ARMENIA

According to its Constitution, adopted in 1995, Armenia is a unitary State. Amendments to the Constitution in 2015 changed the form of government from a presidential republic to a parliamentary one (in force since 9 April 2018). The legislative power is vested in a unicameral parliament, the National Assembly, which consists of at least 101 representatives elected by proportional suffrage for five years. The new Electoral Code also provides for the allocation of four seats in the National Assembly to representatives of national minorities, one each from the country’s Assyrian, Kurdish, Russian and Yezidi communities. The president of the republic is the head of the State and is elected by the National Assembly for a non-renewable term of seven years. The president appoints as prime minister the candidate nominated by the parliamentary majority in the National Assembly. The prime minister is the head of the government.

The 1995 Constitution of Armenia recognises communities (or municipalities) as local self-governments and states the principle of local autonomy. Following the adoption of the 1995 Constitution, the 1995 Law on Local Self-Government was adopted, and granted local self-government bodies greater power in terms of decision making, budget formulation, and control of public property. The 1995 Law is based on the European Charter of Local Self-Government, ratified by Armenia in 2002. Local self-government bodies were established in 1996. Since then, several laws and legal acts have been passed, including the 2004 Law on Municipal Service and the 2008 Law on Local Government in Yerevan City. The latter law gave greater autonomy to Yerevan government bodies, shifting from an appointment system to an election system for the capital's mayor. Local elections are regulated by the national Electoral Code. The amended Electoral Code adopted in 2016 introduced significant improvements to the electoral legal and institutional framework. Nevertheless, the Council of Europe Congress of Local and Regional Authorities’ assessment of 2017 local by-elections in Armenia noted recurrent shortcomings, including the misuse of administrative resources, a lack of confidence in the effectiveness of the complaint adjudication system, allegations of vote buying and an uneven media playing field.

The country is administratively divided into 10 regions (marzes), which are deconcentrated executive bodies of the central government. The regions are headed by a governor, appointed by the central government. The governor is in charge of implementing the government’s regional policy, supervising the local governments’ activities and acting as liaison between the central and local authorities. The Ministry of Territorial Administration and Infrastructure of the Republic of Armenia is responsible for the implementation of socio-economic programs in the administrative regions and the development and reforms of local self-government sector. Each regional (marz) deconcentrated government body forms a consultative council composed of municipal mayors. These councils facilitate direct communication between national and local authorities.

TERRITORIAL ORGANISATION
MUNICIPAL LEVEL	INTERMEDIATE LEVEL	REGIONAL LEVEL	TOTAL NUMBER OF SNGs (2021)
308 municipalities/communities (Ժողովում/ zhoghovum)
Average municipal size: 9 624 inhabitants (including Yerevan), 6 098 inhabitants (excluding Yerevan),
308 (including Yerevan – capital city)			308

OVERALL DESCRIPTION: Armenia is structured under a one-tier local government system, made up of 308 municipalities, including the city of Yerevan. Over the period 2015-2021, the national government has undertaken four rounds of administrative-territorial reform, aiming at promoting mergers of small communities and increasing the efficiency of self-governance and public services provision. As a result, by the end of 2021, the number of municipalities has been divided by three, from the initial 931 in 1995 to 308 in 2021. Municipalities that are inhabited by national minorities have not been involved into amalgamation yet. Eventually, municipalities bring together 20 to 30 settlements and include as a rule the relevant district city-center which previously used to be an independent urban municipality. The resulting configuration reminds of the soviet territorial administrative system founded on the level of larger cities and districts (rayons).

MUNICIPAL LEVEL: Municipal self-government can be categorised as urban and rural. The average size of urban municipalities (excluding Yerevan) is 16 700 inhabitants in 2021. The average size of amalgamated rural municipalities was 4 100 inhabitants in 2021. The largest cities, excluding the capital city, are Gyumry (112 100 inhabitants), Vanadzor (76 900 inhabitants), Abovyan (45 000 inhabitants), Armavir (27 700 inhabitants) and Artashat (19 100 inhabitants). In addition, there are smaller villages at sub-municipal level, which are not self-governed. All municipalities, including Yerevan, are governed by the council (traditionally called the Council of Aldermen or avagani) and the mayor. The members of the council are elected by universal suffrage. The number of councillors varies from 5 to 65 members depending on municipal size. The councillors elect the mayor among them, for a five-year term.

