Republic of Armenia: Second Review Under the Stand-By Arrangement, Request for Waiver of Nonobservance of Performance Criterion, Modification of Performance Criteria, and Rephasing of Purchases Informational Annex

This paper discusses key findings of the Second Review Under the Stand-By Arrangement (SBA) for Armenia. The authorities met all quantitative performance criteria for end-June and end-September, with the exception of the end-September fiscal balance. All structural benchmarks for end-June and end-September were also implemented. The authorities request a waiver of nonobservance for the end-September fiscal balance performance criterion given the minor and temporary nature of the deviation. IMF staff supports this request, as well as the authorities’ request for completing this review.


This paper discusses key findings of the Second Review Under the Stand-By Arrangement (SBA) for Armenia. The authorities met all quantitative performance criteria for end-June and end-September, with the exception of the end-September fiscal balance. All structural benchmarks for end-June and end-September were also implemented. The authorities request a waiver of nonobservance for the end-September fiscal balance performance criterion given the minor and temporary nature of the deviation. IMF staff supports this request, as well as the authorities’ request for completing this review.

Annex I. Armenia: Relations with the Fund

(As of September 30, 2009)

I. Membership Status: Joined 05/28/1992; Article VIII

II. General Resources Account:

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III. SDR Department:

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IV. Outstanding Purchases and Loans:

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V. Latest Financial Arrangements:

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VI. Projected Payments to Fund1/

(SDR Million; based on existing use of resources and present holdings of SDRs)

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When a member has overdue financial obligations outstanding for more than three months, the amount of such arrears will be shown in this section.

VII. Safeguards Assessment

Under the Fund’s Safeguards Assessments policy, an update safeguards assessment of the Central Bank of Armenia (CBA) with respect to the PRGF approved on November 18, 2008, later replaced with the SBA approved on March 6, 2009 (and amended on June 22, 2009) was completed on May 4, 2009. The assessment found that the CBA’s safeguards framework has been strengthened since the 2005 assessment in a number of areas, but some vulnerabilities remain. The CBA’s governance structure remains to be modernized to allow for more independent oversight, and the CBA could further strengthen its internal audit function. A longer-term appointment of the external auditors would also improve audit efficiency and effectiveness.

VIII. Exchange Rate Arrangement

(a) The de jure arrangement is “free floating.” The de facto arrangement was reclassified to “floating” from a “stabilized arrangement” effective March 3, 2009. The official exchange rate is quoted daily as a weighted average of the buying and selling rates in the foreign exchange market.

(b) Armenia maintains no exchange restrictions on the making of payments and transfers for current international transactions except for exchange restrictions maintained for security reasons, and notified to the Fund pursuant to Executive Board Decision No. 144-(52/51).

IX. Article IV Consultations

The 2008 Article IV consultation with Armenia was concluded on November 17, 2008. Armenia is subject to a 24-month consultation cycle.

X. FSAP Participation and ROSCs

A joint World Bank-International Monetary Fund mission assessed Armenia’s financial sector as part of the Financial Sector Assessment Program (FSAP) update during February 16–March 4, 2005. The Financial Sector Stability Assessment (FSSA) report was discussed by the Executive Board on May 25, 2005.

ROSC Modules

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XI. Resident Representatives

Ms. Nienke Oomes, since August 2006.

XII. Technical Assistance

The following table summarizes the Fund’s technical assistance to Armenia since 2002.

Armenia: Technical Assistance from the Fund, 2002–09

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Armenia II. Armenia: World Bank and IMF Collaboration—JMAP Implementation

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Annex III. Armenia: Relations with the European Bank for Reconstruction and Development (EBRD)

(As of end-September 2009)

1. As of end September 2009, the EBRD approved 71 projects in the power, transport, agribusiness, municipal and infrastructure, general industries, property, telecommunications and financial sectors. Total commitments amounted to around EUR 341 million.

