Armenia’s economic growth figures are among the best in the EAEU member states

The Eurasian Fund for Stabilisation and Development (EFSD) runs a number of infrastructure projects in Armenia’s key economic sectors. Alexei Cherekayev, Project Group Director at the Eurasian Fund for Stabilisation and Development, told the ARKA agency about the Fund’s projects and his assessment of Armenia’s economic situation.

The Eurasian Fund for Stabilisation and Development (EFSD) runs a number of infrastructure projects in Armenia’s key economic sectors. How do you assess Armenia’s investment attractiveness, given that our country had the 38^th position, out of 190 countries, in the World Bank’s Doing Business ranking in 2017, up five notches?

Eurasian Development Bank, as the Resources Manager of the Eurasian Fund for Stabilisation and Development, considers that the Armenian government has achieved significant progress in ensuring conditions for doing business successfully. We would like to note particularly the government’s efforts in ensuring businesses’ access to electricity and reducing time for dealing with construction permits.

As for the economy as a whole, our forecasts are positive and we assess rather positively Armenia’s future economic growth that can reach 2.7% of GDP in 2017 and around 3.6% in 2018. Our assessment is close to the IMF’s forecast and we believe that the government has put significant efforts that have already paid back.

How would you comment on the efficiency of programmes run by the EFSD in Armenia? What projects could be of interest to the Bank in the future and in what economic sectors?

We can say that we have two major projects in Armenia at the moment. The first is the construction of the North–South road corridor and, in particular, one of its sections – Agarak–Kajaran (the southern section of the corridor). The second is the upgrade of irrigation systems, which is being fulfilled selectively, but practically in all regions of Armenia and envisions both modernisation and rehabilitation of the existing irrigation systems, and the construction of new ones.

From our point of view, the teams that work on behalf of the government on both transport and irrigation projects are rather professional. Our projects progress rather well despite the current fiscal and other restrictions in Armenia associated with the economic crisis and we hope that they will be implemented with due quality and within prescribed time.

As for the prospects, the first key point for Armenia is agriculture. Agricultural infrastructure in Armenia needs serious modernisation while the country has necessary workforce and people are used to working the land. I should note here that Armenian agricultural produce in the deluxe segment in Russia. For this reason, Armenia needs respective infrastructure because the Soviet infrastructure, including irrigation, is obsolete. It is also necessary to consider whether the agricultural sector has sufficient equipment. The bank will consider opportunities for enhancing cooperation with the Armenian government in this area.

We are currently considering construction of the Mastara irrigation reservoir. It will supplement rather harmoniously the irrigation project we are already working on. The next project will be to enhance Armenia’s transit potential, which is currently being limited by external factors, and any projects aimed at its improvement will automatically affect the cost of export and transportation. Therefore, we consider the North–South project as one of Armenia’s priorities. Moreover, we discuss with the government its possible continuation.

The project envisions road construction. Is it possible to consider the development of rail or air links?

The issue of rail transportation is significantly more complicated. We considered several rail projects, but Armenia has a very complicated terrain and construction will involve significant costs, as well as considerable environmental and social risks. These projects should be approached very carefully and, in the first place, it is necessary to find an investor who could “haul” and manage all this.

If such an investor appears, would the Eurasian Fund for Stabilisation and Development be ready to join rail construction?

Yes, we discussed this issue with the government and if it finds such an investor we’ll be ready to take part in construction of the Iran–Armenia railway.

Does the fund focus on irrigation systems only or is it ready to take part in other projects such as for example greenhouses, agricultural insurance or anti-hail systems?

As for greenhouses, the fund usually finances projects worth not less than US $15 million. In Armenia there are no greenhouses of such a size but we are ready to consider a large project, if any. We have received no such proposals yet.

At the same time, we won’t be able to finance the introduction of agricultural insurance in Armenia, for example, because the fund’s charter puts it straight that a project should have an investment component – the creation of new facilities or the reconstruction of existing ones.

