Republic of Armenia: Second Review Under the Three-Year Arrangement Under the Poverty Reduction and Growth Facility and Request for Waiver of Performance Criterion

The staff report for the Second Review Under the Three-Year Arrangement Under the Poverty Reduction and Growth Facility focuses on the Republic of Armenia’s economic environment and policy discussion. Financial sector reforms will focus on improving corporate governance, strengthening regulation and supervision, and deepening financial intermediation. Price developments should be monitored closely and monetary policy tightened further should inflation pressures increase. The authorities’ plan to subsidize the local gas supplier to limit gas tariff increases for end-users is cause for concern.

Abstract

The staff report for the Second Review Under the Three-Year Arrangement Under the Poverty Reduction and Growth Facility focuses on the Republic of Armenia’s economic environment and policy discussion. Financial sector reforms will focus on improving corporate governance, strengthening regulation and supervision, and deepening financial intermediation. Price developments should be monitored closely and monetary policy tightened further should inflation pressures increase. The authorities’ plan to subsidize the local gas supplier to limit gas tariff increases for end-users is cause for concern.

I. Background to the Discussions

1. Armenia’s economy continued to perform very strongly in 2005: double-digit growth in an environment of no inflation; a strengthened external position; continued reduction in poverty and unemployment (Box 1 and Table 1); and a notable improvement in tax performance.

2. The PRGF-supported program remains on track. All but one end-December quantitative performance criteria as well as all structural performance criteria and benchmarks were observed (MEFP, paras. 6 and 7, and Tables 2 and 3).1

3. The political situation is stable. However, discussions between Armenia and Azerbaijan over the future status of Nagorno-Karabakh at a high-level summit held in Paris in February proved inconclusive, which could increase tensions in the region. Parliamentary elections in May 2007 are expected to dominate the political landscape in the coming months.

4. Policy discussions centered around the macroeconomic prospects for 2006, measures to improve revenue performance, and financial sector development In light of some uncertainties—partly related to the impact of gas price increases—about near-term inflation and growth prospects, the challenge for the authorities is to maintain low inflation through monetary restraint, while supporting economic activity through better budget execution and continued implementation of structural reforms. These reforms focus on improving tax and customs performance and boosting the quality and depth of financial intermediation (Box 1).

II. Economic Environment and Policy Discussions

A. Growth

5. Developments to date: Real GDP grew by 14 percent in 2005, the fourth consecutive year of double-digit growth, underpinned by favorable weather conditions that boosted agricultural production and a boom in construction. Domestic demand continued to be buoyed by rising incomes, investment, and remittances. In the first two months of 2006, real GDP grew by 7 percent (year-on-year), led by services and construction.

A01fig01

Economic Activity and Inflation

(In person, year-on-year growth)

Citation: IMF Staff Country Reports 2006, 196; 10.5089/9781451801613.002.A001

Poverty in Armenia

The 2004 household survey shows a further decline in poverty and inequality, but the overall level of poverty remains high. The headline poverty rate fell from 56 percent in 1999 to 39 percent in 2004, with extreme poverty declining slightly in 2004, following the sharp drop in 2003. Unlike in previous years, the reduction in poverty was driven by a decline in rural poverty, and, to a lesser extent, of poverty in non-Yerevan urban areas, owing mainly to higher growth of agricultural incomes, private transfers from abroad, and state social assistance. The update of the authorities’ Poverty Reduction Strategy Paper (PRSP)is expected to be completed by end-2006.

Armenia: Poverty and Inequality, 1999–2004 1/

(Percent of population, unless otherwise noted)

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Source: Armenian authorities; based on data from household surveys.

Revised series based on data from the National Statistical Service. For the 2004 survey, the complete poverty line, which includes the food poverty line and a non-food allowance, was AMD 14,595 per person per month (less than US$30). The food poverty line, defined as the amount of consumption necessary to satisfy basic food needs and used to assess extreme poverty, was AMD 8,954 (less than US$20). Urban and rural poverty are based on the population size of marzes (regions).

Ranges from 0 (perfect equality) to 1 (total inequality).

6. Outlook: Real GDP growth is projected to be 7.5 percent in 2006, assuming a slowdown of agricultural growth to trend levels. There are risks from higher gas prices on production costs, but more recent developments suggest that the macroeconomic impact of the gas import price increase is likely to be muted (Box 2). At the same time, continued buoyant activity in the construction and services sectors and government efforts to improve budget execution, especially in the area of public investment, are likely to strengthen growth prospects. On balance, the projected growth rate is realistic but on the conservative side.

