Economic reforms

The Armenian tax policy in 1998-2007 was primarily aimed at creating favorable tax conditions to attract investments. There were gradual reductions in the marginal profit tax rate (from 30% to 20%) and the income tax rate (from 30% to 20%), along with the maximum social insurance contribution rates (from 37% to 15%). Based on the principle of equal taxation, ascending rates were established for more expensive property owned by private entities. Favorable tax terms were also established for dividends received from investments: dividends received in Armenia are generally not subject to taxation.

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Another direction of the tax policy of those years was to ensure equal conditions for economic entities, as well as to facilitate, to the utmost extent, the mechanisms for calculating and paying taxes, and to improve the mechanisms for protecting taxpayer rights. In order to encourage small and medium-sized enterprises, the introduction of a simplified tax since 2000 has been an important step. In case of small businesses, it replaced the value-added tax and profit tax (or income tax). The application of this approach towards taxation has to some extent simplified tax accounting, reduced the frequency of contacts between tax authorities and economic entities that pay simplified taxes, and improved their business conditions. Tax control mechanisms have also been significantly improved since 2003. At the same time, these changes were introduced carefully, in order not to disturb the usual work of economic entities.

In 2007, tax revenues increased by more than 4.6-fold as compared to 1997.

In 1998-2006, Armenia's policy was aimed at creating a sound and stable, feasible and solvent financial system that would ensure growth and diversity of volumes, instruments and participants, and which would actively serve the economy, developing in a single philosophy. During this period, significant efforts were made to clear the banking system of dozens of banks with poor-quality assets and no perspective for development. Accordingly, 11 banks were liquidated, 30 banks were removed from the registry, two banks were merged, and one bank was reorganized into a credit organization. At the same time, new banking licenses were issued to three banks. Thus, stable financial institutions were formed in the RA financial system. Due to their flexibility, they acquired a strong position in the financial market. As of the end of December 2006, there were 21 banks operating in the banking system, with total assets of 524.5 billion drams, and their share in the GDP was 19.7%. During 1998-2006, the assets of the banking system more than tripled, increasing by 227%, while the average annual growth for that entire period was 16.3%.

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At the same time, significant growth was recorded in the capital sector — an average of 39.5% per year, and in 2006 this index increased fourfold, as compared to 1998. The growth of deposits was facilitated by the introduction of domestic plastic cards and the rapid development of this market. The monetization rate was also improved: in 1998, it was 10%, while at the end of 2006, this index was already 18.3%. In the period from 1998 to 2006, business loans by 33 banking systems increased by about 3.6 times, however the most significant increase was recorded in 2004-2006, increasing by an average of 36% per year.

The stabilization of the economy had its positive impact also on the attraction of deposits from the banking system. Thus, since 1998, the deposits of the banking system have increased more than fourfold, and since 2004, as a result of a consistent policy of de-dollarization of the economy and strengthening the position of the dram, dram deposits have increased 7-fold, while foreign currency deposits have grown 2.7-fold.

Since 1997, Armenia has entered a stage of economic progress. Systemic reforms have taken place with the introduction of new institutional mechanisms and structures inherent in the market economy. Subsequently, a super task was set to increase their efficiency and create a business environment that would meet European standards. The achievements gained due to the consistent policy of the RA leadership were reflected in the ratings of reputable international organizations: as of 2007, Armenia was a stable and attractive country for foreign entrepreneurs.

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• According to the report of the World Bank and the International Finance Corporation “Doing Business 2007”, Armenia ranked 34th in the rating classification of doing business, ahead of all the CIS countries and neighbouring countries.
• In 2006, the Organization for Economic Cooperation and Development (OECD) revised the risk ratio for Armenia and, in accordance with the Procedure for providing officially supported export credits, Armenia moved from the seventh risk group to the sixth.
• As a result of the classification of the economic liberalization indicator published by the Wall Street Journal and the Heritage Foundation, instead of the 45th place in 2002, in 2006 Armenia ranked 32nd among 161 countries, ahead of all the CIS countries and neighbouring countries.

In 2002, the development of science and technology in Armenia was set as a priority. In the real sector of the economy, there was a technological lag, as a result of which domestic products remained less competitive in international markets. Therefore, the RA Government, in its 2003-2007 Program, fixed the goal of putting the economy on the path of innovative development. In 2005, the Government adopted the "Concept of Innovation Activity in the Republic of Armenia", which established the principles and approaches of the innovation policy. Soon after the adoption of this concept, in September 2005, the program for the formation and development of the innovation system in Armenia for 2005-2010 was approved, along with the RA Law "On State Support for Innovation Activity", adopted in May 2006. Thus, a strong institutional framework was created for innovative development in Armenia. It provided an opportunity to direct development towards the formation of a knowledge-based economy, providing stable guarantees for the consistent improvement of Armenia's competitiveness.