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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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Price: $18.00 a copy

International Monetary Fund

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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.


  • 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


  • 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.


  • 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


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


November 22, 2006

International Monetary Fund

Washington, D.C. 20431 USA

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November 22, 2006