Republic of Armenia
Second Reviews Under the Extended Fund Facility and Extended Credit Facility, and Request for Modification of Performance Criteria: Staff Report; Staff Supplement; Press Release on the Executive Board Discussion; and Statement by the Executive Director for the Republic of Armenia.
Author:
International Monetary Fund
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Publication Date:
13 Jul 2011
eISBN:
9781455299768
Language:
English
Keywords:
ISCR; CR; IMF's executive board; SDR; authorities project inflation; Extended Credit Facility arrangement; GDP; debt service; food price inflation; inflation pressure; excess reserves; dollar lending; Inflation; Credit; Global
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In this study, Armenia’s financial challenges observed in the global crisis are discussed, and also the development processes initiated by Armenia are analyzed. Short- and medium-term outlooks, and risks are also outlined. Fiscal, monetary, and banking sector policies play important roles in the development of the financial system. Structural reforms are accelerated for addressing imbalances, sustainable growth, and poverty reduction. Sound macroeconomic policies and structural reforms will help to ensure rise in productivity, exports, and inflation pickup and reduce the foreign exchange risk.

Abstract

In this study, Armenia’s financial challenges observed in the global crisis are discussed, and also the development processes initiated by Armenia are analyzed. Short- and medium-term outlooks, and risks are also outlined. Fiscal, monetary, and banking sector policies play important roles in the development of the financial system. Structural reforms are accelerated for addressing imbalances, sustainable growth, and poverty reduction. Sound macroeconomic policies and structural reforms will help to ensure rise in productivity, exports, and inflation pickup and reduce the foreign exchange risk.

I. Economic Context

A. Background and Program Implementation

1. Having emerged from the global crisis, Armenia faces several challenges. These include sizable external imbalances, low fiscal revenues, higher public debt, a surge of supply-driven inflation, high dollarization, and increased poverty.

2. The political landscape remains broadly unchanged. Elections for parliament and the presidency are scheduled in 2012 and 2013. The last presidential elections, in 2008, were followed by demonstrations that turned violent. Protests resumed in February, but the authorities and the opposition have pursued dialogue and confidence-building measures in recent weeks. Risks remain from Nagorny Karabakh.

3. Program performance has been strong. All continuous and periodic performance criteria for end-December 2010 were met, and indicative targets and structural benchmarks for end-March 2011 were implemented.

B. Recent Developments

4. The recovery has been sluggish and uneven, and inflation has picked up. The economy grew by 2.1 percent in 2010, with slow growth in construction and a sharp drop in agriculture. Mining, industry, trade, and transport were growth drivers. With domestic constraints and high global prices, food price inflation surged to 17 percent in March, bringing overall inflation to 11½ percent.1 Nonfood inflation reached nearly 7 percent. Data for April and May indicate a moderation of pressures.

5. The external current account deficit declined slightly in 2010, and capital inflows resumed. Exports increased by almost 50 percent, buoyed by high metals prices, and remittances picked up with the recovery in Russia. However, imports also grew strongly. Private capital inflows resumed, as banks accessed external deposits and credit lines to support domestic lending, largely in foreign currency. Foreign investment declined, as large projects were completed.

6. Appreciation pressures eased in 2011, but the dram remains overvalued.2 Supported by private inflows, the end-2010 reserves target was exceeded by a large margin.

7. Fiscal consolidation has continued, despite low revenue collections. Tax revenues remained at 16.4 percent of GDP. Profits taxes were lower, and VAT and customs duties declined in the second half of 2010. Still, the deficit declined by nearly 3 percentage points of GDP, as the authorities restrained spending, particularly domestically-financed investment. The government met its social spending targets, and an increase in family benefits and lump-sum aid is planned for 2011. These benefits have helped ensure that poverty has not risen further with the crisis (Appendix I).

8. Targeted measures have been taken in response to the food and energy price shocks. The government introduced a gas subsidy targeted to the poor, and to assist the hard-hit agriculture sector, an interest rate subsidy, distribution of seeds, and infrastructure improvements. The budgetary cost of these measures is well contained and has been financed by savings in other areas.

9. Concerned with possible second-round effects, the CBA tightened monetary policy. Beginning in February 2011, the CBA raised its policy rate by 125 basis points in three steps to 8.5 percent. The CBA has moved to mop up excess dram liquidity and bring interest rates more in line with its policy stance. It worked with the government to issue additional treasury bills for liquidity management. The CBA also stepped up public communications to explain the exogenous and temporary nature of the shock.

10. While credit has grown at a brisk pace, the banking sector remains sound. Foreign currency lending grew by 40 percent in 2010, and total credit by 27 percent (Box 1). Credit demand has remained strong across sectors and firm size in 2011. The rapid growth of foreign currency lending has increased vulnerabilities, although capital adequacy was over 22 percent at end-2010, with no banks below 12 percent. The ratio of nonperforming loans has declined to around 4 percent from a peak of 10 percent in mid-2009.

11. The authorities adopted an action plan in January to improve the business environment. This aims to improve Armenia’s “Doing Business” rankings including in trade, starting new businesses, permits and registration, contract enforcement, investor protection, and closure and liquidation.

C. Short and Medium-Term Outlook and Risks

12. Growth is projected to accelerate in 2011, and inflation should moderate. Growth is projected at 4.6 percent, helped by a recovery in agriculture. Construction, an important pre-crisis growth driver, is likely to remain sluggish. Inflation pressures appear to be moderating, as food inflation declined in April. This is likely to continue as the harvest season begins. Inflation should return to the target range of 4 ± 1.5 percent in early 2012. Growth is likely to remain around 4−4½ percent during 2012−13. Key risks include continuing weaknesses in agriculture and even stronger global food and fuel price pressures.