Since the adoption of the 2008 Law on Local Government in Yerevan City, the capital city has shifted from a deconcentrated unit of government (marz) to an elected local self-government body. The Yerevan City Council comprises 65 members elected by a proportional electoral system for four years. Yerevan city is divided into 12 administrative districts.

HORIZONTAL COOPERATION: Inter-municipal cooperation is promoted by the constitution itself, as well as by the Law on Local Self-Government (adopted in 1996, lastly amended in 2020). Besides municipality merger and consolidation, the central government has also promoted inter-municipal cooperation. The adoption of a law on Inter-Municipal Unions (2018) creates the conditions for the central government to establish inter-municipal unions on its own initiative, thus delegating State competences to municipal unions and hopefully increasing the accessibility of public services. However, the legal status of the “inter-municipal unions” still remains unclear. In 2020, the only format of inter-municipal cooperation continued to be the joint management of property and land tax administration.

Functions of local self-government bodies are stipulated by the Law on Local Self-Government and the Law on the Budgetary System. Local self-government responsibilities are divided into own competences (mandatory and optional ones) and competences delegated by the central government. For instance, Yerevan performs the function of primary and secondary education as a delegated responsibility, receiving funds for this purpose from the central government. However, there is no clear definition of local authorities’ competences and delegated powers. Most of local services are managed by the central level. There is no regulated distribution of resources and competences according to criteria of size or population. All local governments share the same competences. Inevitably, the scope of actually performed functions varies significantly across municipalities in accordance with their fiscal capacities. Thus, poorer municipalities rely on the deconcentrated bodies of the central government for service provision.

Main responsibility sectors and sub-sectors
SECTORS AND SUB-SECTORS	Municipal level
1. General public services (administration)	Administrative services (civil registry, etc.); Public buildings and facilities
2. Public order and safety	Municipal police; Urban traffic signsYerevan only: Ensures the recruitment of conventional brigade and (or) battalion of home guardsmen from Yerevan citizens
3. Economic affairs / transports	Local roads; Park spaces; Local ports; Urban transports; Pupils transport; Local tourism
4. Environment protection	Parks & green areas; Waste management; Street cleaning
5. Housing and community amenities	Construction/renovation; Provision of drinking water; public lighting; Urban and land use planning; Urbanism
6. Health	Primary healthcare (medical centres); Preventive healthcare (mostly maintenance of hospital and ambulances buildings); Awareness-raising campaigns on healthy lifestyle
7. Culture & Recreation	Sports; Libraries; Local museums
8. Education	Pre-primary education; Maintenance of school buildings; Primary and secondary education (delegated responsibility of Yerevan city; Ecological non-formal education and parenting programs”
9. Social Welfare	Social care for children and youth; Support services for families

Scope of fiscal data: Municipalities

SNA 2008

Availability of fiscal data: High

Quality/reliability of fiscal data: High

GENERAL INTRODUCTION: Municipal finance is governed by the Tax Code, the national law on the Budgetary System, the Law on Local Duties and Fees. Local taxes are established by the National Tax Code and include the real estate tax and the vehicle property tax. The national law on the Budgetary System provides that shares of national taxes may be attributed to municipal governments in accordance with the State Budget Law for the coming year. According to the “Republic of Armenia Government’s 2017-2022 programme”, the main priorities in budgeting and financial management at the community level are the introduction of program budgeting methodology in municipalities as well as the increase in the share of own income in local government revenues.

