ARMENIA - OVERVIEW OF FISCAL DECENTRALIZATION
There are two levels of territorial authority in Armenia – the central government (karavarutyun) and the local level community (hamaynk). The community is the only self-government tier in Armenia. There are 915 communities, including 866 villages, 48 towns and the capital city of Yerevan.
Legal acts governing fiscal decentralisation
The legal framework governing fiscal decentralization is set out in the Constitution, adopted in 1995; the laws on Administrative and Territorial Division (1995); Local Self-Government (1996); Budgetary System (1997); Local Duties and Fees (1998); Financial Equalization (1998); and Local Self-Government (2002).
Qualifying fiscal decentralisation
The process of fiscal decentralization in Armenia commenced in the mid-1990s with the adoption of the Local Self-Government Law and subsequently the passage of laws specifically governing local budgets, duties and fees, and financial equalization mechanisms. The existing legislation does not provide municipalities with sufficient instruments of financing themselves and their activities. Furthermore, Armenia has very few income sources (due to absence of transit and grant incomes and low customs tax rates), which is why most taxes are collected at the central government level.
Municipal fiscal autonomy has remained low in recent years; furthermore, there has not been a notable trend of an increase of local government revenues as a share of GDP and of total public expenditures. In 2010, the share of local government revenue as a percentage of GDP was 2.45%; in 2011—it stood at 2.31%; in 2012—at 2.39%; and in 2013—at 2.32%. According to the latest figures (2014), the share of local government revenue as a percentage of GDP remains low at 2.36%.
The low level of municipal revenue autonomy is also revealed by the fact that own revenues (local taxes, local charges and fees) constitute only 16.3% of municipal revenues and earmarked revenues (shared taxes) amount to 4.1%. According to latest available figures, direct transfers from state budget constitute 48.7% of local revenues. The remaining share of revenue (31%) is derived mostly from grants, business activity income, donations, and state assistance for the implementation of specific municipal projects.
The composition of municipal expenditures reflect the range of competences devolved to the sub-national level in large cities like Yerevan, Gyumri, Vanadzor and some other towns, however, expenditures in the considerably large number of Armenia’s local governing bodies corresponding to communities with populations of less than 1000 inhabitants mostly cover local administration costs.
The largest area of overall municipal expenditure by functional classification (as of 2014), is pre-school education, subsided from central government budget and amounting to 30% of all municipal budgets. The second largest area of expenditure (23%) is ‘general government expenditure’, that is, the wages of administrative staff and mayor and the costs of running the municipality. The third group are housing/communal amenities (13%); 10% is allocated to economic affairs, 10%, to environmental protection (mostly waste disposal), 7% to culture, recreation and religion, 4% to social welfare.
The 1998 law on financial equalization that provides for state subsidies to municipalities takes account of population size, property and land taxes collected in a community; zonal aspects of the land, such as location above sea level and quality of land. All communities are entitled to state subsidies.
Deficit, debt at the sub-national level and borrowing capacity
Many communities have debts but overall, municipal budgets over the last 10 years have been balanced. Deficit in one year would be compensated by surplus in the next. In 2012, municipal budgets had a deficit of 2% (as a share of the budget, or 0.05% share of GDP); while in 2013, there was a 2.5% surplus (or 0.06% of GDP).
Local governments have the possibility of accessing debt markets. Specifically, municipalities have the right to finance their deficit according to the Law on Local Self-Government of Armenia (current version adopted in 2002). The right to credit was included in the first version of the law and is now operable after a series of amendments to it had been adopted. (Article 57).
Municipalities can issue local obligations within the scope defined by the central government. Annual figures for outstanding debt for Armenia’s municipalities are quite low however. The national government controls the limits of borrowing, stipulating the limit of +/- 5 million Euros annually for all the communities including the capital, Yerevan. In 2014, deficit amounted to -0.3 billion drams (-0.5 mln. Euros). Borrowing as part of projects funded by external lenders like the World Bank is incurred by the national government, which then disburses grants to municipalities, while some internationally funded projects, with partial or full fee covering, are being conducted by the municipalities themselves (e.g. World Vision, etc.)
