Armenia's Development Blueprint: Tax Reforms and Educational Equity for Growth

The World Bank's review highlights Armenia's progress in economic growth and fiscal resilience while identifying inefficiencies in taxation and education systems. It recommends targeted reforms to enhance tax equity, expand educational access, and improve governance for sustainable and inclusive development.

The World Bank’s Public Finance Review, led by senior economists Armineh Manookian and Léa Hakim with contributions from a global team, examines Armenia's fiscal policies and education spending, offering a roadmap for inclusive and sustainable development. Armenia has made remarkable economic strides, doubling its GDP per capita between 2017 and 2023 to $8,053. However, the country faces significant challenges in addressing systemic inequities and inefficiencies in its tax and education systems. Despite its resilience to recent shocks, including the COVID-19 pandemic and regional conflicts, vulnerabilities in governance and public finance must be tackled to sustain progress.

Revamping Taxation for Equity and Efficiency

Armenia’s tax revenue has grown substantially, with a tax-to-GDP ratio averaging 23.5% between 2021 and 2023, driven by administrative and policy reforms. Yet, inefficiencies persist, limiting the system's ability to drive equitable growth. Tax buoyancy remains below one, indicating that revenue growth lags behind GDP expansion. Disparities in tax burdens across sectors create distortions, with agriculture and trade taxed lightly compared to real estate and mining. Furthermore, Armenia’s VAT collection is hindered by a high exemption threshold and significant tax expenditures, resulting in forgone revenue equivalent to 5% of GDP. The VAT compliance gap and inefficient excise taxation on alcohol and tobacco exacerbate these issues.

Personal income taxation (PIT) adds to the inequities. Armenia’s flat PIT rate of 20% disproportionately impacts lower-income earners, while passive incomes, such as capital gains and dividends, enjoy lower or no taxation. This structure discourages labor formalization and widens inequality. The report advocates for progressive PIT brackets to reduce the burden on low-income earners and a broadened tax base to ensure fairness. It also calls for modernizing international tax rules to address digital economy challenges and scaling up environmental taxation to support Armenia’s transition to a low-carbon economy. A proposed carbon pricing mechanism could generate additional revenue while advancing sustainability goals.

Closing Gaps in Education Access and Quality

Armenia’s education system presents a mixed picture. While enrollment rates in general education are high, access to pre-primary and higher education is limited, particularly for poorer and rural populations. Only 43% of poor children attend pre-primary education, and just 17% access higher education, contributing to significant disparities in learning outcomes. Armenia lags behind peers in learning-adjusted years of schooling, which average eight years compared to 11.3 actual years, highlighting quality gaps. Private tutoring, largely inaccessible to the poor, further amplifies inequities in educational attainment.

Spending inefficiencies in education compound these challenges. Teacher salaries remain below national averages, making the profession unattractive and contributing to staffing shortages. Capital investment in educational infrastructure has historically been low, with many schools requiring significant renovations. The government’s five-year plan aims to modernize curricula, improve school facilities, and strengthen vocational training, but implementation hurdles remain. Rural schools, in particular, lack adequate resources and infrastructure, further disadvantaging students in these areas.

Transforming Education Through Systemic Reforms

The report emphasizes the importance of targeted reforms to improve education outcomes and equity. Enhancing teacher quality and raising salaries are key to attracting and retaining skilled professionals. Performance-based incentives in school funding are recommended to align resources with measurable outcomes. Developing a robust national assessment system and educational management information systems can strengthen accountability and data-driven decision-making.

Addressing disparities in pre-primary education is another critical priority. The report proposes a range of measures, from low-cost awareness campaigns for families to incentivizing local governments and private providers to expand access. Making at least one year of pre-primary education compulsory is also suggested. In higher education, the government’s Education Strategy 2030 envisions establishing an academic city to align education with labor market needs. Expanding vocational training programs, particularly in underrepresented rural areas, is crucial for bridging skills gaps and boosting economic opportunities.

Strengthening Governance for Inclusive Development

Governance reforms are essential to improving efficiency and equity in public finance and education. The fragmented oversight of education funding, involving multiple authorities, hampers policy implementation and consistency. Streamlining responsibilities and ensuring accountability at all government levels are critical steps. Consolidating small schools into networks and investing in public transport systems for students can address inefficiencies while enhancing access.

Demographic shifts, including a declining population of primary school-age children, present an opportunity to reallocate resources toward higher education and vocational training. These sectors are pivotal for equipping the workforce with skills demanded by emerging industries. The report also highlights the potential for targeted partnerships with private entities and non-governmental organizations to strengthen education programs and expand access.

Paving the Way for Armenia’s Sustainable Future

The World Bank’s analysis underscores Armenia’s potential to achieve inclusive and sustainable growth through targeted fiscal and education reforms. Addressing inefficiencies and inequities in taxation and public spending will not only enhance human capital but also drive resilience and economic transformation. The recommendations focus on improving tax system fairness, expanding access to quality education, and strengthening governance frameworks. If implemented effectively, these measures promise to create a foundation for equitable growth, reduce poverty, and position Armenia as a model for sustainable development in the region.