Subnational government expenditure by economic classification
2020	Dollars PPP / inhabitant	% GDP	% general government	% subnational government
Total expenditure	297	2.2%	7.2%	100.0%
Inc. current expenditure	259	1.9%	7.2%	87.0%
Compensation of employees	59	0.4%	8.0%	19.9%
Intermediate consumption	42	0.3%	9.3%	14.0%
Social expenditure	5	0.0%	0.4%	1.7%
Subsidies and current transfers	152	1.1%	16.7%	51.3%
Financial charges	-	-	-	-
Others	-	-	-	-
Incl. capital expenditure	39	0.3%	7.4%	13.0%
Capital transfers	-	-	-	-
Direct investment (or GFCF)	39	0.3%	7.4%	13.0%

EXPENDITURE: The share of local expenditures accounted for 7.2% of general government expenditures and 2.2% of national GDP in 2020, although municipal competences are theoretically quite significant. The major item of expenditure by economic classification is “subsidies and current transfers”. These transfers are lump-sum funding provided to municipal institutions (such as kindergartens or libraries), which may decide on their own how they allocate it across items of expenditure (wage payment, procurement of goods, payment for utilities etc.). General government main expenditures are generally personnel wages, which together with administrative staff, wages of municipal institutions’ personnel, account for more than 40% of total expenditures. After a slow increase following the establishment of the Armenian local government system, these ratios have remained stable since 2011, though slightly lowered in 2020 due to the reduction of municipal revenues as a result of the COVID-19 crisis.

DIRECT INVESTMENT: In 2020, the share of capital expenditure of all municipalities of Armenia (including Yerevan) accounts for 13% of total subnational government spending.After the period of municipal capital expenditure contracting over 2012-2016, the total capital expenditures increased over 2018 and 2020. This was mostly due to the increase in capital transfers from the central government. In addition, financial means have been allocated to the regional administrations (marzes) from the government reserve fund in order to provide capital subsidies for the development of municipal infrastructure. Until 2017, capital grants were only given for specific purposes (e.g., disaster recovery). In 2017, the 2017-2022 programme of the government of Armenia was adopted and provides for the implementation of capital investment programmes to reduce disparities in the socio-economic development of communities and marzes. However, in 2020, mainly due to the pandemic and the war with Azerbaijan, about 20% of investment programmes have not been implemented and some programmes were implemented partially. Most municipalities’ capital expenditure from own resources are dedicated to small capital repairs.

Prior to the enactment of the Public-Private Partnerships (PPP) law in 2020, PPP projects at the municipal level were implemented only in the form of concessions and mostly in Yerevan. Examples were construction works, urban improvement and mini food markets. The PPP law provides for the participation of municipalities in PPP projects to the full extent on equal terms with the central government.

Subnational government expenditure by functional classification
2020, GG non-consolidated	Dollars PPP / inhabitant	% GDP	% general government	% subnational government
Total expenditure by economic function	297	2.2%	-	100.0%
1. General public services	77	0.6%	9.5%	26.1%
2. Defence	0	0.0%	0.0%	0.1%
3. Security and public order	-	-	-	-
4. Economic affairs/transports	23	0.2%	7.5%	7.8%
5. Environmental protection	35	0.3%	77.7%	11.9%
6. Housing and community amenities	29	0.2%	60.2%	9.7%
7. Health	1	0.0%	0.3%	0.3%
8. Recreation, culture and religion	19	0.1%	24.8%	6.5%
9. Education	105	0.8%	25.5%	35.4%
10. Social protection	7	0.1%	0.6%	2.2%

Education (35.4%), general public services (26.1%), environmental protection (11.9%), housing and community amenities (9.8%) are the key sectors of local government expenditure in 2020. Expenditures in the education sector mostly include construction and maintenance of schools and kindergartens. However, Yerevan’s expenditures on education amount to about 60% of total Armenian municipal expenditures and constitutes about 60% of its own expenditure. This is due to the fact that only Yerevan performs general education as a delegated function. Therefore, average figures of subnational expenditure are not as representative as they would be if expenditure was more uniformly distributed across local governments. Though the ratio of municipal governments in total general government spending appears to be stable, the composition of local expenditures has been changing over time and nowadays the main resource-intensive competence is the provision of pre-primary, primary, and secondary general education.

