The National Financial Structure

The National Financial Structure

The various aspects of Armenia's financial system were reformed or replaced piecemeal in the early 1990s, with the national cash flow severely restricted by the strangulation of foreign trade and diversions to support military operations and emergency humanitarian needs.


Banking reforms in Armenia moved somewhat more slowly than in other former Soviet republics. In late 1991, the specialized state banks of the Soviet system were converted into joint-stock commercial banks, and some new commercial banks were formed. But the State Bank of Armenia (Gosbank Armenia) and the Bank for Foreign Economic Affairs remained official branches of central state banks in Moscow. The consequence was diminished local control over monetary policy.

A new Central Bank of Armenia was not fully established until early 1994, and even then the bank was not entirely free of state control. The global financial community considers the bank's independence vital to normalization of Armenia's international financial dealings, along with stabilization of the dram, the national currency established in 1993, and regularization of the dispersal of state pension allowances. In 1993 official exchange rates for the dram were as much as 100 percent more than black-market rates, which economists consider the more accurate value. Because of a shortage of hard currency in 1993, banks tried to restrict sales of hard currency that would further diminish the exchange value of the dram.

The National Budget

The tax base of the 1992 budget was to include a new value-added tax, several excise taxes, and a revised system of enterprise and personal income taxes. Hard-currency export earnings were to be taxed at 25 percent. The fastest-growing expenditure categories were national defense and allowances to citizens to mitigate the effects of price liberalization. The 1992 budget called for a cut of about 45 percent in real expenditures (equivalent to a nominal increase of 155 percent), which would still leave a deficit of 1.2 billion rubles, or 11 percent of total expenditures. Budgets were extremely difficult to plan because of the Azerbaijani blockade and the unpredictable inflation rate.

Price Policy

In mid-1990 the government introduced a three-stage price reform program, implementation of which was severely hindered by the contraction of the national economy. The purpose of the first stage was to improve agricultural production incentives by raising government procurement prices for staple products. The second stage raised wholesale prices and tariffs to bring them closer to world market levels and to stimulate price negotiations. The third stage fixed prices (usually at increases of 300 to 500 percent) for food, medicine, utilities, and transportation, but it freed the prices of most other items. Experts believed that prices would not reach true equilibrium until the end of shortages caused by the blockade.

Between December 1992 and September 1993, annual price increases for various goods and services ranged from nearly 600 to over 1,200 percent. Whereas the average monthly increase for all expenditures in 1993 was 23 percent, the rate fell considerably in the second half of the year. By the summer of 1993, monthly increases had fallen below 17 percent.

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