As for climate change, the fund may consider such projects in principle but it depends on the overall effect on agriculture as well as the integration effect since one of the objectives is to strengthen integration between the fund’s member countries.

It should also be taken into account that the fund may finance only those projects that cannot be financed by the commercial market.

What is the total amount of investment extended by the fund to Armenia? Do you plan to expand financing and what will this depend on?

The amount of finance extended by the fund to Armenia is US $490 million at the moment. We have already signed a US $300 million fiscal assistance agreement, a US $150 million North-South road construction agreement, and a US $40 million irrigation project. All these agreements are in effect. We are also considering construction of the Mastara reservoir worth US $40 million.

Given that Armenia’s limit for access to the fund’s finance exceeds US $1 billion, we are ready to consider new projects in the above sectors. The issue of additional finance depends, in the first place, on Armenia’s debt sustainability and the fiscal rule currently in effect. Armenia is known to be in a rather complicated debt situation while all loans extended by the fund are sovereign, which means that they increase foreign debt. Therefore, if the situation changes and the debt burden eases, the consideration of new projects will take less time.

However, the overall structure of the fund is that the government submits projects for consideration and the fund’s council considers them and, if it complies with the fund’s priorities and mandate, passes a resolution to finance such projects.

What are the fund’s project selection criteria? What are the priorities? Are there any indicators the Armenian government should pay attention to when preparing projects for finance by the EFSD?

The fund was created with the aim to overcome negative crisis effects, ensure long-term sustainability and promote integration. In the first place, projects should meet these three criteria. Then we consider cost effectiveness and whether it is possible to raise finance in the commercial market in order to avoid competition with the national banking system since the fund has cheap and long money and they are channelled into projects with long payback periods.

We surely view positive experience in fulfilling similar projects with other international development banks as an advantage. As for the projects we run in Armenia now, the North–South project is co-financed by the Asian Development Bank and the irrigation and Mastara reservoir project is supported by the World Bank.

Would you please comment on certain projects, if possible? What stage are they at, how many money has been already disbursed, when will they be completed and how do you assess their productivity? Of particular interest are the irrigation modernisation project and the North–South road construction project, especially in view of the fact that the project raised concerns and was criticised, the contractor was replaced, and so on.

We plan to begin to transfer money for the North-South project this year. It was delayed, it is true, because of fiscal restrictions in Armenia, in particular as regards the use of foreign resources and the level of the government debt. Despite these restrictions, the government decided that this project is a priority. Its fulfilment has been postponed, but insignificantly – until 2021. This year we plan to invite bids for the design of the road section and involve a supervisor. Construction is expected to begin the next year.

As for the construction of tunnels and bridges where the government plans to involve private companies, this does not involve our part of the project. We are currently considering the possibility of building a tunnel between Agarak and Kajaran with PPP finance. We are waiting for proposals from the government and are ready to consider them.

At the same time, we do not exclude participation in the construction of other North–South sections if the government approaches us with respective proposals. Since the fund is already involved in the project, we’ll be ready to review such an application.

The irrigation project has been in the implementation phase since the autumn of 2016. A total of US $5 million has been disbursed already out of US $40 million. We hope that bidding will be finalised for some positions within two to three months and both consultant and construction contracts will be awarded.

The programme envisions construction or modernisation of irrigation canals, as well as rehabilitation of pumping stations. Work will be undertaken at more than 30 sites throughout Armenia. The programme is expected to improve the efficiency of irrigation to 100% at some sections.

The EFSD Council has preliminarily approved the Mastara reservoir construction project in Armenia (US $40 million). Could you describe the project and its expected outcomes in more detail?

We have reviewed the water sector and identified that new irrigation reservoirs should be built to accumulate water from melting glaciers. Mastara was selected in cooperation with the World Bank as the most efficient storage reservoir. The World Bank will support the project. At present, we have selected a consultant to determine all technical parameters of the reservoir as well as economic indicators. It is planned that all technical issues will be settled by the end of the year and construction will begin in 2018.

