Three-year, US$395 million program under the Extended Fund (EFF) and Extended Credit facilities (ECF), approved by the IMF Executive Board in June 2010. With strong performance, the Board concluded the second program review in June 2011, enabling disbursement of about US$58 million
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Press Release No. 11/264
June 29, 2011
The Executive Board of the International Monetary Fund (IMF) has completed its second review of Armeniaթ§Չ-Չ§s economic performance under a program supported by the Extended Fund Facility (EFF) and the Extended Credit Facility arrangement (ECF).1
The decision enables the authorities to draw an additional SDRթԹ 36.2թԹ million (about US$57.8թԹ million), bringing total disbursements under the arrangement to an amount equivalent to SDR 108.6 million (about US$173.5թԹ million).
The three-year SDRթԹ 266.8 million (about US$426.2 million) EFF and ECF arrangement with Armenia was approved by the IMFթ§Չ-Չ§s Executive Board on June 28, 2010 (see Press Release No. 10/263).
Following the Executive Board’s discussion on Armenia, Ms. Nemat Shafik, Deputy Managing Director, stated:
թ§Չ-ժThe Armenian authorities are to be commended for the continued implementation of sound policies under the Fund-supported program. These policies have helped underpin a steady recovery from the global financial crisis. Growth is expected to accelerate and broaden in 2011, but Armenia faces a number of outstanding challenges, including a surge of inflation, sizeable external and fiscal imbalances, high financial dollarization, and, in the wake of the crisis, increased public debt and poverty.
թ§Չ-ժFiscal policies have been prudent, with the budget deficit reduced significantly in 2010, and further consolidation underway in 2011 and planned for the medium term. The strengthened fiscal position will help ensure fiscal and debt sustainability and reduce vulnerabilities. Decisive implementation of tax policy and revenue administration reforms will ease the burden of adjustment on spending and provide space for additional, well-targeted capital and social outlays. These, in turn, will help reverse the crisis-related increase in poverty.
թ§Չ-ժMonetary policy will continue to aim at mitigating wider inflationary pressures. The authoritiesթ§Չ-Չ§ policy response to the pickup of inflation has been timely and effective, and efforts to more actively manage liquidity have increased the responsiveness of market rates to the policy rate, improving the traction of monetary policy. The Central Bank of Armenia stands ready to take additional actions should inflationary pressures persist. Private inflows have resumed and banking indicators, already strong, continue to improve. The Central Bank of Armenia continues its efforts to improve the resilience of the banking sector.
թ§Չ-ժSound macroeconomic policies and structural reforms will help ensure a smooth and orderly external adjustment. Broad-based reforms aimed at enhancing the business environment and domestic competition will promote external competitiveness, productivity, and exports, and greater flexibility of the dram will provide appropriate price signals and reduce exposure to foreign exchange risk.թ§Չ-Թ
1 The Extended Credit Facility (ECF) has replaced the Poverty Reduction and Growth Facility (PRGF) as the Fundթ§Չ-Չ§s main tool for medium-term financial support to low-income countries by providing a higher level of access to financing, more concessional terms, enhanced flexibility in program design features, and more focused streamlined conditionality. Financing under the ECF carries a zero interest rate, with a grace period of 5թԹզ years, and a final maturity of 10 years (http://www.imf.org/external/np/exr/facts/ecf.htm). The Fund reviews the level of interest rates for all concessional facilities every two years.
Background
After a deep downturn in 2009, activity in Armenia is recovering, underpinned by a strong policy response and the gradual return of external flows, reflecting rebounding remittances, bank lending, and exports, helped by high mineral prices. However, the recovery has been slow and uneven, with gains in industry and services partly offset by a sharp decline in agriculture in 2010, reflecting both poor weather and underlying structural weaknesses. Recovery of the construction sectorթ§Չ-Չa key driver of pre-crisis growthթ§Չ-Չwas sluggish. Higher food prices have contributed to a run-up of headline inflation, which is at 9 percent as of end-May. With the economy recovering slowly and a weak external environment, important medium-term challenges have come to fore. The external current account deficit has remained at double-digit levels, the public debt ratio has almost tripled in the past two years, and poverty levels have risen as a result of the crisis.
Role of the Fund
In the first half of 2010, the authorities reformulated their economic program to give more attention to Armeniaթ§Չ-Չ§s medium-term challenges. They cancelled the stand-by arrangement that had supported the response to the crisis and put in place a three-year program supported by the EFF and ECF arrangements. The program aims to achieve strong growth and poverty reduction, debt sustainability, and financial sector stability with a focus on:
- Reducing the overall fiscal deficit by around 5 percentage points over the medium-term, while protecting key social expenditures;
- Implementing reforms to improve the integrity of the tax system, to cast a wider tax net, and to achieve gains in revenue administration;
- Ensuring greater exchange rate flexibility and strengthening of the monetary framework;
- Continued strengthening of financial sector supervision to maintain robust confidence in the banking system and improve its resilience to shocks; and
- Improving the business environment, enhancing competitiveness, and reducing poverty.
In addition to financial support, the IMF has a wide-ranging program of technical assistance with Armenia, focused in particular on tax policy and revenue administration, expenditure policies, macroeconomic modeling and the inflation targeting framework, contingency planning in the banking sector, bank restructuring, and statistics. In addition, the authorities have requested a full update of the Financial Sector Assessment Program report in 2011. Efforts by the IMF are coordinated with the work of other agencies, including the World Bank, the European Bank for Reconstruction and Development, the Asian Development Bank, the European Union, and bilateral partners.
Progress to Date
Program performance has been strong, and program targets for end-2010 were met. An IMF staff team visited Armenia in late-March/early-April to review performance at the end of 2010. Fiscal consolidation is moving forward, ensuring that public debt remains sustainable. The Central Bank of Armenia (CBA) has maintained a flexible exchange rate while safeguarding international reserves. Credit to the economy has been picking up, driven by the recovering industry and services sectors. To address the high level of financial dollarization, the CBA has issued new prudential regulations to address currency-induced risk. Headline inflation, which has increased due to supply shocks, is expected to go back to the inflation target band by early next year.
The Challenges Ahead
The key challenge is to implement fiscal and external adjustment firmly, while protecting the poor and adjusting policies as needed, should developments impede the recovery.
- Armeniaթ§Չ-Չ§s economic growth remains dependent on a solid and stable recovery in Russia, which in turn depends on the economic outturn in Europe and the rest of the world.
- Tax policy and administration reforms are rightly broad and bold, but their implementation will not always be easy. Sustained political consensus is needed to increase tax collections through these reforms.
- The banking sector is sound and well-capitalized, but the crisis has increased foreign currency lending, exposing banks to indirect credit risks. The authorities are taking steps to ensure that these risks are well managed.
- While Armenia now has ample international reserves, balance of payments pressures remain. Fiscal discipline, coupled with exchange rate flexibility, will be needed to mitigate pressures, along with continued support from Armeniaթ§Չ-Չ§s external donors and partners.
- Protecting the poor during this period of consolidation will be critical. To this end, the authorities have committed to improving the efficiency and targeting of social spending.
Armenia is well-placed to weather these challenges. The policy package being implemented by the authorities, combined with financial support from the IMF and other partners, should enable Armenia to restore and sustain strong economic growth, rising incomes and employment, and falling poverty.
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