2. There are three sovereign projects. First, the EBRD approved a sovereign guaranteed loan of EUR 54.8 million for construction of the Hrazdan Unit 5 thermal power plant in March 1993, partly aimed at the eventual closure of Armenia’s nuclear plant in Medzamor. The government was contemplating the privatization of Hrazdan Unit 5 as the completion of this plant was constrained by limited budgetary resources. The EBRD had funded technical assistance for the Hrazdan privatization prospectus and followed the privatization process. The Hrazdan Thermal Power Complex was transferred to the Russian Federation in the context of the debt-for-equity deal. Second, in November 1994, the agreement on a EUR 21.8 million loan to build an air cargo terminal in Zvartnots airport was signed under a guarantee by the Armenian government. The airport was transferred to private management in 2002 (according to concession agreement). The new management has prepared a master plan for the development of the airport, which is expected to generate further cargo traffic for the cargo terminal. Third, the EBRD approved a 7 million EUR loan to the State Committee for Water Systems, owner of the water and wastewater assets located in the small municipalities outside of Yerevan, in April 2007. The proceeds of this loan will be used to improve wastewater treatment in five municipalities located near Lake Sevan.

3. Most of the Bank’s projects in Armenia are in the private sector. Amongst other corporate clients the EBRD has provided a loan to the Yerevan Brandy Company owned by Pernod Ricard of France (EUR 16.5 million). In 2007 the Bank provided a USD 20 million loan to the private concessionaire of Zvartnots International Airport, Armenia’s principal gateway. The loan was a commercial facility with no sovereign support. Other private sector finance includes relatively smaller loans to private companies and equity participation in a number of companies in various sectors of the industry. In the banking sector, a first equity participation in the Commercial Bank of Greece-Armenia (EUR 1.1 million) was approved in late 1999 and a second equity participation in Armeconombank was approved in 2004. The Bank also acquired an equity stake in an Armenian non-bank financial intermediary, CIRCO, an insurance subsidiary of Cascade Capital Holding. A Multi-Bank Framework Facility of EUR 10 million, aimed at providing medium to long term funds to Armenian banks was activated in early 2000. In 2006 the Armenian Multi bank Framework Facility II in the amount of USD 40 million was approved, expanding the scope of eligible projects to equity and non-bank financial institutions financing. Subsequently, due to successful utilization of the facility, it was extended by another USD 80 million. The EBRD expanded its relationship with the partner banks in Armenia from four to ten. Six banks were provided with new credit facilities under the MBFF, including through historic (for Armenia) commercially-syndicated loans to ACBA Credit Agricole Bank and Armeconombank. The Bank acquired new equity stakes in three banks including those with foreign strategic co-investors (ProCredit and Byblos bank Armenia) and Ararat Bank. One institution (Armeconombank) was provided with a mortgage facility, and the first leasing facility in Armenia was signed with ACBA Leasing. Co-financing facility with local banks was also extended through three MCFF facilities with eleven MCFF sub-loans. By means of MCFF the Bank has entered such new sectors as healthcare and telecom, in addition to significantly expanding its portfolio of agribusiness loans. A Trade Facilitation Program with the purpose to facilitate access of Armenian banks to trade financing was also made available to five Armenian banks. In April 2009, the EBRD signed a EUR 42 mln loan agreement with Electric Networks of Armenia to upgrade and modernize the obsolete low-voltage infrastructure and improve energy efficiency. Again in 2009, the EBRD provided an additional EUR 3.1 million to ACBA Leasing, EUR 4.2 million to Elite Holding for the construction of a mixed-purpose building and EUR 0.2 million to a private TV station under MCFF with Armeconombank.

4. The EBRD has launched the Turn Around Management (TAM) and Business Advisory Service programs in Armenia in 2003, originally funded by the EU-Tacis program but now funded from the ETC Fund, to support micro, small, and medium-sized enterprises. Since 2003 BAS has completed 581 projects in the amount of € 2.2 million, while TAM delivered 17 projects.