7. Authorities’ views: The authorities believe that a growth forecast of 7.5 percent in 2006, which underlies their budget projections, is appropriate in light of the uncertainties associated with the agricultural harvest and the potential impact of the gas price increase on the economy (MEFP, para. 13). They will revise their macroeconomic framework in the second half of the year, if warranted by economic developments.

Gas Price Increase

The Armenian authorities negotiated a new gas delivery contract with their Russian supplier Gazprom that increases the gas import price from US$55 to US$110 per 1000 cubic meters, effective April 1, 2006.

The impact of the price increase on end-user tariffs will, however, be lower than initially expected. While the specific details and modalities have not yet been determined, in early April the government announced its intention to subsidize the local gas supplier Armrusgazard in order to limit gas tariff increases to around 10 percent for monthly consumption of up to 10,000 cubic meters and 20 percent for larger consumers. This compares to an average increase of 50 percent (80 percent for larger consumers) approved earlier this year. The subsidy, which is intended to last through 2008, will be financed by the sale of the fifth bloc of the Hrazdan power plant (currently under construction) to Gazprom for US$248.8 million. While most of the proceeds of the sale will be used to finance the subsidy, about US$60 million will be transferred to the government budget in two installments, starting in 2007. There may be other additional energy sector assets involved as well.

B. Inflation, Monetary Policy, and the Exchange Rate

8. Developments to date: Inflation remained subdued in 2005, with the end-year inflation rate falling to -0.2 percent, reflecting a drop in food prices associated with a good harvest and lower import prices as a result of dram appreciation. The 12-month inflation rate was 0.3 percent in March 2006. Against a backdrop of muted inflationary pressures, broad money grew briskly over the year, reflecting high demand for money and continued monetization, increased confidence in the banking system, and an appreciating dram (Table 4). Reserve money grew by 52 percent in 2005 on account of partially unsterilized Central Bank of Armenia (CBA) intervention in the foreign exchange market; a modification in reserve requirements in June (see IMF Country Report No. 05/422); and a drawdown of government deposits toward the end of the year. The 12-month growth rates of reserve money and broad money remained broadly unchanged in the first quarter of 2006. In early 2006, CBA increased the repurchase rate, its key policy interest rate, by 0.5 percentage points to 4 percent.

Armenia: Monetary Indicators, December 2005

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At program exchange rates, excluding the SPA.

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Monetary Aggregates

(In percent, 12-month rate)

Citation: IMF Staff Country Reports 2006, 196; 10.5089/9781451801613.002.A001

9. Reflecting an improved external outturn and firming confidence, the dram appreciated around 8 percent against the U.S. dollar and 4 percent in real effective terms through end-2005. However, the dram has remained broadly stable since May 2005 on account of CBA intervention in the foreign exchange market through September, high import growth, the strengthening of the U.S. dollar vis-à-vis other major currencies, and a slowdown in the growth of remittances. Since December, there have been no CBA purchases of foreign exchange. More recently, there have been small scale sales of foreign exchange for liquidity management purposes.

A01fig04

Armenia: Exchange Rate Developments

Citation: IMF Staff Country Reports 2006, 196; 10.5089/9781451801613.002.A001

10. Outlook: The 2006 monetary program targets end-year inflation at 3 percent. Inflationary pressures are likely to increase in 2006 on account of higher expected agricultural and energy prices, as well as a somewhat more expansionary fiscal policy stance. The lagged impact of the rapid monetary expansion during 2005 and a slower increase in money demand could also add to inflation.2 However, inflation should be contained within the authorities’ target of up to 3 percent. Reserve money growth is programmed to slow to 19.2 percent, while credit growth is projected to remain robust at 27 percent. Continuing de-dollarization on the back of rising confidence and an appreciated currency is envisaged to expand dram broad money at a faster pace than broad money.

