Quasi-Fiscal Activities, Hidden Government Subsidies, and Fiscal Adjustment in Armenia (World Bank Working Papers)

Annotation This Paper Analyzes Quasi-fiscal Deficits And Subsidies, And Their Impact On Armeniaa'-s Fiscal Performance In The Second Part Of The 1990s. In Addition, It Discusses The Specific Features Of Quasi-fiscal Financing In Transition Economies. Estimates Of Armeniaa'-s Actuarial And Hidden Deficits In The Second Part Of The 1990s Shows That Its Deficits Were Relatively Modest Compared To Similar Economies. While These Deficits Remain, They Have Declined Recently, Becoming The Main Source Of Fiscal Adjustment In Armenia. This Study Also Presents A Comprehensive Picture Of Subsidization In Armenia, Including Hidden And Quasi-fiscal Subsidies That Were A Primary Cause Of The Hidden Deficit. The Paper Shows The Ultimate Sources And Main Beneficiaries Of These Subsidies. It Concludes That The Main Distortive Impact Of Quasi-fiscal Subsidies Is On Social Policy, Not On Enterprise Restructuring And Private Sector Performance. Traditional And Alternative Approaches To The Evaluation Of Fiscal Adjustment -- Quasi-fiscal Activities In The Fsu Countries. Lev Freinkman, Gohar Gyulumyan, Artak Kyurumyan. Includes Bibliographical Referenfces. This paper aims to develop a detailed analysis of quasi-fiscal deficits and subsidies, and their impact on Armenia's fiscal performance in the second part of the 1990s. Based on the flow-of-funds approach, we estimate the magnitude of the quasi-fiscal deficits and the incidence of quasi-fiscal subsidies in Armenia, as well as identify main recipients and sources of quasi-fiscal financing. The principal finding of the paper is that while quasi-fiscal deficits in Armenia remain considerable, their recent decline has been a major contributing factor to Armenia's fiscal adjustment. The paper also shows that households remain a major ultimate recipient of quasi-fiscal subsidies. Thus, the main distortive impact of quasi-fiscal subsidies is on social policy and equity, rather than on enterprise restructuring and private sector performance. Still, the current level of public sector deficit in Armenia remains too high, which requires an additional adjustment effort. The paper suggests that to make fiscal adjustment sustainable a further strengthening of financial control, accounting and reporting in the public sector is needed, including through better Government monitoring of debts and other liabilities accumulated by the large state enterprises and phasing out the phenomenon of implicit (hidden subsidies), such as debt-for-equity swaps. The proposed approach to the analysis of quasi-fiscal deficits and subsidies, based on estimates of accumulated debts in the public sector and its main parts, seems to be fully applicable to other economies in transition, especially to those low-income CIS countries, which are heavily dependent on energy imports