Intergovernmental fiscal relations in Armenia: current status and perspectives for reform

Abstract

In new independent Armenia local self-government is already 12 years old. For more than a decade the system of local self-government was continuously reformed; as a result its legal basis evolved and numerous changes have been introduced to the system. These changes were directed at improvement of the quality of public services, expansion of the autonomy of communities, and strengthening the role of public in government decision-making. Despite the fact that the system of local self-government in Armenia became established and developed, there are still a number of problems on the political agenda that require immediate solutions. Particularly, it is critical to raise the level of financial autonomy of municipalities and their ability to maintain financial sustainability; on the other hand the role of central government as a provider of grants and intergovernmental assistance will remain important. Today the existing system of intergovernmental fiscal relations in the country needs close review and further improvement. The purpose of this work is to analyze the current state of intergovernmental fiscal relations, to study the financial autonomy of local self-government in Armenia, and explore what measures should be taken to strengthen financial capacity of communities and promote fiscal decentralization. As a first step of studying the current state of intergovernmental fiscal relations in Armenia this paper discusses the international experience of different countries, preferably those European nations, which have similarities with Armenia (transitional economies, comparable size, large number of small communities, etc. (Czech Republic, Hungary, Bulgaria and Poland). The paper next reviews the governance structure in the Republic of Armenia, and analyzes the relationship and the division of powers between central and local government. It is then followed by a discussion of the budgetary system, where the main focus is local government budgeting and structure of intergovernmental transfers. The paper makes an in-depth analysis of equalization grants (subsidies) and targeted (earmarked) grants (subvention), reveals their strengths and weaknesses. The final part of the paper focuses on the key challenges to existing system of IGF and provides a set of recommendations on how to overcome the main shortcomings of the IGF relations and what could be the main direction for the future reforms.