5. Supporting development of renewable energy was another core activity of the Bank. To that end, the EBRD joined forces with the WB, USAID, and Cascade Credit (a financing arm of the Armenian-American Cafesdjian Foundation) to launch the Armenian Renewable Energy Programme (AREP). The Bank’s participation took the form of a loan to Cascade Credit. The Bank also continued to finance renewable energy projects on its own through Direct Lending Facility, with two such projects signed. In addition to renewable energy, the Bank returned to the mainstream segment of the sector, seeking to support post-privatisation development of the sector with a loan to the Armenian privately-owned power distribution company.

6. Projects identified by the Bank for future development are well-diversified across sectors, and includes several relatively large transactions. Additional business opportunities are offered by the country’s infrastructure sector, including projects in the public sector (municipal and sovereign). In this respect, the EBRD is considering financing the phase 2 in the development of Yerevan international airport and exploring opportunities in water, sanitation and solid waste treatment. The Bank is about to launch a USD 25 million program to finance projects for industrial energy efficiency and renewable energy through local banks.

7. The EBRD’s current country strategy was approved in April 2009. The key priorities of the EBRD for the coming years are: (i) financial sector; (ii) enterprise sector, particularly SME and micro-enterprises financing through credit lines to Armenian banks or direct loans and equity investments, (iii) infrastructure investments in the development of alternative energy sources and municipal infrastructure projects and (iv) policy dialogue with the government, other multilateral and bilateral donors and other stakeholders.

Annex IV. Armenia: Statistical Issues

1. Data provision has some shortcomings, but is broadly adequate for surveillance. Further improvements in real, fiscal, and external sector statistics would be desirable in order to facilitate enhanced design and monitoring of economic policies. The overall quality, timeliness, and coverage of macroeconomic statistics have improved significantly over the past few years. The Fund has substantially facilitated this process through technical assistance from the Statistics Department, the Fiscal Affairs Department, and the Monetary and Capital Markets Department. On November 7, 2003 Armenia subscribed to the Special Data Dissemination Standard (SDDS). The April 2008 data ROSC mission prepared a detailed evaluation of the quality of the macroeconomic statistics.

Real sector statistics

2. The National Statistics Service (NSS) has made significant changes to the national accounts methodology to bring it in line with best international practices although some shortcomings on data sources and methods remain. Progress has been made in developing estimates of monthly and (constant price) quarterly GDP that are now published. Basic data collection procedures have also partially improved. The national accounts statistics are compiled following the conceptual frameworks of the 1993 SNA and ESA 95. The classification of value added by economic activity follows the ESA 95 directions and data are published grouped accordingly to the A3, A6, A17 and A60 codes of the EU nomenclature of economic activities.

3. Annual and quarterly GDP estimates are compiled at current prices, at comparable previous year’s prices, and at average annual prices of the base year (1998) for the series up to the year 2006. Since 2007, GDP at constant prices is computed at average annual 2005 prices. The February 2009 ROSC mission found that compilation techniques for the estimates of GDP by production at constant prices are sound, however there is still need for improvements in the corresponding estimates of GDP by expenditure, particularly regarding the volume measures of imports and exports. The mission also found that government expenditures and some transactions with the rest of the world are recorded on a cash basis rather than the required accrual method. Moreover, quarterly data are still collected on a cumulative basis, which are likely to undermine their accuracy. Additionally, statistical techniques need improvements regarding the estimates of the imputed rental services for owner-occupied dwellings, and consumption of fixed assets.

4. The CPI covers 11 large population centers and the capital city. Since January 2006 the CPI has been computed using 2005 weights. Concepts and definitions used in the compilation of the CPI are broadly in line with international standards; source data and compilation techniques are generally adequate. The NSS compiles a ten-day and a monthly CPI. The ten-day index and the monthly index are disseminated jointly. The February 2009 ROSC mission recommended the development of an approach to include household expenditure on owner-occupied dwellings in the CPI calculations.

