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IMF Executive Board Approves Three Year, US$13.6 Million Poverty Reduction and Growth Facility Arrangement for the Republic of Armenia

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International Monetary Fund
Published Date:
January 2009
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The Executive Board of the International Monetary Fund (IMF) has approved a three year, SDR 9.2 million (about US$13.6 million) arrangement under the Poverty Reduction and Growth Facility (PRGF) for the Republic of Armenia to support the government’s economic program through 2011. The decision will enable the Republic of Armenia to draw an amount equivalent to SDR 1.31 million (about US$1.9 million) from the IMF immediately.

Following the Executive Board’s discussion, Mr. Murilo Portugal, Deputy Managing Director and Acting Chair, stated:

“After the successful conclusion of its third PRGF-supported program in May 2008, Armenia’s economic performance has remained very strong. High growth has been maintained and has contributed significantly to the marked reduction in poverty. Inflation has increased in the wake of rising international food and fuel prices and growing domestic demand pressures, although it remains lower than in other CIS countries. Adherence to prudent macroeconomic policies and the progress made in structural reforms has helped to achieve these results.

“The worsened global macroeconomic outlook has increased uncertainty, but Armenia is in a strong position to withstand the impact of the global economic downturn. A gradual deceleration of growth in Armenia may help dampen inflationary pressures. It may also contribute to reducing the external current account deficit, which has increased on the back of rising imports and sluggish exports, despite strong remittance inflows. Medium-term prospects, although highly uncertain, remain benign in view of favorable investment opportunities.

“Continued sound fiscal and monetary policies remain key to maintaining macroeconomic stability. Prudent policies are necessary to reduce the current macroeconomic imbalances. Current challenges highlight the need to strengthen policy frameworks. The floating exchange rate regime continues to be the best option for Armenia, and the authorities are encouraged to complete the transition to full-fledged inflation targeting. At the same time, building capacity for fiscal policy analysis will help strengthen the budgetary process and enhance fiscal policy credibility, increasing its effectiveness as a demand management tool. In addition, the authorities must be prepared to adjust swiftly to a rapidly changing economic environment. A weakening external environment might also increase Armenia’s financing needs and possibly call for an early review of the situation.

“Improving external competitiveness requires a renewed push for structural reforms. Focus should be on enhancing productivity, improving the business environment, and boosting domestic competition. In this regard, the completion of the unfinished tax policy and administration reform agenda is particularly important. These reforms would significantly reduce the cost of doing business, particularly in the export sector, and contribute to leveling the playing field, ultimately promoting private sector development,” Mr. Portugal said.

Annex Recent Economic Developments

Armenia is poised for another year of double-digit growth, but inflation and external imbalances have been growing. Notwithstanding the temporary trade disruptions during the Georgia conflict, annual real GDP grew by 10.4 percent in the nine months to September 2008, and is projected to remain around 10 percent this year, assuming continued strong activity in construction and services. Annual inflation remained high through September at 11.3 percent, but dropped to 8.6 percent in October on the heels of falling food prices, remaining lower than in some neighboring countries.

While inflation was driven mainly by the global spike in food and energy prices (including the elimination of a natural gas subsidy last May), demand pressures have played an increasing role. Indeed, rising wages, persistently large foreign exchange inflows, rapid credit growth, and a sharply widening current account deficit have raised concerns about overheating. But the downward risks from the global economic downturn could help unwind accumulated macroeconomic imbalances.

Budget execution in 2008 has been prudent. Tax collection has been well above expectations, driven by a surge in VAT revenue partly associated with high import growth. The overall deficit remained lower than projected through September 2008, at 0.5 percent of projected annual GDP.

Monetary policy has been tightened to address rising inflationary pressures. To limit the second-round effects of higher food and energy prices, the Central Bank of Armenia (CBA) raised the repurchase rate gradually from 4.5 percent in June 2007 to 7.75 percent in September 2008, but left the rate unchanged since, in response to the uncertain external economic environment.

Despite large private transfers, the current account has continued to deteriorate. Imports have surged on the back of high international food and energy prices and buoyant demand, while export performance has been disappointing. With appreciation pressures dampened by rising import demand, the dram/dollar exchange rate has been broadly stable since December 2007. International reserve coverage dropped somewhat, but remains adequate, at about 3 ½ months of imports.

Program Summary

Armenia’s PRGF-supported economic program builds on the authorities’ Sustainable Development Program (SDP). The main goals of the new program are to sustain and broaden economic growth, and further reduce poverty, consistent with SDP priorities. Appropriate fiscal and monetary policies will underpin the macroeconomic objectives of the program. Its main focus will be on strengthening the fiscal and monetary policy frameworks and their coordination, while deepening productivity-enhancing structural reforms, and improving governance. In particular, reforms in tax policy and tax administration will be essential for the success of the program.