11. Authorities’ views: The CBA emphasized its commitment to a more restrained monetary policy to achieve its end-year inflation target of not more than 3 percent in 2006. It intends to limit the increase in net foreign assets, increase further the policy interest rate if necessary, and step up open market operations (MEFP, para. 14). Acknowledging the drawbacks of the previous monetary targeting strategy in an environment of unstable money demand and external shocks, the CBA decided to move to a full-fledged inflation targeting monetary policy framework over the medium term (see MEFP, paras. 9 and 15). The current monetary policy framework—a reserve money program with quantitative targets for NIR and NDA and with changes to the repurchase rate as the main policy instrument—would be retained during the transition. The authorities view the development of financial markets (see Section E below) as key to strengthening the transmission mechanism from short-term rates to economic activity and inflation. In this context, CBA introduced weekly tenders for repos and other changes in its operational framework, including the issuance of CBA bills of AMD 20 billion in 2006, to improve liquidity management. The CBA also plans to develop forward-looking inflation forecasting models to help guide monetary policy in the context of inflation targeting (MEFP para. 15). In this context, the CBA has restated its commitment to the market determination of the exchange rate, noting that foreign exchange interventions will only be used as an instrument for liquidity management and to smooth out volatility of the exchange rate (MEFP, para. 14).

C. Fiscal Policy

12. Developments to date: Fiscal policy remained sound in 2005, with an overall deficit of 2.6 percent of GDP, slightly higher than programmed (2.4 percent of GDP), and a notable increase in tax revenue (Table 5). As a result, the floor on the cash balance of the central government was missed by a small margin, largely on account of unforeseen end-year capital expenditures. Tax revenues rose by 0.3 percent of GDP relative to 2004, the largest increase since 1999, reflecting better administration and further closing of loopholes in the tax system, particularly in value added and profit taxes. Both current and capital expenditures increased relative to the 2004 outturn, largely on account of higher social outlays and increased construction. Tax revenues in the first quarter of 2006 were 16 percent higher than during the same period in 2005. Public debt declined to 26 percent of GDP in 2005 from 31 percent in 2004.

Armenia: Fiscal Indicators, December 2005

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Cumulative flow from the beginning of the year until the end of December.

Overall balance on a commitment basis.

13. Outlook: The 2006 budget envisages an overall deficit of 2.8 percent of GDP, consistent with the authorities’ Medium-Term Expenditure Framework (MTEF) for 2006–08, with half of the deficit financed externally and the remainder by drawing down government deposits. Tax revenues are envisaged to increase by 0.4 percent of GDP relative to the 2005 outturn on account of tax and customs reforms (see Section E below). Total expenditures (excluding grants from the Millennium Challenge Account (MCA)) are to increase by 1.2 percent of GDP relative to the 2005 outturn, largely matched by grants of the same magnitude. The combined education, health, and social security allocations are budgeted to rise by 0.9 percent of GDP, while capital expenditure is budgeted to rise by 1.3 percent of GDP (excluding disbursements from the MCA). At the same time, some savings are envisaged, particularly in subsidies to the water and irrigation sectors and interest payments, while wages are budgeted to increase only slightly relative to GDP. Bringing forward the budget process and introduction of a public investment plan in the authorities’ 2006–08 MTEF should improve budget execution relative to previous years.3

Armenia: Functional Classification of Government Expenditures, 2003–08

(In percent of total expenditure)

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Sources: Ministry of Finance; and Fund staff estimates and projections

14. Coordination issues: Coordination between the monetary and fiscal authorities has recently weakened, both with respect to an overall framework for monetary policy objectives and government debt management. The absence of adequate coordination mechanisms as well as more frequent informal consultations to discuss expected changes in government balances for central bank liquidity management could complicate macroeconomic policy in the period ahead.

15. Authorities’ views: Raising the tax-to-GDP ratio remains a key priority. The authorities recognize the need to increase revenue buoyancy and remain committed to further improving the tax system and strengthening tax and customs administration (Section E below). The authorities believe that expenditure execution is likely to improve further given an earlier approval of the budget, but they agreed to remain vigilant regarding expenditure efficiency.

D. External Sector

16. Developments to date: The external current account strengthened considerably (from a deficit of 4.6 percent of GDP in 2004 to a deficit of 3.3 percent of GDP in 2005), driven by robust exports of base metals and processed foodstuffs, tourism earnings, and strong remittance inflows (Table 6). Gross official reserves increased by US$134 million, providing 3.7 months of import coverage. The authorities finalized their MCA Compact (worth US$236 million over 5 years), and agreement was reached with the Lincy Foundation on a sizeable private grant.