Government finance statistics

5. The budget execution reporting system compiles data on a cash basis supplemented with monthly reports on arrears and quarterly reports on receivables and payables. Daily revenue and cash expenditure data for the central government are available with a lag of one to two days. The Ministry of Finance (MoF) is undertaking a comprehensive reform of the treasury system, including the introduction of an internal auditing system in line ministries and their budgetary institutions. A single treasury account (TSA) was introduced in 1996, and all bank accounts held by budgetary institutions were closed, except for Project Implementation Units that are required by donors to operate with commercial banks’ accounts. Starting in 2002, some budgetary institutions have been converted into “noncommercial organizations” (NCOs). These units have been taken out of the treasury system and have their own bank accounts but report data on cash flows and balances to the MoF since 2003. The February 2009 ROSC report recommended including NCOs in the government finance statistics data published on national websites. These exceptions notwithstanding, all government receipts and payments are processed through the TSA, although there are still shortcomings on the timeliness and quality of data on the operations of local governments. Classification of government transactions by function and economic category are generally in line with the Manual on Government Finance Statistics 1986, and monthly data on central government operations are disseminated one month after the reporting period.

6. The budget presentation and the classification of items under the economic and functional classification of expenditures needs to be made more transparent; for instance, the data have been subject to frequent reclassifications, and wages for military personnel are reported in the broader category of “other” goods and services rather than as a wage item. The February 2009 ROSC report recommended using market value rather than face value for financial assets other than loans, and for non-financial assets. The reconciliation of central government with general government operations is done by the NSS in cooperation with the MoF.

7. Since 2008, government finance statistics meet the classification requirements of the Government Finance Statistics Manual 2001 (GFSM 2001) for central government. The plans for improvement of the MoF envisage further significant progress within the next two years in implementing the GFSM 2001 classification for local government in 2009 and in accrual recording for all units of general government in 2010.

Monetary and financial statistics

8. Monetary and financial statistics are provided on a timely basis. Daily data on the accounts of the Central Bank of Armenia (CBA) are provided daily with a one-day lag, while monthly data on the monetary survey are provided with three-week lag (and preliminary weekly data with a one-week lag). The balance sheets of the CBA and of the deposit money banks follow IAS methodology. Monthly interest rate data are provided with an one-week lag.

9. Responding to a STA request, the CBA has compiled and submitted a complete set of monetary data beginning from December 2001 using Standardized Report Forms (SRF). STA validated the resulting monetary aggregates and the data have been published since the December 2006 issue of IFS Supplement and are used to update IFS. An Integrated Monetary Database (IMD) has also been established by STA to share the SRF data with MCD.

External sector statistics

10. The coverage of external sector data has improved in recent years. Trade statistics are provided on a timely basis, and trade data by origin, destination, and commodity are generally available within a month. Price data for exports and imports are less readily available. Quarterly balance of payments statistics are generally available with a three-month lag. However, on remittances, which account for a significant part of the inflows, there are considerable discrepancies among available source data. Survey data are considerably lower than data obtained through the money transfer system. The NSS and CBA are working on establishing a compilation program that would enable proper measurement of remittances. The absence of a comprehensive, continuously updated business register hampers the coverage of transactions and institutional units; in particular, the coverage of the financial account items for the private nonbank sector.

11. Quarterly data on international investment position are published by the NSS within one quarter after the reference period, and the annual data within two quarters; and are also provided for publication in IFS.

Armenia: Table of Common Indicators Required for Surveillance

(As of October 6, 2009)

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Includes reserve assets pledged or otherwise encumbered as well as net derivative positions.

Both market-based and officially determined, including discount rates, money market rates, rates on treasury bills, notes and bonds.

Foreign, domestic bank, and domestic nonbank financing.

The general government consists of the central government (budgetary funds, extra budgetary funds, and social security funds) and state and local governments.

Including currency and maturity composition.

Includes external gross financial asset and liability positions vis-à-vis nonresidents.

Daily (D), Weekly (W), Monthly (M), Quarterly (Q), Annually (A); Irregular (I); and Not Available (NA).

Republic of Armenia: Second Review Under the Stand-By Arrangement, Request for Waiver of Nonobservance of Performance Criterion, Modification of Performance Criteria, and Rephasing of Purchases: Staff Report; Press Release on the Executive Board Discussion; and Statement by the Executive Director and Advisor for the Republic of Armenia.
Author: International Monetary Fund