Strengthening the policy frameworks will require, among other things, strengthening the institutional and analytical capacity at the Ministry of Finance, and adopting a Forecasting and Policy Analysis System for inflation targeting at the Central Bank of Armenia. The current global crisis highlights the need to minimize Armenia’s vulnerabilities by stepping up efforts to diversify production and reduce dependence on remittances. In view of increasing global risks, Armenia’s external financial requirements may increase as well, possibly calling for higher access than under the current PRGF arrangement.

Armenia: Selected Economic and Financial Indicators, 2003–09
2003200420052006200720082009
Proj.Proj.
(In percent of GDP, unless otherwise specified)
National income and prices
Real GDP growth14.010.514.013.313.810.08.0
Gross domestic product (in billions of drams)1,6251,9082,2432,6563,1493,6724,169
Gross domestic product (in millions of U.S. dollars)2,8073,5784,9096,3869,22812,06914,019
Gross domestic product per capita (in U.S. dollars)8741,1131,5231,9762,8423,6984,274
CPI (period average)4.77.00.62.94.49.25.2
CPI (end of period)8.62.0-0.25.26.67.55.0
Unemployment rate (in percent)10.19.68.17.27.1
Poverty rate (in percent)42.934.629.826.5
Investment and saving (in percent of GDP) 1/
Investment24.324.930.535.937.236.836.3
National savings17.524.329.434.130.827.125.5
Money and credit (end of period)
Reserve money6.611.351.941.150.918.617.6
Broad money10.422.327.832.942.326.021.1
Commercial banks’ 3-month lending rate (in percent)22.517.518.317.118.6
Central government operations (in percent of GDP)
Revenue and grants17.815.417.818.020.120.221.1
Of which: tax revenue 2/14.014.014.314.516.016.416.8
Expenditure and net lending 3/18.917.119.920.022.421.622.1
Overall balance on a cash basis-1.5-1.6-2.0-2.1-2.2-1.4-1.0
Underlying balance 4/-3.6-1.4-2.3-2.3-3.0-1.9-1.7
Government and government-guaranteed debt (in percent of40.932.424.318.717.415.814.6
Share of foreign currency debt (in percent)93.593.090.888.288.085.581.3
External sector 5/
Exports of goods and services (in millions of U.S. dollars)9031,0711,4161,5101,7771,8962,168
Imports of goods and services (in millions of U.S. dollars)-1,406-1,628-2,124-2,536-3,589-4,671-5,641
Exports of goods and services (percentage change)29.518.532.26.717.66.714.4
Imports of goods and services (percentage change)27.015.830.519.441.530.120.8
Current account (in percent of GDP) 1/-6.8-0.5-1.0-1.8-6.4-9.7-10.8
FDI (net, in millions of U.S. dollars)121246233450701815962
External debt-to-exports ratio (NPV, in percent)60596072674643
Debt service ratio (in percent of exports of goods and services)6/15.68.94.43.92.92.92.6
Gross international reserves (in millions of U.S. dollars) 7/5025476671,0721,6571,8361,968
Import cover 8/3.73.13.23.64.33.93.7
Nominal effective exchange rate 9/-4.613.411.715.614.1
Real effective exchange rate 9/-2.68.65.114.712.6
End-of-period exchange rate (dram per dollar)566486450364304
Average exchange rate (dram per dollar)579533458416342
Memorandum item:
Population (in millions)3.2123.2143.21233.2313.280
Sources: Armenian authorities; and Fund staff estimates and projections.

The 2004-2006 external current account figures were revised following changes in methodology

Tax revenues in 2007 include 0.2 percent of GDP in tax arrears paid by Armentel, which were not part of the official target.

Including the gas subsidy during 2006–08.

Overall balance excluding grants and external interest payments.

With the exception of gross international reserves, figures for 2007 are estimates.

Private external debt included since 2006.

Excluding the special privatization account (SPA).

Gross international reserves in months of next year’s imports of goods and services.

A positive sign denotes appreciation. Base year 1995=100. The calculations are based on 1999–2001 average trade weights.

Sources: Armenian authorities; and Fund staff estimates and projections.

The 2004-2006 external current account figures were revised following changes in methodology

Tax revenues in 2007 include 0.2 percent of GDP in tax arrears paid by Armentel, which were not part of the official target.

Including the gas subsidy during 2006–08.

Overall balance excluding grants and external interest payments.

With the exception of gross international reserves, figures for 2007 are estimates.

Private external debt included since 2006.

Excluding the special privatization account (SPA).

Gross international reserves in months of next year’s imports of goods and services.

A positive sign denotes appreciation. Base year 1995=100. The calculations are based on 1999–2001 average trade weights.

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