A01fig05

Exports, Imports, Current Account

(in percent of GDP)

Citation: IMF Staff Country Reports 2006, 196; 10.5089/9781451801613.002.A001

17. Outlook: The external current account deficit is projected to widen somewhat in 2006 on account of a weakening in the trade balance driven by a moderation in export growth, along with a deceleration of the growth of remittances relative to recent years (Box 3). Nevertheless, the continued strength of the capital and financial account is projected to allow gross international reserves to increase by US$76 million, providing for an increase in reserve coverage of 3.8 months of imports.

A01fig06

Real and Nominal Effective Exchange Rates

(Index: 1995=100)

Citation: IMF Staff Country Reports 2006, 196; 10.5089/9781451801613.002.A001

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Gross International Reserves and Nominal Exchange Rate

Citation: IMF Staff Country Reports 2006, 196; 10.5089/9781451801613.002.A001

1/ Gross International Reserves including Special Privatization Account (SPA)

E. Structural Reforms and Other Issues

Tax and customs reforms

18. Measures taken since last review: Good progress was made in fiscal reforms, with a particular focus on closing loopholes in the tax system and improving tax and customs administration (MEFP, para. 8). In tax policy, the minimum social security contribution was raised and legislation for a presumptive tax on property development to reduce tax evasion in construction will be shortly submitted to parliament; however, the amendment to reduce the list of goods exempt from VAT payment at the border was not approved by parliament. In tax and customs administration, sanctions for providing false documentation to revenue agencies were raised and tax audits strengthened; a 2006–08 IT strategy for the tax agency was finalized; a review of the customs agency by independent experts was concluded; and a pilot was initiated to introduce self-declaration and assessment in customs.4

Remittances: Evolution and Estimation

Given both the absolute volume and the rapid growth of remittances in recent years, there is much interest in understanding the factors influencing these flows and their likely evolution.

Based on private transfers through the banking system, the sources of remittances are reasonably well understood. The CBA estimates that, in 2005, some 81 percent of such flows came from Russia. Furthermore, the CBA has developed a simple model of the economic chain behind remittances. The chain starts with the price of oil, which is transmitted through income growth and prices in Russia’s nontradable sector (where most Armenians in Russia work), and results in the growth of transfers and factor incomes flowing into Armenia.

Nevertheless, banking system and official data do not capture all flows, and questions persist as to the ‘true’ level of remittances Estimates vary from around 10 percent of GDP to over 25 percent of GDP.

As a result, there is much interest in deepening analysis in this area. The Armenian authorities, with support from the World Bank and other donors, have recently undertaken a study of the sources, nature, and extent of private transfers. In addition, Armenia will be included in a cross country analysis of remittances currently planned by the Asian Development Bank. Furthermore, the Armenian authorities are involved in discussions (with the Luxembourg Group) aimed at improving national statistics in this area.

19. Measures expected in 2006: Tax and customs reforms in 2006 will remain focused on enhancing revenue performance and strengthening tax and customs administration (MEFP, paras. 18–22). In tax policy, access to the simplified tax will be narrowed further to reduce tax evasion in profit and value-added taxes. While the 2007 elections make more far-reaching tax policy reforms difficult, the authorities expressed their commitment to bring the agricultural sector into the normal tax regime effective 2009; to move large-scale operations from the presumptive tax to the regular tax regime; and to allow the current profit tax exemptions for foreign enterprises to expire in 2008. In tax administration, completion of an IT acquisition action plan will reduce technical impediments to tax administration reforms. Steps to improve tax compliance include: applying universal VAT cross-checks from mid-year; strengthening of the verification of tax losses; and improving tax audits and arrears collection. In customs administration, measures will focus on increasing capacity for, and use of, risk assessment by establishing a dedicated risk management unit; expanding the use of self-declaration and assessment; and improving transparency.

Financial sector reforms

20. Measures taken since last review: The authorities continued their efforts to strengthen the financial sector’s regulatory and supervisory framework (MEFP, para. 9). Amendments to the Law on Banks and Banking regarding consolidated supervision, corporate bank governance, and enhancing the effectiveness of external audits in risk management were passed by parliament. A unified financial regulation and supervision system was adopted, and by-laws on prudential regulation as well as accounting and reporting requirements in the insurance sector were finalized.

