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IMF Executive Board Approves US$127.6 Million Extended Arrangement for Armenia

Author(s):
International Monetary Fund. Middle East and Central Asia Dept.
Published Date:
March 2014
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The Executive Board of the International Monetary Fund (IMF) today approved a 38-month SDR 82.21 million (about US$127.6 million, or 89.4 percent of Armenia’s quota) Extended Fund Facility (EFF) arrangement with the Republic of Armenia to support the authorities’ economic program. The approval enables the disbursement of SDR 11.74 million (about US$18.2 million), while the remaining amount will be phased over the duration of the program, subject to semi-annual program reviews.

The program aims to support a rebound in economic activity, further progress in poverty reduction, inflation stabilization, and a reduction in outstanding fiscal and external vulnerabilities.

Following the Executive Board discussion on Armenia, Ms. Nemat Shafik, Deputy Managing Director and Acting Chair, said:

“Armenia’s performance under the 2010–13 Extended Fund Facility and Extended Credit Facility arrangements was sound. However, growth and inflation remain volatile, the external current account deficit continues to be large, and poverty and unemployment are still high. The new 38-month extended arrangement with the Fund aims to support the authorities in addressing these challenges and to sustain Armenia’s access to international financial markets.

“Fiscal policy will play a central role in the program, supporting growth in 2014 and reducing the headline deficit over the rest of the program period to build up policy buffers. Delivering planned revenue gains and reducing the under execution of the public investment budget will be essential for successful implementation of the fiscal strategy. Another key measure in the fiscal area is setting up institutional structures to monitor and mitigate fiscal risks.

“Under the authorities’ program, monetary policy will continue to be framed by inflation targeting in the context of a flexible exchange rate regime. For the financial sector, policy will be geared towards promoting resilience to shocks and greater financial deepening.

“Growth-enhancing structural reforms will also play a central role in the new program, given the objective of transforming Armenia into a dynamic emerging market. In this context, smooth accession to the Eurasian Customs Union, along with continuing growth of trade and other links with the European Union, will be essential to achieve diversification of markets, products, financial flows, and investors.

“Risks to the new program appear to be manageable, and Armenia’s repayment capacity remains robust. The authorities have a long track record of sound macroeconomic policies but maintaining a strong ownership of the program will be essential to its successful implementation.”

Annex

Recent developments:

Despite sound performance under the 2010–13 IMF-supported program, challenges to the Armenian economy remain, in terms of macroeconomic stabilization, reduction of vulnerabilities, and medium-term growth dynamics. Inflation and growth remain highly volatile, as the growth slowdown and inflation increase in 2013 have illustrated. The external current account deficit and dollarization remain high, keeping the economy vulnerable to shocks. Poverty and unemployment also remain high, and the transition towards an alternative to the pre-crisis construction-led growth model has been slow. Armenia took major financial and trade decisions in 2013, with a 7-year debut Eurobond issued in September, and the announcement that it would seek accession the Eurasian Customs Union.

Program Summary

As part of the program, fiscal policy will support the growth recovery in 2014 by providing a modest stimulus, before moving to a gradual consolidation stance in 2015-17. This will place public debt on a declining path during the program period. Revenue measures will support the consolidation and also create room for addressing social and investment needs.

Monetary and exchange rate policies will be guided by the authorities‧ framework of inflation targeting and exchange rate flexibility, with program policies focusing on continued improvements in monetary operations, communications, and modeling. Financial sector policies will target implementation of remaining recommendations of the IMF’s 2012 Financial Sector Assessment Program (FSAP) Update, which aim to promote resilience to shocks and greater financial deepening.

Structural reforms will support medium-term growth by targeting improvements in the business climate, strengthening institutions, improving connectivity and competition, creating a stronger environment for private and foreign direct investment, and tackling key risks, especially in the energy sector.

Barring major shocks, Armenia’s balance of payments gaps should close by the end of the program period and the country should be able to sustain access to international financial markets, paving the way for an exit from IMF support, provided that balance of payments difficulties are resolved, as expected.

