Statement by the IMF Staff Representative on the Republic of Armenia

This paper discusses Armenia’s request for a Stand-By Arrangement (SBA) with exceptional access of 400 percent of quota. Given the urgency of the situation, the request is being considered under the Emergency Financing Mechanism. The new program aims to achieve the necessary external adjustment, restore confidence in the domestic currency and the banking sector, and protect the poor. The authorities have also committed to a set of policies in the exchange rate, monetary and financial, and fiscal areas as well as on maintaining its ongoing structural reform program.

Abstract

This paper discusses Armenia’s request for a Stand-By Arrangement (SBA) with exceptional access of 400 percent of quota. Given the urgency of the situation, the request is being considered under the Emergency Financing Mechanism. The new program aims to achieve the necessary external adjustment, restore confidence in the domestic currency and the banking sector, and protect the poor. The authorities have also committed to a set of policies in the exchange rate, monetary and financial, and fiscal areas as well as on maintaining its ongoing structural reform program.

1. This statement reports on economic and policy developments in Armenia in the last three days. These developments do not change the thrust of the staff appraisal.

2. On March 3, the Central Bank of Armenia (CBA) announced a return to the floating exchange rate regime, and noted that they expected the rate to depreciate from 305 dram per US dollar to around 360–380 dram per US dollar. They also announced an increase in the policy interest rate of 100 basis points. This was accompanied by a coordinated communication campaign, including statements from the Fund and the World Bank.

3. Since March 3, the foreign exchange market has been generally calm. The rate quickly jumped to around 372 dram per US dollar, a depreciation of about 22 percent, where it remained for two days. There was limited intervention from the CBA. On March 5, dollar sales picked up, and the rate appreciated to 363 dram per US dollar, with the central bank buying dollars. Bid/ask spreads of the banks were initially very wide, but have since narrowed.

4. The CBA has indicated that most banks had a limited net open position just prior to the devaluation, so that bank losses on foreign currency exposures have to date been relatively small. There are no reports of banks being in difficulties, and thus far, there is no evidence of significant deposit outflows from the banking system.

5. On March 3, there was initially some erratic pricing behavior by retailers, and hoarding by consumers. Some stores closed to reset prices, and announced very sharp increases in retail prices, beyond what pass-through from the exchange rate would imply. Since then, and following public statements by the authorities on price hikes by retail outlets, the situation has settled and most prices—with the exception of petroleum products—have returned close to earlier levels.

6. On a separate issue, the authorities recently withdrew the proposed legislation to increase customs tariffs, and they have indicated that they do not intend to reintroduce it for the foreseeable future. The depreciation of the exchange rate has removed the competitiveness reasons for the tariff increase, and in the current context, the authorities are reluctant to add further pressure to import prices. They are examining the potential revenue impact of not introducing this measure, and are considering other measures that would enhance revenue.

Republic of Armenia: Request for Stand-By Arrangement-Staff Report; Staff Supplements and Statement; Press Release on the Executive Board Discussion; and Statement by the Executive Director for the Republic of Armenia.
Author: International Monetary Fund