Edward Sandoyan: We are losing our state
Interview with Prof. Edward Sandoyan, director of Economy and Business School of the Russian-Armenian (Slavonic) University, former finance minister
-Mr. Sandoyan, the government has approved the budget 2014 and sent it to the parliament. According to the draft budget, the income will be increased without making the tax load heavier. What’s your opinion about this?
-I am one of the founders of the tax system in Armenia. In October 1991 we established the state revenue service. I worked as deputy minister for three years. Later I served in the Central Bank and contributed to the formation, development and monitoring of the banking system in Armenia. Later I was appointed finance minister. If one asks me what is the biggest failure in the past 22 years, I will say that we have made a system, which has only one goal – collect taxes by all means. This system sets a plan. Annual budgets are approved without proper discussion of potential inflows. The only thing that is discussed before adoption is expenses. They assume income part is guaranteed and think about distribution. They calculate the expected growth of GDP and assume that taxes should grow accordingly. The notion behind this fiscal policy is that taxpayers are opponents and businesses should not be allowed to become richer. As a result of this policy the tax collection service is implementing a destructive policy by reaping off businesses. The goal of tax collection should be encouraging economic development and growth of businesses. If the goal is revised to help businesses grow, tax collection policies are changing allowing businesses more time for development. Small and medium businesses lack influence and are not protected from monopolies, which are untouchable.
Small businesses are considered potential criminals and operate as long as they are not caught. This policy is creating an inadequate environment. The population’s 50.4%, which is 621,000 people, are employed non-formally. Employees are not protected either; there is no social protection. People are not protected by the state; they don’t have documents, contracts that can be enforced. Courts are not independent either and do not enforce contracts. We have spoilt our society and created an environment that has elements of feudalism. This is very dangerous. The reason is our lack of understanding of microbusiness. The state should be happy to have people that are doing business. Small business owners are the best citizens and they should be free to work and grow; they should be enabled to pay 120 or 50,000 dram tax annually and be free of contact with the tax administration.
Certainly the government should control tax collection. However, the system acts differently and if you have even one unregistered employee, you are a criminal and you have violated the law. There are a lot of mechanisms that allow this. If we do this and liberate small businesses, in the first year 15-16% of the population will be employed, and in the second year – 35%. This will help to reduce the number of social payments, too. It is about 8-10 billion drams that the budget can easily afford, and the results will be highly positive as people will start to love their country. In countries where small and medium businesses have influence and large businesses are minority, employment structure is the best.
This is merely a result of the acting talentless tax administration. And we are repelling our population. We are a country of over 17% unemployed citizens, 35% poverty. What else does our government do besides solving these problems? We are making the taxing administration a hammer and through that we are trying to peel off as much money as possible from our citizens. Even if there were angels in the tax bureau they would still do the same because each of them is demanded to submit X amount of money from taxpayers.
As a result, no one cares how many businesses were shut down or what the loss was for business owners or how many of them left the country. This is a terrible hit on the future of this nation because we are making our capable citizens leave the country. But don’t they wonder why many of our Diaspora Armenians, who have large businesses worldwide, don’t care to invest in Armenia despite the charity campaigns? Why doesn’t any of them come to Armenia? The answer is simple. In the current tax legislation it is impossible to start a profitable business here. This year we want to increase GDP by 83 billion AMD but they are planning to do so at the expense of taxpayers and businesses.
-They say the GDP would increase at the expense of the black market cut.
-This has become fashionable too. Who would know where the shade is? I know where it is. It is behind a dozen big businessmen. The rest is done to mug taxpayers. Small and medium businesses don’t have growth in Armenia?
How would they levy taxes? It means they are confiscating the circulated funds of businesses and not the profits. That is the reason why during the recent years enterprises go bankrupt like mushrooms, even the chains do – Armavia, Star, etc. I am sure the boys of the tax administration are also mad because they are only complying with the orders. During the past two years, the most powerful tax administration has become the current one. I am sorry about the time we have wasted during these years. Nothing was improved and things have gotten even worse. We are losing our statehood and have appeared in worse conditions.
-What solutions do you see?
-For example, for the tax administration we should plan our revenues the way IMF does. Levying more than that would mean killing a business. The predicted budget index for this year is terribly exaggerated. The budgetary policy and the expenditures should be revised in order to improve the lifestyle of citizens. During these years, large entrepreneurs were born who attained leading roles in various parts of the market. I think this government has just one goal. It is very easy for the government to have 20-30 loyal entrepreneurs, who are always willing to repair a school or house, which is extremely useful during elections. But by doing so, we have appeared in a deadlock. This model has evidently faded out. The population got poor. If we see the changes of the consumption basket we will notice that poverty rose 50-60%. It means we have reached the point when we have insolvent citizens. This means absence of the inflow of incomes from consumers. And if the population doesn’t have income it cannot but buy the goods that are produced or imported. As a result of polarization of calculation of revenues, we have 0,3% of super rich population and 50-60% poor population (in Georgia this index is 9,9%, in Russia 5,4%, Kazakhstan 5,5% and in Azerbaijan 4,5%). We are gradually becoming a very uncompetitive state. I have expected much more from the government. Small successes do not imply systematic change and we cannot afford to wait another 20-30 years. We are lagging behind from the other states of the region.
-What changes will the pension reform bring to our loves?
-Indeed, there is the need of pension reforms. They should have started this much sooner. But there are risks here. They have evaluated the inflows and we transitioned to a joint tax method, which is welcomed. We have forgotten that the main privilege of the pension funds is the principle of self-management and we have gone in the wrong direction. Instead of conducing to the development of corporative pension funds we are doing the opposite by accessing the monopoly field, the majority of which will go to the foreign market. It means that we are creating “long money” for foreign states. We have forgotten about the necessity of corporative funds. It is a wonderful system and people should be able to manage their own pensions. Are we sure that in 5-6 or 20 years the state will be able to pay us back? Who has predicted that? Who has done those calculations? There are numerous questions here.
-According to you, is the redistribution of European stocks a necessity and an efficient method?
-Here are many questions too. We are forking 700 million USD foreign debt in the form of European stocks. Are we going to the Eurasian Union? Yes, we are. Do we have good relations with Russia? Yes, we do. We have 500 million USD debt – Libor +3%. The interest rate is 3,6%. They bought the Europeans stocks at 6% but surprisingly they became tax-exempt. If we count those and the third party costs the rate will reach 7%. This is extremely expensive money. Why are we bringing this expensive money for 7 years? With that, we are paying the Russian loan.
-They bring the reason that Libor might drastically grow.
-It might or might now. They should have negotiated with Russia first. Haven’t they decided to link our future with Russia? We should negotiate with Russia to revise the conditions of the loan especially now that we are going to the Eurasian Union. I don’t understand whether there is a parliament or courts in our country. It means that whenever the government decides it can increase the threshold of foreign debt by 10% or more. This is very unclear.
The guys of the finance ministry are happy and are playing games by pressing buttons. Nobody was able to know where this money went and what results we gained. Such things can be done when there is a concrete program. For example, Georgians have created an investment fund in the amount of 5 billion USD. They have allotted 1 billion for the development of agriculture. They have concrete programs what to do. If they told us that by taking 700 million they are going to help the start-up businesses or direct the funds to banks for lower interest credits, I could understand this. It makes our budget even more expensive and it complicates the monetary policies of the Central Bank. Moreover, if the state borrows the money at 6% then the banks will receive it at higher rates. This macro-economic policy of our government is unclear for me.
By Gayane Khachatryan