Armenia: Selected Economic and Financial Indicators, 2009-16
20092010201120122013201420152016
Act.Act.Act.Prel.EBS/13/75Proj.Proj.Proj.Proj.
National income and prices
Real GDP (percent change)-14.12.24.77.15.13.24.34.54.7
Gross domestic product (in billions of drams)3,1423,4603,7783,9984,3514,2904,7145,1235,578
Gross domestic product (in millions of U.S. dollars)8,6489,26010,1429,95010,36510,54711,21611,60912,039
Gross domestic product per capita (in U.S. dollars)2,6612,8383,0973,0333,1533,2083,4053,5173,640
CPI (period average; percent change)3.57.37.72.54.05.85.04.04.0
CPI (end of period; percent change)6.78.54.73.24.05.64.04.04.0
GDP deflator (percent change)2.67.84.3-1.24.04.05.44.04.0
Poverty rate (in percent)34.135.835.0
Investment and saving (in percent of GDP)
Investment33.829.427.022.824.523.924.424.925.5
National savings18.014.616.111.614.415.517.318.118.9
Money and credit (end of period)
Reserve money (percent change)13.8-0.832.31.910.329.99.0
Broad money (percent change)16.410.623.619.615.915.211.3
Velocity of broad money (end of period)3.83.83.43.02.82.8
Commercial banks’ 3-month lending rate (in percent)19.117.720.718.518.3
Central government operations (in percent of GDP)
Revenue and grants20.921.222.122.323.223.323.523.323.6
Of which: tax revenue 1/16.116.416.718.121.722.522.722.723.0
Expenditure 2/28.626.225.023.925.525.825.925.425.4
Overall balance on a cash basis-7.9-4.6-2.8-1.5-2.3-2.5-2.3-2.0-1.8
Public and publicly-guaranteed debt (in percent of GDP)40.239.742.044.043.545.445.246.046.2
Share of foreign currency debt (in percent)88.987.486.886.986.484.884.484.484.9
External sector
Exports of goods and services (in millions of U.S. dollars)1,3361,9372,4072,4402,6992,5832,7572,9323,123
Imports of goods and services (in millions of U.S. dollars)-3,683-4,212-4,797-4,907-5,135-5,022-5,155-5,365-5,596
Exports of goods and services (percent change)-24.045.024.31.48.35.86.86.36.5
Imports of goods and services (percent change)-22.414.413.92.34.92.32.64.14.3
Current account balance (in percent of GDP)-15.8-14.8-10.9-11.2-10.0-8.4-7.2-6.8-6.6
FDI (net, in millions of U.S. dollars) 3/725562447474440549413432472
External debt (in percent of GDP)56.466.471.576.276.079.377.077.778.1
o.w. public debt (in percent of GDP) 4/35.734.736.438.237.638.538.138.839.2
Debt service ratio (in percent of exports of goods and services) 4/5.44.74.29.815.634.110.46.36.7
Gross international reserves (in millions of U.S. dollars)2,0041,8661,8691,7991,4672,2532,1932,2782,376
Import cover 5/5.74.74.64.33.35.24.94.94.9
Nominal effective exchange rate (percent change) 6/-8.4-2.6-2.8-7.3
Real effective exchange rate (percent change) 6/-7.51.30.0-6.1
End-of-period exchange rate (dram per U.S. dollar)378363385.8403.6405.6
Average exchange rate (dram per U.S. dollar)363374372.5401.8406.8
Memorandum item:
Population (in millions)3.23.33.33.3
Sources: Armenian authorities; and IMF staff estimates and projections.

From 2013, tax revenue includes social contribution.

In 2013 includes 1.5 percent of GDP related to the acquisition by Gazprom from the government of 20 percent of the shares of ArmRusGazprom, and the transfer (expenditure) of the same amount from the government to ArmRusGazprom to liquidate liabilities. Excluding this transaction, the deficit would amount to 1 percent of GDP.

In 2013, a credit for $155 million is registered in FDI to reflect the acquisition by Gazprom of 20 percent of the shares of ArmRusGazprom, while an offseting debit is registered in other capital (net) to reflect the corresponding reduction in liabilities of the latter with the former.

Based on public and publicly-guaranteed debt.

Gross international reserves in months of next year’s imports of goods and services, including the SDR holdings.

A positive sign denotes appreciation.

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

From 2013, tax revenue includes social contribution.

In 2013 includes 1.5 percent of GDP related to the acquisition by Gazprom from the government of 20 percent of the shares of ArmRusGazprom, and the transfer (expenditure) of the same amount from the government to ArmRusGazprom to liquidate liabilities. Excluding this transaction, the deficit would amount to 1 percent of GDP.

In 2013, a credit for $155 million is registered in FDI to reflect the acquisition by Gazprom of 20 percent of the shares of ArmRusGazprom, while an offseting debit is registered in other capital (net) to reflect the corresponding reduction in liabilities of the latter with the former.

Based on public and publicly-guaranteed debt.

Gross international reserves in months of next year’s imports of goods and services, including the SDR holdings.

A positive sign denotes appreciation.

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