21. Measures expected in 2006: Financial sector reforms in 2006 will focus on further improving corporate governance of banks, strengthening regulation and supervision, and deepening financial intermediation (MEFP, paras. 24–25). The authorities intend to specify and implement a consolidated supervision framework for monitoring beneficiary owners of banks beyond the licensing stage in order to better control related-party influence on bank operations. They also intend to publish reports on the compliance of commercial banks with the amended Law on Banks and Banking, and amend legislation enabling the CBA to publish violations of, and sanctions against, noncompliant commercial banks. Lastly, the authorities plan to improve regulation and supervision of foreign exchange cash operations. The implementation of such reforms, together with the envisaged entry of foreign banks, should increase competition and contribute to the narrowing of interest spreads.

22. Further reforms are envisaged in the nonbank financial sector (MEFP, paras. 26–27). These will focus on implementing a regulatory and supervisory framework in the insurance sector; eliminating limitations on the range of services that insurance providers with substantial foreign ownership can offer in Armenia, and encouraging entry into the sector of reputable international companies. Finally, the authorities are embarking on a major reform of the pension system.

Program monitoring

23. The performance criteria, structural benchmarks, and indicative targets under the program are specified in the attached MEFP and the addendum to the technical memorandum of understanding (Attachments II and III). Performance under the third review will be assessed based on end-June 2006 data and measures (Attachment II, Tables 1 and 2). The third review of the program is expected to take place in September 2006

III. Staff Appraisal

24. The economy continues to perform very well. Prudent fiscal and monetary policies, strong external transfers, and ongoing structural reforms have contributed to the impressive growth performance and decline in poverty of recent years. The main challenge is to sustain economic growth, which will require inter alia continued prudent macroeconomic policies, strong revenue performance to fund infrastructure development and expand public services targeted at poverty alleviation, as well as financial sector development.

25. The planned tightening of monetary policy is appropriate. The rapid increase in monetary aggregates in 2005 and uncertainties about remonetization carry inflationary risks. Price developments should be monitored closely and monetary policy tightened further, should inflationary pressures increase. The credibility of the monetary stance is particularly important in light of the authorities’ move toward a full-fledged inflation targeting regime over the medium term. In this context, clear communication of CBA’s policy stance will enhance the effectiveness of monetary policy and the development of a forward-looking framework for inflation forecasting will strengthen monetary policy decision making. Moreover, staff also encourages the authorities to maintain a flexible exchange rate regime.

26. The 2006 budget is compatible with macroeconomic stability and PRSP objectives. It rightly emphasizes improving revenue performance and increasing expenditures for infrastructure and social services. Given that tax performance is relatively poor by regional standards, staff places particular emphasis on improving further the tax–to-GDP ratio in line with PRSP objectives. To this end, tax revenue performance should be revisited during the year and the tax target increased if warranted by a revision of the 2006 nominal GDP growth forecast. More fundamentally, tax buoyancy needs to be increased without resorting to ad hoc discretionary measures to increase collection. Staff also encourages the authorities to improve further expenditure efficiency and targeting to ensure adequate and high quality public investment and social spending.

27. The authorities’ plan to subsidize the local gas supplier to limit gas tariff increases for end-users is cause for concern. While the modalities and details have not yet been finalized, staff urges the authorities to (i) ensure full transparency in accounting for the subsidy by incorporating potential proceeds of any asset transfer to the budget; (ii) avoid general subsidies to offset higher gas prices, as they are inefficient and will be difficult to eliminate; (iii) target subsidies to the most vulnerable groups; and (iv) phase out any subsidies by end–2008 to ensure full cost-recovery and reduce medium-term fiscal risks.

28. The authorities’ emphasis on pressing ahead with reforms in tax and customs administration, if sustained, would be welcome. In tax policy, privileges and loopholes in the tax system should be further reduced. In this regard, it is regrettable that the amendment to reduce the list of goods exempt from VAT payment at the border, which would strengthen the VAT chain, was not approved by parliament. In tax administration, it will be important to adopt the IT strategy to improve information sharing and implement a risk-based selection criteria in the areas of audits, arrears collection, and VAT refunds. In customs administration, the main recommendations of the recent review conducted by a specialized agency should be implemented.

29. Financial sector development is critical for sustaining economic growth over the medium term. The reforms being undertaken should improve further corporate governance, strengthen regulation and supervision, and deepen financial intermediation. Their implementation, together with the envisaged entry of foreign banks should increase competition, improve market efficiency, and contribute to the narrowing of interest rate spreads.

