Republic of Armenia: Request for Three-Year Arrangements under the Extended Fund Facility and the Extended Credit Facility, and Cancellation of the Stand-By Arrangement Informational Annex

Economic activity appears to be recovering, underpinned by a strong policy response. Fiscal consolidation will be crucial to maintain debt sustainability and support the envisaged external adjustment over the medium term. Sound monetary and exchange rate policies are essential to maintain macroeconomic stability. Improvements in tax administration are needed to achieve the program’s goals of sound public finances and stronger economic growth. Broader efforts to strengthen the business environment are crucial to boost medium-term growth prospects. Risks to the program are manageable.


Economic activity appears to be recovering, underpinned by a strong policy response. Fiscal consolidation will be crucial to maintain debt sustainability and support the envisaged external adjustment over the medium term. Sound monetary and exchange rate policies are essential to maintain macroeconomic stability. Improvements in tax administration are needed to achieve the program’s goals of sound public finances and stronger economic growth. Broader efforts to strengthen the business environment are crucial to boost medium-term growth prospects. Risks to the program are manageable.

Annex I. Armenia: Relations with the Fund

(As of May 31, 2010)

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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Formerly PRGF.

VI. Projected Payments to Fund 2/

(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 17, 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. With the approval of a new program, an updated safeguards assessment will be required.

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.

XI. Resident Representatives

Mr. Guillermo Tolosa, since January 2010.

XII. Technical Assistance

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

Armenia: Technical Assistance from the Fund, 2002–10

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Annex II. Armenia: World Bank and Imf Collaboration—JMAP Implementation (As of end-May, 2010)

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

(As of end-May 2010)

1. As of end of May 2010, the EBRD had approved 83 projects in the power, transport, agribusiness, municipal and infrastructure, general industries, property, telecommunications and financial sectors. Total commitments amounted to around EUR 427 million.

2. There are four 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. In April 2007, the EBRD approved a EUR 7 million loan to the State Committee for Water Systems, owner of the water and wastewater assets located in the small municipalities outside of Yerevan. The proceeds of this loan will be used to improve wastewater treatment in five municipalities located near Lake Sevan. In March 2010, EBRD has signed a EUR 5.0 million sovereign loan with Yerevan Metro Company. This project will provide emergency investments in the Yerevan Metro, covering immediate rehabilitation needs including safety upgrades and energy efficiency. The investment is part of the plan to improve and reform public transport services in the capital of Armenia.

3. Most of the Bank’s projects (96 percent) in Armenia are in the private sector. The Bank has committed EUR 85.2 million to Armenia in 2009 through 11 transactions, all in the private sector. In addition to the loan to Electric Networks of Armenia (please see section 5 below), the Bank approved an additional loan to Zvartnots International Airport in the amount of EUR 29.6 million (to be supplemented by investments from ADB and DEG). This project follows on from the successful completion, in May 2007, of the first phase of the Passenger Terminal, for which the Bank provided a EUR 14.8 million loan together with DEG (USD 10 million). This project involves the construction and purchase of equipment for the second phase of the Passenger Terminal complex at Zvartnots International Airport, Armenia and will facilitate the completion of Airport Terminal development reallocating all operations (arrivals and departures) from the old Airport building. 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.

During January-May 2010, EBRD has approved eight projects with total commitment of EUR 18.0 million. The portfolio for 2010 comprises five projects in the financial institutions sector, two Agribusiness and one sovereign project with Yerevan Metro Company. It is worth mentioning that two loans to financial institutions are in local currency.

4. In the banking sector, a first equity participation in the Commercial Bank of Greece–Armenia (EUR 1.1 million) was approved in late 1999. Now there are four local banks where EBRD participate in equity: Armeconombank, Byblos Bank Armenia, Ararat bank and Procredit Bank. The Bank also acquired an equity stake in an Armenian non-bank financial intermediary–Cascade Insurance and Reinsurance Company, an insurance subsidiary of Cascade Capital Holding.

The Armenia Multi-Bank Framework Facility II (AMBFF II), established to provide loans and equity to commercial banks and leasing companies in Armenia, was originally approved by the Board on 8 March 2006 for an amount of $40 million, and then the facility was extended for $80 million on 9 November 2007. In late 2009, the EBRD has approved a further $100 million extension to AMBFF II (AMBFF II extension II) in order to support increased financial intermediation and the development of the financial sector in Armenia, to contribute to economic development by providing medium to long-term funding to selected Armenian financial intermediaries. The Facility will seek to develop new products for financial institutions, including provision of local currency loans.

The EBRD expanded its relationship with the partner banks in Armenia from four to twelve (taking into account the fact that two EBRD clients-America Bank and Cascade Bank will merge later in 2010). Nine banks were provided with new credit facilities under the AMBFF. In 2010 EBRD has extended its FI portfolio under Armenian Multi Bank Framework Facility by three more banks (Byblos Bank, ArmSwissBank and Ameria Bank). One institution (Armeconombank) was provided with a mortgage facility, and the first leasing facility in Armenia was signed with ACBA Leasing in 2008 for the amount of EUR 5.9 million. Cofinancing facility with six local banks was also extended resulting in twelve sub-loans to Armenian corporates. By means of co-financing lines 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 nine Armenian banks.

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 Cafesdjian Foundation) to launch the Armenian Renewable Energy Program (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-privatization development of the sector with a loan to the Armenian privately owned power distribution company. In April 2009, the EBRD signed a EUR 42 million loan with Electric Networks of Armenia to upgrade and modernize the obsolete low-voltage infrastructure and improve energy efficiency.