Subnational government revenue by category
2020	Dollars PPP / inhabitant	% GDP	% general government	% subnational government
Total revenue	335	2.5%	9.6%	100.0%
Tax revenue	66	0.5%	2.2%	19.7%
Grants and subsidies	182	1.4%	-	54.3%
Tariffs and fees	79	0.6%	-	23.5%
Income from assets	8	0.1%	-	2.5%
Other revenues	-	-	-	-

OVERALL DESCRIPTION: Taxes, State duties, charges, transfers and other revenues, such as land and property rent, contribute to local revenues at large, but local governments do not benefit from local fiscal autonomy yet. The share of local revenue relative to national GDP remains very low (2.5% in 2020). Armenian municipalities have limited resources and rely mostly on intergovernmental transfers, amounting to 54.3% of subnational government revenue in 2020. Moreover, there are important territorial differences in fiscal capacity. The dynamics of total municipality revenues in the period 2010-2020 show that following some decline in 2017 and 2018, significant revenue growth was recorded throughout 2019 and 2020. This growth is due to the increase in intergovernmental transfers (by 22.1%) and, especially, transfers from the central government reserve fund (by 54.3%). These transfers were provided to municipalities out of international grants matched by the central government and aimed at municipal investments into local infrastructure. Own source revenue increased only in vehicle tax (by 9.0%), other revenues decreased. As a result, municipal own source revenue accounts for about 30% of total revenues.

Over the past years, the share of the Yerevan city budget revenue in the total revenue of Armenian municipalities has decreased from 60% in 2016 to 47% in 2020, but still accounts for almost half of total municipal revenues. The contraction is due to the increased financial support provided to smaller municipalities from the central level.

TAX REVENUE: Local taxes constituted 19.7% of total local revenues in 2020 and are determined by the central government. The most significant contribution to municipal tax revenues comes from property taxes (85% in total). Municipalities can raise real estate and vehicle taxes’ rates by up to 10% on their own initiative. Property taxes on immovable property account for 30.9% of local tax revenues. Local self-government units can set tax reliefs for property taxes up to 10% of planned local budget revenues for the year, including tax allowances and tax credits. Starting in 2021, the tax base for property taxes is being gradually converted to the market value. This should significantly increase the tax amounts and, consequently, tax revenue of municipal governments. However, tax arrears on this tax could also increase as lower income population would not be able to pay it. According to national legislation, local governments can also retain shares from personal and corporate income taxes, and environment-related mandatory payments but this is not yet effective in practice.

GRANTS AND SUBSIDIES: More than half of municipality revenues are constituted by grants (intergovernmental transfers). These include capital grants and equalisation grants. The total amount of equalisation transfers is guaranteed up to 4% of the consolidated budget revenues for the previous fiscal year. Targeted central government grants for the implementation of delegated powers are only provided to Yerevan.

In 2016, the adoption of a new Law on Financial Equalisation defined concepts and principles of financial equalisation, as well as calculation and allocation procedures for the subsidies granted according to the equalisation criteria. The law was intended to enter into force in 2019. However, over the past five years, the central government has constantly postponed the full implementation of the new procedure for the allocation of intergovernmental transfers to municipalities. The Law provides that the amount of the transfers is based on a fiscal equalisation formula, which takes into account, formally and transparently, estimated revenue capacity and expenditure needs of municipalities.

In addition, since 2018, the central government has been implementing a capital grant programme aiming at providing resources to finance capital infrastructure development in municipalities (amounting in total to AMD 500 million, i.e., 0.9 USD PPP per capita).

From 2019 to 2020, total intergovernmental transfers increased by 22.1%, and equalising transfers by 8.5%, while earmarked transfers for current expenditures decreased by 5.8%.

OTHER REVENUE: Local charges and fees and similar revenues make up a large part of local revenues, as set and regulated by separate regulatory instruments on local charges and fees. Local governments keep user charges, from both delegated services (e.g., civic acts, notary services) and local services (e.g., charges for local transportation, construction, entertainment and lottery, etc.). They also collect local fees and revenues from local property leasing. Local community councils have a certain degree of power regarding setting charge/fee rates for different services.