30. The program’s prospects remain very good, but there are risks. Effective policy coordination between the monetary and fiscal authorities is needed to ensure that the inflation target can be met and fiscal performance maintained. In this context, it will be important to maintain a prudent fiscal policy as the campaign for next year’s parliamentary elections picks up.

31. Based on the authorities’ good track record and the strength of the 2006 program, staff supports the authorities’ request for completion of the second review under the program, a waiver for the nonobservance of the performance criterion on the cash balance of the central government as it was minor, and modification of the end-June quantitative performance criteria.

Table 1.

Armenia: Selected Economic and Financial Indicators, 2001–06

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

End of period.

Comprises state-owned energy companies. Data for 2001–02 include the electricity distribution company, Armelnet, which was privatized in late–2002. Data for 2003–04 exclude Armelnet and two generation companies that were also privatized.

In percent of exports of goods and services.

Gross international reserves 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.

Table 2.

Armenia: Quantitative Targets, June – December 2005 1/

(End of period ceilings on stocks, unless otherwise specified)

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All items as defined in the Technical Memorandum of Understanding.

Indicative target.

Performance criterion.

At program exchange rate of 500 dram per U.S. dollar for 2005 and program exchange rate of 450 dram per U.S. dollar for 2006.

The December 2005 target has been adjusted by AMD 10 billion on account of lower-than-expected World Bank project lending.

Cumulative flow from the beginning of the calendar year until the end of the month indicated.

Includes debt with maturity of more than a year as well as obligations with maturity of one year or less, excluding normal import-related credit and sales of treasury bills to nonresidents.

Excludes reserve money liabilities denominated in foreign currencies from September 2005 onwards.

Table 3.

Status of Structural Measures for the Second Review under the PRGF

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This structural performance criterion is for the third review under the PRGF arrangement.

Table 4.

Armenia: Monetary Accounts, 2005–06

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Sources: Central Bank of Armenia; and Fund staff estimates.

At program exchange rate of 450dram/US$.

The projected decline in other items (net) in 2005 is related to additional privatization proceeds primarily from the sale of a copper company. These proceeds will be deposited in the special privatization account (SPA) which is a separate account at the CBA and is subject to regular audit by Parliament. Those proceeds are not reflected in the fiscal accounts until funds are earmarked for spending within the budget.

See footnote 5 of Table 2.

At actual exchange rates, excluding the SPA.

At program exchange rates, excluding the SPA.

At actual exchange rates, excluding the SPA and foreign currency reserve money.

At program exchange rates, excluding the SPA and foreign currency reserve money.

Defined as reserve money minus NIR plus medium-and long-term liabilities. Reserve money denominated in foreign currencies is included in reserve money and NIR up to June 2005. They are excluded for September 2005 onward.

Ratio of foreign currency deposits to total deposits (in percent).

Ratio of foreign currency deposits to broad money (in percent).

Table 5.

Armenia: Central Government Operations, 2004–06

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Sources: Ministry of Finance and Economy, Central Bank of Armenia, and Fund staff estimates.

Relative to the 2005 budget, the staff presentation makes the following adjustments: (i) estimated military wages are reclassified from Other goods and services to Wages; (ii) an AMD 12.5 billion fee for the participation in the tender for the Molybdenum copper plant is recorded as privatization proceeds instead of nontax revenue; (iii) external grants, external interest, and external financing are converted at the program exchange rate of 500 AMD per US dollar and AMD 680.4 per euro.

Relative to the 2006 budget, the staff presentation makes the following adjustments: (i) estimated military wages are reclassified from Other goods and services to Wages; (ii) external grants, external interest, and external financing are converted at the program exchange rate of AMD 450 per US dollar and AMD 504 per euro.

Staff presentation based on the budget exchange rate of AMD 420 per U.S. dollar.

Includes current spending funded from the reserve fund; capital spending is recorded under capital expenditure.

The statistical discrepancy is corrected for accumulation of deposits in non-central government treasury accounts at the central bank and below-the-line operations that are not reflected in the budget reports.

Use of funds from the Special Privatization Account (SPA) is shown in nonbank financing. The timing of the use of these funds does not always coincide with the timing of the conversion into domestic currency. At conversion, CBA net claims on central government (NCCG) are reduced. Thus, in a given period the sum of central bank financing and use of the SPA in the fiscal accounts equals the change in the sum of the stock of NCCG and the SPA in the CBA balance sheet.

Overall balance plus privatization proceeds.