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© 2006 International Monetary Fund
December 2006
IMF Country Report No. 06/433
Republic of Armenia: 2006 Article IV Consultation and Third Review Under the Poverty Reduction and Growth Facility—Staff Report; Public Information Notice and Press Release on the Executive Board Discussion; and Statement by the Authorities of the Republic of Armenia
Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. In the context of a combined discussion of the 2006 Article IV consultation with the Republic of Armenia and third review under the Poverty Reduction and Growth Facility, the following documents have been released and are included in this package:
the staff report for the 2006 Article IV Consultation and Third Review Under the Poverty Reduction and Growth Facility, prepared by a staff team of the IMF, following discussions that ended on September 13, 2006, with the officials of the Republic of Armenia on economic developments and policies. Based on information available at the time of these discussions, the staff report was completed on November 3, 2006. The views expressed in the staff report are those of the staff team and do not necessarily reflect the views of the Executive Board of the IMF;
a Public Information Notice (PIN) and Press Release, summarizing the views of the Executive Board as expressed during its November 22, 2006, discussion of the staff report on issues related to the Article IV consultation and the IMF arrangement, respectively; and
a statement by the Executive Director for the Republic of Armenia.
The document listed below has been or will be separately released.
Selected Issues Paper
The policy of publication of staff reports and other documents allows for the deletion of market-sensitive information.
To assist the IMF in evaluating the publication policy, reader comments are invited and may be sent by e-mail to publicationpolicy@imf.orga.
Copies of this report are available to the public from
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INTERNATIONAL MONETARY FUND
REPUBLIC OF ARMENIA
Staff Report for the 2006 Article IV Consultation and Third Review Under the Poverty Reduction and Growth Facility
Prepared by Middle East and Central Asia Department
(In consultation with other departments)
Approved by Lorenzo Pérez and Adnan Mazarei
November 3, 2006
A staff team visited Yerevan during August 31–September 13 to conduct the 2006 Article IV Consultation and Third Review Under the Poverty Reduction and Growth Facility. The mission met with Mr. Khachatryan (Minister of Finance and Economy), Mr. Chshmarityan (Minister of Trade and Economic Development), Mr. Movsisyan (Minister of Energy), Mr. Sargsyan (Chairman of the Central Bank), and other senior officials. It also met with members of parliament and representatives of the business and donor communities.
The mission team consisted of Mr. Al-Atrash (head), Ms. Dabla-Norris, Mr. Floerkemeier (all MCD), Mr. Hauner (FAD), Mr. Atoyan (PDR), and Mr. Crowley (MCM). It was assisted by Ms. Oomes, resident representative, and Mr. Stepanyan and Ms. Minasyan, economists in the local office.
The attached Letter of Intent (Attachment I) and the Memorandum of Economic and Financial Policies (MEFP, Attachment II) set out the authorities’ economic program for the remainder of 2006 through June 2007.
Appendices on relations with the Fund, the World Bank, the European Bank for Reconstruction and Development, statistical issues, and debt sustainability analysis are attached.
Armenia has accepted the obligations under Article VIII Sections 2, 3, and 4, and maintains an exchange system free of restrictions on payments and transfers for current international transactions, except for exchange restrictions maintained for security reasons that have been notified to the Fund pursuant to Executive Board Decision No. 144-(52/51).
Armenia’s data are adequate for surveillance and program monitoring. Armenia subscribes to the Special Data Dissemination Standard (SDDS).
A press statement was issued and a press conference was held at the end of the mission.
Contents
Executive Summary
I. Introduction
II. Macroeconomic Policies
A. Recent Growth and Outlook
B. Inflation, Monetary, and Exchange Rate Policies
C. Fiscal Policy
D. External Sector Issues
III. Fiscal Reforms
IV. Financial Sector Development
V. Staff Appraisal
Boxes
1. Sources of Growth
2. Recent Exchange Rate Developments
3. External Competitiveness—Is Appreciation the Main Concern?
4. What Explains the Low Tax-to-GDP Ratio?
5. Financial Sector Development
Text Tables
1. Fiscal Indicators, June 2006
2. Functional Classification of Government Expenditures, 2003–08
Figures
1. Economic Activity and Inflation
2. Monetary Aggregates
3. Base Money Growth, 2005–06
4. Gross International Reserves and Nominal Exchange Rate
5. Exports, Imports, Current Account
Tables
1. Selected Economic and Financial Indicators, 2001–06
2. Quantitative Targets, December 2005–June 2006
3. Status of Structural Measures for the Third Review Under the PRGF
4. Monetary Accounts, 2005–07
5. Central Government Operations, 2006–07
6. Balance of Payments, 2005–10
7. Medium-Term Macroeconomic Framework, 2005–10
8. Indicators of Fund Credit, 2005–10
9. Poverty Indicators and Millennium Development Goals, 1990–2015
10. Financial Soundness Indicators for the Banking Sector, 2003–06
Appendixes
I. Fund Relations
II. Relations with the World Bank
III. Relations with the EBRD
IV. Statistical Issues
V. Debt Sustainability Analysis
Attachments
I. Letter of Intent
II. Memorandum of Economic and Financial Policies
III. Amendments to the Technical Memorandum of Understanding
Executive Summary
Background
Armenia’s economy continues to perform strongly. Prudent fiscal and monetary policies and ongoing structural reforms have contributed to double-digit growth in a low inflation environment; a continued reduction in poverty; and a notable improvement in tax performance. The PRGF-supported program is on track.
Focus of discussions
Policy discussions centered around the appropriate monetary, exchange rate, and fiscal policy mix to maintain macroeconomic stability in the context of sizable foreign exchange inflows and on measures needed over the medium term to sustain and broaden economic growth.
Main policy recommendations
The cautious monetary policy stance in 2006 is appropriate. Inflationary pressures have increased owing to large foreign exchange inflows and supply shocks. 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, a floating exchange rate regime is essential.
The 2006 and 2007 budgets are compatible with PRSP objectives. Fiscal policy rightly emphasizes improving revenue performance and increasing expenditures for infrastructure and social services. It is important to increase tax buoyancy without resorting to ad hoc discretionary measures to increase collection.
The focus of fiscal reforms in 2006–07 should continue to be on reducing tax privileges and loopholes as well as strengthening tax and customs administrations.
Financial sector reforms should concentrate on improving corporate governance, strengthening regulation and supervision, and deepening financial intermediation, including the development of the nonbank financial sector. The implementation of these reforms, together with the envisaged entry of foreign banks, should increase competition and contribute to the narrowing of interest rate spreads.
Risks
The program’s prospects remain very good, but there are risks. The appreciation of the dram has raised serious concerns in the country, and inflationary pressures have increased. Effective policy coordination between the monetary and fiscal authorities is needed to maintain macroeconomic stability. A prudent fiscal policy is required in the run-up to next year’s parliamentary elections.
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Public Information Notice (PIN) No. 06/138
FOR IMMEDIATE RELEASE
December 7, 2006
International Monetary Fund
700 19th Street, NW
Washington, D. C. 20431 USA
On November 22, 2006, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with the Republic of Armenia.1
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Press Release No. 06/263
FOR IMMEDIATE RELEASE
November 22, 2006
International Monetary Fund
Washington, D.C. 20431 USA
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November 22, 2006
