This 2008 Article IV Consultation highlights that Armenia’s recent economic performance has remained strong, and the economy is poised for another year of double-digit growth. Rising inflation, a widening current account deficit, and rapid credit growth have raised concerns about overheating. Executive Directors have commended the authorities for the successful implementation of macroeconomic policies under the Poverty Reduction and Growth Facility (PRGF)-supported program that expired in May 2008. Directors have also welcomed the authorities’ intention to withdraw fiscal stimulus during 2008–09 to address current imbalances.

Abstract

This 2008 Article IV Consultation highlights that Armenia’s recent economic performance has remained strong, and the economy is poised for another year of double-digit growth. Rising inflation, a widening current account deficit, and rapid credit growth have raised concerns about overheating. Executive Directors have commended the authorities for the successful implementation of macroeconomic policies under the Poverty Reduction and Growth Facility (PRGF)-supported program that expired in May 2008. Directors have also welcomed the authorities’ intention to withdraw fiscal stimulus during 2008–09 to address current imbalances.

1. This statement reports on economic and policy developments in Armenia since the staff report was issued. These developments do not change the thrust of the staff appraisal.

2. Recent economic data are consistent with staff projections for 2008.

  • Year-on-year headline inflation decreased as expected, from 11.3 percent in September to 8.6 percent in October, mainly due to a decline in food inflation.

  • Net international reserves were lower than projected in September 2008, owing to foreign exchange intervention by the CBA in support of the dram. The end-year target is still within reach, as large-scale FDI inflows are expected in the next several weeks.

  • Preliminary third-quarter data on budget execution show a lower-than-projected deficit through September 2008. Tax revenues were slightly higher than projected, whereas expenditures were on target.

3. The short-term impact of the global financial crisis is expected to be contained, given Armenia’s limited integration with the international financial system. But longer-term risks to growth have increased with the prospects of a global recession. In the best-case scenario, the global slowdown could help unwind the accumulated macroeconomic imbalances and dampen the pre-crisis risk of overheating. But a hard landing cannot be ruled out in case of a drastic decline in remittances and FDI, given Armenia’s strong dependence on these inflows.

4. In reaction to the worsened international outlook, the CBA has kept its policy rate unchanged since September, putting on hold its policy of gradual monetary tightening. In addition, the authorities are temporarily supporting the exchange rate to reduce the risk of redollarization and currency destabilization. Staff has advised the authorities to allow two-way exchange rate flexibility to avoid one-way bets and a reduction of international reserves. Given current policies and the stable financial sector, a moderate depreciation is unlikely to cause a loss of confidence in the dram. But it would help improve external competitiveness and reduce the large current account deficit.

Republic of Armenia: 2008 Article IV Consultation and Request for a Three-Year Arrangement Under the Poverty Reduction and Growth Facility: Staff Report; Staff Supplement; Staff Statement; Public Information Notice and Press Release on the Executive Board Discussion; and Statement by the Executive Director for the Republic of Armenia.
Author: International Monetary Fund