In 2020, a new duty was introduced in the territory of Yerevan on delivering sales and services through mobile trading points. However, in 2020 the collection on this new duty accounted for only 0.2% of Yerevan’s total revenue.

ⓘ No detailed data available for this country

FISCAL RULES: The Law on the Budgetary System states that Armenian municipalities must prepare a balanced budget which covers both operating and capital expenditures and revenues. Municipal budgets may include a contingency fund to finance unplanned expenditures, interests on borrowings and capital investments. This fund may not exceed 30% of the total budgeted revenue of the municipality for the given fiscal year. Furthermore, municipal budgets must be public and accessible. After adoption of the municipal budget by the municipal council and the regional governor, the mayor must submit the budget to the field treasury of the Ministry of Finance and Economy. The implementation of the municipal budget is overseen by the municipal council and/or a specialised audit company, as well as the National Assembly and the central government.

According to the Law on “Local self-government” local authorities may receive credits and loans for the purpose of local budget expenditure implementation with the prior approval of the Ministry of Territorial Administration and Infrastructure. The annual amount of credit expenditures cannot exceed 20% of the municipal budget. A municipality can only take a credit after paying back the previous one and credits can only be allocated to the capital investment budget. In order to be able to take credits the municipality must have guarantees. In practice, most municipalities do not have enough financial resources to be able to obtain credits from commercial banks. The issuance of local bonds remains only on paper. Interestingly, local authorities can borrow from another municipality after agreement between them and the State designated agency. These borrowed amounts must be used to finance current expenses only.

DEBT: In 2020, municipalities did not receive any loans form external sources, nor did they borrow from the State budget or other municipalities. A law on municipal bonds is under consideration since 2016. The law is still not adopted, and as of 2020, there were no procedural rules in place for the issuance and allocation of municipal bonds. Therefore, no municipality has issued any bonds so far.

TERRITORIAL MANAGEMENT OF THE CRISIS: A coordination mechanism to respond to the crisis was set up on 30 January 2020 in the form of an inter-ministerial commission on the prevention of the spread of COVID-19. The commission is headed by the vice-prime minister who gained the position of a commandant. Municipal responsibilities in the area of healthcare and education, primarily hurt by the crisis, are mostly limited to maintenance of school buildings. hospital and ambulances.

Municipalities appeared to be the major translators of the central government’s crisis decisions to the citizens and the implementers of the COVID-19 fighting measures that were taken at the central level. They had to ensure compliance with restrictive quarantine measures and at the same time, ensure the provision of quality local services.

The major emergency measure undertaken by municipal governments was the extension of public service provision during the quarantine restrictions in new circumstances: closure of preschools and primary schools and organisation of the distance learning process; providing assistance to groups with a higher risk of infection (elderly, disabled, etc.), for example to buy groceries, medicines, etc.; preparation of schedules for shopping to avoid congestion; monitoring the use of protective masks by residents; development of new e-services that would help people in quarantine restrictions; providing support for local businesses; explanation and information campaigns to avoid citizens' distrust of municipal and central governments; burial of the deceased, which required the development of special procedures.

In 2021, the Armenian Centre of Expertise for Good Governance undertook a survey of 52 amalgamated municipalities to assess the impact of the pandemic on local government. The key findings of the survey include the recognition that amalgamation has helped communities to respond more efficiently to the crisis, although they also acknowledge that existing local emergency response plans were neither useful nor effective. In general, coordination between levels of governance in Armenia worked smoothly; local authorities were able to fulfil their basic functions and new examples of inter-municipal cooperation emerged.

EMERGENCY MEASURES TO COPE WITH THE CRISIS AT THE DIFFERENT LEVELS OF GOVERNMENT: The territorial central government bodies providing social care, based on the list of COVID-19 positive and self-isolated people, were responsible for conducting needs assessment and distributing food and personal protective equipment to affected people. Local government bodies supported the territorial bodies in this process.

