Press Information Notice (PIN) No. 98/17

Press Information Notice (PIN) No. 98/17


March 12, 1998

International Monetary Fund

Washington, D. C. 20431 USA

The IMF Executive Board on February 6, 1998 concluded the 1997 Article IV consultation1 with Armenia, and completed the mid-term review under the second annual arrangement under the Enhanced Structural Adjustment Facility (ESAF).


In December 1994, Armenia embarked on a comprehensive program of macroeconomic stabilization and structural reform with the financial support of international financial institutions and donors. By end-1996, the firm implementation of these policies had contributed to the reduction of inflation to single digit levels and to the resumption of output growth at an annual rate of about 6 percent. Prices were liberalized, with the exception of those for public utilities, communal services, and urban transport which, nonetheless, were adjusted several times. Privatization of small and medium enterprises proceeded as targeted, and decisive steps were taken to reform various sectors, including banking, education and health. During this period, the IMF provided financial support for Armenia’s program under the Systemic Transformation Facility (December 1994), a one-year stand-by (June 1995), and a three-year ESAF (February 1996).

Armenia’s record of good macroeconomic performance suffered a setback that started in the third quarter of 1996 and lasted well into the first half of 1997. For 1997 as a whole, real GDP growth slowed to 3 percent, inflation accelerated to almost 22 percent, and the external current account deficit (excluding official transfers) stalled at around 27 percent of GDP. Although real shocks affected agricultural output in mid-1997, there was some easing of financial policies as well as a loss in the momentum of structural reform.

The deficit of the state budget (on an accrual basis) is estimated to have reached 6.3 percent of GDP in 1997, down from 8.6 percent in 1996. Tax revenue performance was strong and expenditures were kept slightly below the level of the preceding year. However, the government incurred expenditure arrears in the first three quarters of 1997, and engaged in sizable quasi-fiscal operations via the extension of guarantees on bank borrowing by major enterprises. There was further progress in improving the functioning of the treasury, the targeting of the social safety net, and the pension system.

Reserve and broad money continued to grow strongly, albeit at a lower rate than in the previous year. Reserve money growth was led by increases in domestic credit during the first half of 1997. Thereafter, it was fueled by large capital inflows, which could not be sterilized given the limited instruments of monetary control. Following a 14 percent depreciation in the first 7 months, the exchange rate remained at around dram 500 per U.S. dollar until the end of the year.

Armenia’s external current account and trade deficits did not improve as expected in 1997, mainly on account of a sharp increase in recorded imports (particularly shuttle trade) driven in part by the rapid expansion in domestic credit. Exports are estimated to have been significantly lower than in 1996. Official and private transfers remained sizable. The management of the external debt improved further. Armenia concluded debt restructuring agreements with Russia and Turkmenistan, and made debt service payments to the European Union.

There has been a noticeable improvement in the overall health of the banking system, as evidenced by a sharp decline in the extent of nonperforming loans. Significant progress has also been achieved in the area of privatization. In late 1997, the authorities initiated the privatization of 11 large enterprises through international tenders, but interest by prospective buyers has been mixed. In December 1997, the government approved a financial rehabilitation plan for the energy sector and a program to privatize energy enterprises.

Following on the steps taken in the fourth quarter of 1997 to restore macroeconomic stability, the authorities have designed a package of corrective policies for 1998. Inflation is expected to decline to 9 percent at end-1998 and the external current account (excluding official transfers) to 22 percent of GDP. Building on an acceleration of structural reform, real GDP growth is expected to recover to over 5 percent in 1998. Consistent with continued financial restraint, the Armenian Parliament approved the 1998 budget which calls for a state budget deficit of 5.5 percent of GDP, and the Central Bank of Armenia has announced a tight monetary program. Important financial sector reforms, particularly as regards enhanced bank supervision, will continue. Privatization of small and medium-size enterprises is expected to surge with the introduction of cash privatization, and efforts to attract foreign investors to the international tenders will be increased. The government also intends to embark on a civil service reform and will seek to obtain membership with the World Trade Organization in 1998.

Executive Board Assessment

Recalling Armenia’s good track record of macroeconomic performance and structural reforms, Directors expressed concern at the setbacks in 1997. While noting the negative effects of real shocks on macroeconomic performance, Directors regretted the more-expansionary-than-programmed macroeconomic policy stance, and the loss of momentum in structural reforms. Accordingly, they warmly welcomed the recent efforts to put the program back on track, notably the tightening of macroeconomic policies and the steps taken to accelerate and deepen the structural reform process, which were already beginning to produce some positive results. In this regard, while noting the uncertainty created by the recent resignation of some senior officials, Directors were encouraged by the authorities’ reaffirmation of their continuing commitment to the IMF-supported program. They underscored the fact that major issues remained to be addressed, particularly with regard to fiscal policy, privatization, the financial rehabilitation of the energy sector, and external debt management, in order to improve the environment for increased investment and to build a lasting basis for sustained growth.

