out within the limits of budgetary allocations envisaged for the programs selected in accordance with the defined expenditure priorities.
(ii) Efficiency of allocation – Public expenditure should be consistent with the public policy priorities, and the system should enable inter-sectoral and intra-sectoral redistribution of resources from lower priorities to higher ones, and from low efficiency programs to higher efficiency ones.
(iii) Technical (production) efficiency – Sectoral ministries (departments) should assure the maximum attainable level of efficiency, comparable with the productivity of the private sector.
The introduction of the medium-term public expenditure planning seeks to solve the following problems:
(i) Improve the microeconomic balance, through formation of a realistic and comprehensive package of resources (revenues);
(ii) Contribute to inter-sectoral and intra-sectoral redistribution of resources to priority directions;
(iii) Reduce uncertainties in terms of policies and financing, so as to contribute to the improvement of the quality of future planning;
(iv) Establish robust budget ceilings by sectors, while creating the conditions and incentives for the targeted and efficient use of available resources by sectoral ministries (departments);
(v) Improve the system for assessment of budgetary programs, and enhance the level of transparency of public financial management.
Medium-Term Public Expenditure Planning Approaches
The planning of the medium-term public expenditure is an on-going process and, in essence, represents a complete logical chain of “policy formulation – planning – budgeting”. It enables to mitigate the possible inconsistency between available resources and expenditure needs, as well as to reflect in public expenditure the state policy changes with regard to certain sectors. In this respect, it is justified, that the MTEF is developed (and/or reviewed) before the drafting of the annual budget, thus providing guidance for working out the annual budget.
Planning of the medium-term public expenditure implies:
(i) Comprehensive assessment of the budget resources (receipts) consistent with a sustainable economic environment;
(ii) Bottom-up estimation of expenditure needed for implementation of policies;
(iii) Reconciliation of available resources and expenditure needs through relevant mechanisms.
Organizational Bases for Developing the MTEF 2006-2008
The Law on the Budgetary System of the Republic of Armenia, the Decree of the Prime Minister No 790-N “On Starting the Budgeting Process of the Republic of Armenia for the Year 2006” dated December 2, 2004, and the methodological instructions of the Ministry of Finance and Economy issued on the basis of the provisions of the said decree have regulated the process of developing the MTEF 2006-2008.
In essence, such an approach to the issue reflects the fact that the Armenian authorities consider the medium-term public expenditure framework as a component of the budgeting process, thus emphasizing its the political importance as well.
One of the crucial prerequisites for the development of the framework is formation of a relevant institutional structure, gradual improvement of which will contribute to the enhancement of the further planning quality.
During the current year, just as over the last two years, the below-mentioned two units established by the Decree of the Prime Minister have managed, controlled, and coordinated the process of developing medium-term public expenditure framework:
(i) The standing higher council of medium-term public expenditure frameworks (with the Prime Minister as the chairman of the council), providing strategic decision-making and supervision of the framework development; and
(ii) The standing workgroup coordinating the works for the development of medium-term public expenditure frameworks (with the First Deputy Minister of Finance and Economy as the group leader), providing coordination of the works for the development of the medium-term public expenditure framework.
This kind of approach implies strengthening the role of sectoral ministries (departments) in the budgeting process, which would contribute to the improvement of budgeting and well-grounded strategic decision-making at the sectoral level, also ensuring the maximum possible consistency between the benchmarked policies and the available financial resources. In this context, coordination of the actions of the Ministry of Finance and Economy and the sectoral ministries (departments) is emphasized, since both the processes of drafting and executing State Budgets are highly dependent on it.
At the same time, it should be mentioned that, at the suggestion of the Prime Minister and on the presentation of the political parties incorporated into the ruling political coalition, a number of National Assembly deputies representing those parties have been collaborating with the standing workgroup coordinating the works for the development of medium-term public expenditure frameworks. This kind of approach implies participation of political forces in the budgeting process from the initial phase of the MTEF development, thus enabling early reconciliation of the attitudes and opinions of the Government and the political forces with regard to choosing among certain strategies and expenditure priorities to be stipulated by medium-term expenditure frameworks.
Reforms Aimed at Improvement of Medium-Term Expenditure Planning
For the implementation of the planned objectives, the Government has been also implementing reforms aimed at the introduction of program budgeting in the country. The primary purpose of program budgeting reforms is the enhancement of economic and financial efficiency of public expenditure through assisting the Government in allocation of resources to the priority expenditure areas. Within the framework of program budgeting, this task is implemented through provision of more accurate information to the Government on definition of priorities in terms of public expenditure allocations. In particular, the Government and the society are provided with information on the services or direct outcomes rendered in return to state financing. Therefore, program budgeting appears to be an instrument for interconnecting policy processes, such as the poverty reduction strategy with the medium-term public expenditure frameworks and with State Budgets. This would help to assess whether expenditure decisions are well targeted, and thus to channel the resources to the sectors and programs that most contribute to the implementation of the Government’s objectives.
Presently, pilot works for program budgeting reforms are implemented in four ministries of the social sector. These ministries engaged in pilot works test the methodology and the approaches of program budgeting reforms in order to confirm their applicability, while the reforms are expanded within the whole system of public administration.
PART AFISCAL POLICY
CHAPTER 1STRATEGIC AND MEDIUM-TERM PRIORITIES AND THEIR IMPLEMENTATION
STRATEGIC AND MEDIUM-TERM PRIORITIES
The key strategic priorities of the Government are identified in the Poverty Reduction Strategic Program (PRSP) and in the Government’s Action Plan approved by the National Assembly on June 12, 2003. In conformity with these documents, during the forthcoming years the Government will place more emphasis on the following priorities of State Budget expenditure (in the context of this framework, priority sectors are defined as those being allocated considerable portions of additional budgetary funds, or being financed under loan proceeds):