Assistance to the elderly was mainly provided by local governments and NGOs (such as the provision of extra-financial or in-kind support to pensioners living alone).

In the Kotayk region, the municipality of Hrazdan, set up a network of all organisations and individuals providing or willing to provide social and other aid, like food and household support, as early as March 2020.

In the response to COVID-19, the UNDP representation and the Armenian Ministry of Territorial Administration and Infrastructure, in partnership with the Ministry of Emergency Situations, Yerevan City Supermarkets, local self-governance bodies and community volunteers, provided emergency packages to vulnerable groups of people in more than 100 settlements across Armenia.

On 4 August 2020 a webinar on Challenges for Local Authorities was organised by the Union of Communities of Armenia. It focused on developing the staff capacities most needed by local authorities in the context of a pandemic.

IMPACTS OF THE CRISIS ON SUBNATIONAL GOVERNMENT FINANCE: The emergency measures taken during the pandemic have had a negative impact on the Armenian economy. In addition to the fall in oil prices, which affected Armenia via international trade and the reduction of remittances from migrants, the greatest damage made to the economy since the beginning of the pandemic was caused by the 2020 military conflict with Azerbaijan. These shocks derailed Armenia’s previous economic expansion and resulted in a sharp 7.4% contraction in GDP.

The share of municipal revenues in general government revenue increased from 8.7% in 2019 to 9.6% in 2020, while the share of expenditures decreased from 7.9% to 7.2%. This can be explained by the fact that in the 2020 budget, municipalities received significant resources in the form of targeted grants for specific development projects. These projects had been supported by international organisations through the central government. However, the COVID-19 crisis did not allow for the realisation of what was planned and municipal budgets then showed a significant surplus, as these grants could not be reallocated to other purposes.

Municipal revenue grew from 2.2% to 2.5% of GDP between 2019 and 2020 due to increased amount of grants from the central government (from 1% of GDP to 1.3% of GDP). The share of tax revenues in total municipal revenues contracted from 21.5% to 19.7% while grants increased from 46.3% to 52.2%. The crisis led to reduction and deferral of tax payment to municipal governments, as well as communal property rent and payments for utilities. On the expenditure side, municipal current expenditures grew from 1.8% to 2% of GDP between 2019 and 2020, while investments grew from 0.2% to 0.3% of GDP and their share in total spending raised from 10.7% to 12.4%. Most notably, the share of expenditures on economic affairs increased, due to support for local businesses (from 5.7% to 7.8% of total expenditures) and the share of education expenses, due to the investments required by the shift to distant education and increased sanitary measures (from 34.7% to 35.4% of total expenditures). This increase in spending was compensated by the reduction of expenditures on general public services (from 28.2% to 26.1% of total expenditures).

ECONOMIC AND SOCIAL STIMULUS PLANS: On 4 February 2021, the government decree on the Economic Response Programme was approved in Armenia. One of the key points of this programme is the launch of large-scale urban development projects: the construction of the 33rd quarter of Yerevan (Firdus), the investment programme of the Kond district, the Saryan 22 building investment programme and the continuation of the implementation of the Old Yerevan project. Yerevan municipality was designated as the co-implementer of these projects.

In 2020, with a view to improving the economic and social infrastructure of the municipalities, a number of urban development programmes were implemented in Armenia, most of which at the expense of subsidies provided from the State budget. In 2020, the co-financing of 579 subsidy programmes from the central government budget was around AMD 14.3 billion (USD 91 million PPP) and the amount of co-financing of the municipalities was AMD 10.8 billion (USD 69 million PPP). Thus, (before the amalgamation of municipalities in late 2020) out of 373 municipalities, 343 received subsidies. However, due to the pandemic, martial law and weather conditions, were not able to complete all projects. As a result, the contracts for unfinished subsidy programmes were extended until 1 August 2021.

The EU also plans to support recovery and investment in the country. These funds will be provided to the central government and might be further transferred to municipalities in the form of earmarked grants.