6. 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 647 projects in the amount of EUR 2.4 million, while TAM delivered 20 projects.

7. Projects identified by the Bank for future development are well diversified across sectors, and include several relatively large transactions. Additional business opportunities are offered by the country’s infrastructure sector, including projects in the public sector (mainly municipal). In this respect, the EBRD is exploring opportunities in public transportation, 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.

8. The EBRD’s current country strategy was approved in May 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: Relations with the Asian Development Bank (ADB)

(As of end-February 2010)

1. As of end-February 2010, ADB had approved 5 projects in the transport, municipal infrastructure, and general budget support sectors. Total commitments amounted to about USD 224 million.

2. All approved projects are sovereign. The first project is Rural Roads Rehabilitation Sector Loan (USD 30.6 million) for rehabilitation of 220 km rural roads approved on November 15, 2007. The second one is Water Supply and Sanitation Sector Loan (USD 36 million) for repair and replacement of the exiting water supply infrastructure in small towns and neighbouring villages approved on December 18, 2007. The third project is Supplementary Loan (USD 17.3 million) to the existing Rural Roads Rehabilitation Project approved on November 18, 2008. The purpose was to finance the increase of the project cost resulting from construction materials price increase, domestic inflation, and appreciation of the Armenian dram. The fourth one is the Crisis Recovery Support Program Loan (USD 80 million) approved on July 15, 2009. This was a general budget support loan to protect social expenditures. And the last one is the first tranche (USD 60 million) loan under the North-South Road Corridor Investment Project approved on October 12, 2009. This loan is for rehabilitation of the 18.8 km of the four-lane Yerevan-Ashtarak highway. All approved loans are from the ADB concessional window under the Asian Development Fund (ADF). ADB has not yet provided loans to Armenia from its nonconcessional window under the Ordinary Capital Resources (OCR).

3. In addition to loan projects, the ADB is also involved in non-lending operations, mostly the Advisory Technical Assistance. Those are mostly research-oriented: Transport Sector Development Strategy for 2009–19 (transport sector road map for 10 years); Yerevan Sustainable Urban Transport Project (urban transport master plan and investment plan for Yerevan); Institutional Modernization to Improve the Business Environment (assisting the government with the introduction of online business registry system). Some of the advisory technical assistance might lead to loan projects, with the Yerevan Sustainable Urban Transport Project being one of the examples where the concept of the project resulted in an idea of the Yerevan city west by-pass road and provide better access to the Yerevan metro.

4. To increase the efficiency and long-term cooperation, the ADB offered a new instrument, namely funding of a project under the Multi Finance Facility (MFF). This facility allows approving a long-term sector assistance program to be disbursed in tranches. Under the MFF, the ADB has approved USD 500 million for the North-South Road Corridor Investment Project. The funds will be available for 7 years and country would request them in tranches, with the first 60 million tranche already approved. The Yerevan Sustainable Urban Transport project would be prepared as an MFF type with the indicative amount of up to USD 300 million.

5. The ADB’s economic report and the interim operational strategy for 2006–09 for Armenia were approved in 2006. The Country Operational Business Plan for 2008–10 was approved in 2007. In third quarter of 2010, the Bank is planning to prepare the Armenia Country Partnership Strategy for 5 years. The key priorities for the coming years are: (i) transport infrastructure; (ii) urban development; (iii) private sector, particularly banking, finances, renewable energy, and transport; and (iv) policy dialogue with the government, other multilateral and bilateral donors, and other stakeholders on country development prospective and reforms.

Annex V. Armenia: Statistical Issues

1. Data provision has 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. A multi-topic statistics mission visited Yerevan in February 2010 to review progress with implementation of past recommendations and follow up on the outstanding issues in national accounts, balance of payments, and monetary and financial statistics.

Real sector statistics

2. Despite the efforts to enhance national accounts statistics compilation, the quality of national accounts data requires substantial improvements. With respect to the statistical techniques used to compile gross domestic product (GDP), the two main problems are the coverage of informal activities and the derivation of volume measures. Basic data collection procedures have also partially improved, but substantial shortcomings remain in some areas, notably construction. The main issues arise from the monthly and quarterly business statistics surveys that still collect data on a cumulative rather than on a discrete basis. In construction, capturing informal activities needs to be improved and a new construction output price index, based on a sound methodology, needs to be developed to improve estimates of the construction output volume measures.

3. 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. The NSS is developing a plan for implementing the System of National Accounts 2008 (2008 SNA). 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. Progress has been made in developing estimates of quarterly GDP at constant prices that are now published. The February 2008 ROSC mission found that compilation techniques for the estimates of GDP by production at constant prices were sound, however there was 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 were recorded on a cash basis rather than the required accrual method. Moreover, quarterly data were still collected on a cumulative basis, which 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. In 2009, the Armenian authorities decided to transfer the responsibility for compiling the balance of payments, international investment position (IIP), and external debt statistics from the NSS to the CBA. The NSS and CBA agreed on a target date for transferring the responsibility beginning with the data for the first quarter of 2011. The February 2010 mission agreed with the authorities on an action plan aimed to ensure a smooth inter institutional transfer of the responsibility as well as the consistency and continuity in the production of the external sector statistics.

11. 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.

12. 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 June 11, 2010)

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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: Request for Three-Year Arrangement Under the Extended Fund Facility and Extended Credit Facility, and Cancellation of the Stand-By Arrangement: Staff Report; Press Release on the Executive Board Discussion; and Statement by the Executive Director for the Republic of Armenia.
Author: International Monetary Fund