Aristomene Varoudakis, the head of the bank’s Yerevan office, said the shadow economy and the resulting tax evasion is one of the most serious problems hampering Armenia’s economic development.
“I have no number to give you, but what I am hearing from different analysts is that the shadow economy in Armenia could be an equivalent of as much as 35 or 40 percent of GDP,” Varoudakis told a news conference. “And of course, it is a very important challenge to formalize this informal economy so as to increase tax revenues and be able to pay for much needed social services.”
Varoudakis said companies involved in the shadow sector would also benefit from the legalization and transparency of their operations. “And people working for those businesses will be better protected,” he argued.
Both the World Bank and the International Monetary Fund have long been pressing the Armenian authorities to improve tax collection. The authorities’ tax revenues have grown steadily and considerably since the late 1990s, but they remain very modest in relative terms. The revenue total was equivalent to only about 16.5 percent of GDP last year.
The Armenian government and Prime Minister Tigran Sarkisian in particular have repeatedly declared improved tax administration a top priority. But as a senior IMF official stated in April, government efforts have still not lived up to the fund’s expectations.
Varoudakis said government action is especially needed in Armenia’s export-oriented mining industry. “Now the mining sector is rather undertaxed in Armenia,” he said. “Taxation regime in the Armenian mining sector is way below the international best standards.”
The World Bank official said the government has pledged to remedy the situation with major changes in Armenia’s tax legislation regulating the work of mining companies. The planned reform will be financed from a $25 million budgetary loan which the bank plans to allocate to the government this year, he said.