Directors stressed the importance of maintaining a prudent fiscal policy stance and improving fiscal management. They welcomed the strong revenue performance in the second half of 1997, which had allowed the clearing of expenditure arrears. In this regard, Directors noted the authorities’ efforts to improve tax administration, broaden the tax base, and enforce payments discipline—although further efforts would be needed, especially to address the problem of tax arrears. While noting the authorities’ efforts to improve the management of the treasury, Directors expressed concern about the recurrent problems in controlling budgetary expenditure and the recourse to expenditure sequestration. In this regard, further progress should be achieved through the firm implementation of the specific action plans that incorporated the technical advice given by IMF-led teams of experts. Directors also welcomed the adoption of new procedures on accounting and financing of budgetary expenditures aimed at avoiding the reemergence of expenditure arrears. They welcomed the initiative to rationalize and improve the targeting of the social safety net, and to strengthen the pension system, so as to protect the most vulnerable groups in society.

Directors commended the authorities’ recent implementation of a tighter monetary program and their decision to cease the government’s net borrowing from the central bank in 1998. They welcomed the securitization of the outstanding central bank claims on the government, which would improve monetary management, and help to deepen and broaden financial markets. Directors also welcomed the government’s decree to cease providing guarantees on domestic commercial borrowing by state enterprises, a step that would help moderate such credit expansion. They considered appropriate the government’s intention to pursue a foreign exchange policy that will allow the exchange rate to reflect underlying market pressures.

Directors expressed concern about the weakening of the external current account and the sensitivity of the trade balance to unanticipated changes in import prices. The vulnerability of the external sector underscored the importance of closely monitoring trade developments and adopting a cautious approach to external borrowing. Noting that Armenia would continue to depend on concessional foreign assistance for the foreseeable future, they supported the authorities’ efforts to monitor external borrowing more closely. Directors called for stringent efforts over the coming years to curtail the accumulation of nonconcessional debt.

Directors noted that, although some structural elements of the program had fallen behind schedule, positive actions had been taken, particularly in the area of privatization. They endorsed the introduction of a cash privatization program in 1998, which should help reestablish the momentum of privatization of small- and medium-sized enterprises, and enhance the scope for foreign participation in the privatization of large enterprises. They emphasized the importance of designing a comprehensive strategy for the use of the one-time proceeds arising from such privatization, and welcomed the authorities’ commitment to limit the use of these proceeds for budgetary support and to improve the profile of debt.

Directors welcomed the progress that had been made in strengthening the banking system, particularly in the areas of banking supervision, improved loan portfolios, and the move to international accounting standards. The decision to place two banks under special supervision in 1997 had been noteworthy. While Directors noted the government’s decision to intervene in the third problematical bank, they stressed that it was important to signal that such an intervention was exceptional and temporary.

Directors welcomed the financial rehabilitation plan for the energy sector, and stressed the importance of developing an appropriate strategy for the major energy-consuming enterprises as soon as possible, so as to limit the government’s financial involvement in them in the future. In this regard, Directors supported the authorities’ intention to explore avenues to reduce the cost of financing for completion of the thermal plant, which would eventually replace the nuclear power plant, and encouraged other creditors to help find a creative solution to this problem.

Directors welcomed the significant progress that had been made in improving the quality, coverage, and timeliness of macroeconomic data, and encouraged the authorities to adopt an even more open policy on data dissemination.

Press Information Notices (PINs) are issued, at the request of a member country, following the conclusion of the Article IV consultation for countries seeking to make known the views of the IMF to the public. This action is intended to strengthen IMF surveillance over the economic policies of member countries by increasing the transparency of the IMF’s assessment of these policies.

Armenia: Selected Economic Indicators

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Sources: Armenian authorities; and IMF staff.

Estimated unless otherwise indicated.

Over same period of previous year.

Calculated on the basis of the average exchange rate.

1997 data shown are actual.

Includes the republican and local budgets.

In final quarter of the period using GDP of the corresponding quarter, seasonally adjusted.

Excludes official transfers.


Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country’s economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country’s authorities. In this PIN, the main features of the Board’s discussion are described.

Press Information Notices