Armenia

A SUPPLEMENT TO EUROMONEY – April 1997

Introduction

Both in Armenia and the former Soviet Republics the financial and, in particular, the banking systems were the last area where reforms were introduced. When the Soviet Union collapsed, the newly independent republics were developing and pursuing their own economic policies, though they were all still in the rouble zone. This had an adverse effect on the financial and banking system development.

In the early 1990s the banking system’s capital was increased considerably. It was mainly influenced by strict statutory and total capital minimum requirements of the Central Bank of Armenia. In addition to this, a clarification of the regulatory framework and closer approaches to international standards in 1995 resulted in a significant inflow of foreign capital.

In April 1993 banking legislation was ratified by parliament, enabling the implementation of an independent monetary policy. Later, faced with the breakdown of the old rouble zone, Armenia assumed monetary independence and introduced its own national currency, the dram, in November 1993. The following spring the Central Bank of Armenia was established. A difficult period followed which lead to inflation of 500% and a sharp decline in the exchange rate. Under these circumstances several key principles of economic policy were formulated :

* macroeconomic stability;

* implementation of appropriate monetary and fiscal policies that would foster non-inflationary economic growth;

* institutional changes that would create financial market stability;

* modern payment system development;

* development of a strong banking system;

* creation of legal framework that would foster investment.

Privatization

In formulating a programme on macroeconomic stability special emphasis was placed on an acceleration of reforms. In 1994 a large scale privatization programme was adopted which envisaged the privatization of small, medium and large enterprises from various branches of the economy. Appropriate market-based institutions were also established such as stock and commodity exchanges and prerequisites for credit and securities markets were provided. Serious attention was given to developing a modern payments system that has reduced the time of intra-regional payments to five days (down from two weeks).

Legal framework

In the summer and autumn of 1996, the National Assembly of Armenia adopted new legislations that will regulate the banking sector.:

* Law on Central Bank;

* Law on banks and banking

* Bankruptcy law

* Law on bank secrecy

* Collateral law

Adopting these laws was in connection with the end of the most difficult and important stage of banking system formation in the past two years. It is hoped that this new framework will enable the banking sector to fully establish itself and function properly.

As of the beginning of March 1997 there are 32 banks with 141 branches operating in the Republic of Armenia (except the branches of Armsavingsbank, which is currently in the process of reorganization). The formation of the banking regulation framework was the result of implemented consistent policy of the last two years which has aimed to ensure banking system stability and the creation of effective services systems for the economy .This has led to the implementation of internationally accepted standards and the integration of the Armenian banking sector with the world financial framework.

Foreign investment policy

Armenia’s policy towards foreign investments are defined in the 1994 Law on Foreign Investment. It is a liberal policy aimed at attracting investors. It provides a guarantee against nationalization and confiscation, except in extreme circumstances and upon a judicial decision. It also guarantees the right to repatriate profits and assets. For foreign enterprises or joint ventures where foreign investment is over 30%, all profits are tax free for two years. Foreign ventures with a majority stake are charged at only 50% of the full rate after the initial grace period. Any enterprise with foreign ownership is entitled to indefinite duty-free treatment on all their imports of capital equipment and recurrent inputs and are exempt from any export taxes.