Does the fund consider, at least in the longer term, financing joint projects by the EDB countries? If yes, what could these projects be and in what sectors? What resources could the fund extend in such a case?

Financing joint projects is part of the fund’s mandate. These are projects with an integration effect or those run in two or more countries. However, the fund’s member governments have not presented any such projects for consideration yet. The fund will be ready to consider such initiatives, if submitted.

Given that today integration effects are measured in terms of increased mutual trade, we have selected the following areas for finance in Armenia: agriculture that automatically influences export revenues, and transit potential – the North-South corridor involving several countries since it will run through Georgia (Poti) to Russia. Most often, joint projects by two countries are in the area of transport in the first place, in the power sector in the second place, and in agriculture in the third place.

As regards transport, the situation in Armenia is more complicated given its isolation and the Georgian factor. We can note that relationships between Georgia and Russia are improving, to an extent, and it is possible that some ways to arrange normal transit will be found. Transit potential is of significant importance because freight traffic from or to Iran may be arranged through Armenia from Russia or Belarus. This is in high demand, in our opinion. However, Iranian drivers prefer not to use this road, especially its southern sections, because it is very hard to drive there and they have to search for bypasses.

As for the power projects, since the electricity tariff in Armenia provides a return on investment in the power facilities, the fund does not consider these projects as they can be financed by the private market. At the same time, if necessary or if the government so requests, the fund is ready to finance construction of transit power facilities between Iran, Armenia and Georgia, in particular transmission lines already financed by international development banks.

What is your forecast for the country’s GDP growth in 2017 and what will help to achieve it? In this context, to what extent is the IMF’s forecast realistic, suggesting that Armenia’s GDP will grow by 2.9% in 2017 and 2017 while in 2016 it was 0.2%?

We assess Armenia’s economic outlook for the next several years as positive. Economic growth is recovering with the gradual recovery of consumer demand. It is forecast to be 2.7% in 2017 and 3.6% in 2018, so we see the Armenian economy positively. This is possibly one of the best indicators in the EAEU countries.

Economic growth, in our opinion, will be ensured by increased consumer demand and exports. The increase in exports will be associated, in the first place, with increases in agricultural exports, because consumption grows and Armenia’s opportunities for exporting its agricultural produce improve as well. Also, as we know, a logistics terminal is being built and necessary infrastructure is being created. Export growth should boost GDP. Consumer demand will also improve given that crisis effects have gone down, to a degree, in Russia as well, and remittances are expected to stimulate growth.

Are there any recommendations for businesses or the government concerning preparation of investment projects? What should attention be paid to in preparing a project for it to be of interest to the fund?

I can say that Armenia has a sound institutional base in many aspects. It has probably one of the strongest experiences in fulfilling international projects and serious specialists in project management units. As for recommendations, it would be advisable to cut down bureaucracy further, although in this aspect Armenia provides very beneficial conditions compared to other EDB member countries. It would also be advisable to ensure greater coordination between ministries and authorities because some projects begin to skid due to the lack of coordination.

We can finance private businesses provided that a number of conditions are met. In particular, we have very stringent requirements for project implementation because decisions are made by six finance ministers who sign only those projects that guarantee payback. For this reason, the fund hasn’t financed a single private project to date.

As for businesses, we would like to see their greater involvement with public-private partnerships. This should be, however, a bilateral move. On the one part, the government should devise decent laws and guarantees for private partners in such partnerships and, on the other part, private partners should understand that if the government engages in a partnership the project should not only generate profit, but help to solve some national tasks.

So, we would like to observe rapprochement in this case. The PPP projects we saw seem one-sided: businesses pursue their interests only while the government pursues its own interests. The fund is ready to engage in PPP initiatives if interesting projects are submitted for its consideration.