Abstract
This paper focuses on the Republic of Armenia’s 2002 Article IV Consultation, First and Second Reviews Under the Poverty Reduction and Growth Facility (PRGF), and a Request for Waiver of Performance Criteria. The PRGF-supported program approved in 2001 focuses on revenue mobilization, the clearance of government arrears, and a decline in the deficit of the energy sector. Performance during the first year of the program was mixed. Tax collection was sluggish, and delays with structural reforms in the energy, water, and irrigation sectors led to the nonobservance of several quantitative performance criteria under the program.
1. The following information has become available since the issuance of the staff report (SM/02/170) on September 12. It does not change the thrust of the staff appraisal.
Prior Actions
2. The authorities have confirmed that the two outstanding prior actions listed in Table 2 of the Memorandum of Economic and Financial Policies (repayment of the loan to the budget and elimination of external arrears to Russia and Turkmenistan) have been implemented. More specifically, the loan for AMD 4.9 billion extended to the energy sector in the first quarter of 2001 was repaid to the Treasury on September 16, 2002. As part of a contract signed between the Armenian and the Russian authorities in July 2002, understandings were reached on the clearance of interest arrears and deferral of principal arrears until the end of this year. Regarding Armenia’s external debt arrears to Turkmenistan, the authorities of both countries have been negotiating since August 2002 the settlement of all of Armenia’s debt to Turkmenistan through the provision of goods. They are currently discussing the list of goods that would be supplied and their respective values.
Recent Developments
3. Earlier this month, the World Bank informed the Armenian authorities that the release of the US$20 million “floating” tranche of the Fourth Structural Adjustment Credit, expected in the fourth quarter of this year, was put on hold because of uncertainty about the effects of the sale of the electricity distribution company to a non-strategic investor. As specified in the technical memorandum of understanding, the program has adjusters in the event of a shortfall in external financing. In the meantime, the World Bank is proceeding with the Fifth Structural Adjustment Credit. Given the importance of the energy sector to the budget and the economy, the staffs of the Fund and the Bank have urged the authorities to ensure that the management selected for the company is fully qualified and able to assure a reliable and cost-efficient supply of electricity. The authorities are aware that this delay in foreign financing will require the formulation of a tighter budget for 2003 which should give priority to social expenditures and the clearance of domestic arrears. Discussions on the 2003 budget will be held during a staff visit in late October.
4. During the first seven months of the year, the average level of wages rose by 11 percent and the unemployment rate fell from 11 percent to 8.3 percent. At end-August 2002, the value of the dram vis-à-vis the U.S. dollar was almost unchanged compared to its value at end-December 2001.
5. The authorities have confirmed that they consent to the publication of the staff report, including the letter of intent, the memorandum of economic and financial policies, and the technical memorandum of understanding, as well as the PRSP preparation status report and the associated joint staff assessment.