13. The external current account deficit is projected to decline from 14 to 11½ percent of GDP. High prices will boost food and fuel imports, but mining exports and remittances are expected to increase further. Private inflows are likely to moderate, but FDI should begin to rebound from low levels in 2010. Official inflows are likely to be higher reflecting additional and delayed disbursements. Small external financing gaps projected for 2012–13 could widen if further food and fuel price pressures emerge, or expected remittance and FDI flows do not materialize. Spillovers from renewed financial uncertainty in Southern Europe or sustained difficulties in the Middle East appear unlikely, in the absence of adverse domestic or regional developments.

Armenia: Foreign Currency Lending

Foreign currency (FX) lending has risen fast. Financing sources have been mainly in FX, and deposits remain highly dollarized. As the outlook has improved and the currency denomination of required reserves has changed, banks have drawn down excess FX reserves for lending. The extended period of relative stability of the dram-dollar exchange rate since last summer may also have provided further incentives for borrowing in FX.

Factors that have supported FX lending are expected to diminish, while deposit dollarization is declining. Excess reserves have been reduced, and CBA measures have contributed to an initial dedollarization of deposits. Greater exchange rate flexibility would reduce incentives to borrow in FX.

uA01fig01

FX Excess Reserves

(in million USD)

Citation: IMF Staff Country Reports 2011, 178; 10.5089/9781455299768.002.A001

Sources: Armenian authorities; and Fund staff estimates.
uA01fig02

Banks’ Foreign Liabilities, NonresidentDeposits and Dollarization

Citation: IMF Staff Country Reports 2011, 178; 10.5089/9781455299768.002.A001

14. The medium-term external outlook remains challenging. Barring a sharp increase in FDI, the current account will need to decline substantially as crisis support unwinds and given limited potential for private borrowing. High export prices and strong remittance flows may cushion the adjustment, but further structural reform and a return of the real exchange rate to its equilibrium level would be important to help limit risks.

15. Further fiscal consolidation is needed to support external adjustment, but this may be increasingly challenging given the election cycle. The 1-percentage point adjustment in 2011 reflects a further decline in capital spending, albeit to levels within precrisis norms. Tax revenues are cautiously projected to remain flat. The deficit is projected to decline to 2.4 percent of GDP in 2013 and stabilize at 2 percent of GDP thereafter, so that debt declines in percent of GDP. However, this stance may be challenging with elections in 2012–13.

II. Policy Discussions

16. Key objectives for 2011 are to support the recovery and alleviate poverty, while bringing down inflation. This requires: (i) continuing fiscal adjustment (maintaining priority investment spending and well-targeted social assistance); (ii) prudent monetary policy; (iii) exchange rate flexibility; and (iv) further structural reforms.

A. Fiscal Policy

17. Fiscal consolidation remains a top priority, with a focus on revenue measures.

  • The 2011 budget is in line with the deficit-reduction target. Staff observed that revenue weaknesses experienced in 2010 may persist, and the authorities pledged to manage expenditures cautiously to achieve the deficit targets.

  • Staff and the authorities agreed on the importance of deeper tax reforms, but implementation needs to be firmed up. Staff noted that spending has borne the burden of adjustment and stressed the need to make a decisive breakthrough on revenue reforms to enhance collections and equity (Box 2). The authorities agreed in principle on a number of reforms, including base broadening of the VAT and income taxes. However, they noted that near-term implementation is subject to capacity constraints, while politically-sensitive measures require consensus building. The authorities agreed that the erosion of excise taxes should be addressed and committed to other tax measures, including a reform strategy paper drawing on recent TA recommendations. Staff urged that the window for enacting far-reaching reforms before the election cycle be used.

  • While debt sustainability remains on firm footing, staff cautioned that fiscal slippage would increase vulnerability. Staff projections show public debt rising further in 2011 before declining to below 40 percent of GDP by 2014. However, relaxing the deficit path by just ½-1 percentage point of GDP would reverse this reduction. Prospects would be further undermined by a change in the concessionality of Armenia’s borrowing. Higher revenues would significantly ease the burden of consolidation and provide space for additional social and capital outlays.

Armenia: Tax Reforms

Critical tax collection gains remain elusive. Actions have been taken to develop audit manuals, cash register surveillance, improved large taxpayer auditing, and risk management in VAT refunds, and to pass legislation bringing several forms of presumptive taxation into the regular tax regime. However, the broad tax reform effort has so far fallen short of expectations, in terms of higher revenues. This reflects the need for continuing improvements in revenue administration, including coordination between the Finance Ministry (MoF) and the State Revenue Committee (SRC), and underlying tax policy weaknesses.

Important work remains ahead. In addition to new program benchmarks for 2011, the authorities should diversify revenue sources and raise collections from visible and less mobile bases (natural resources, property, consumption). Better taxing visible wealth (property, land) would also help address informality. Equity concerns should be addressed, including capital gains, interest income, and dividends, exemptions for agriculture and military pay, deductions for mortgage interest and tuition, and corporate tax incentives. A new fiscal regime for mining in line with best practices is also critical. As a key step, the authorities are strengthening information sharing between the MoF and SRC.

B. Monetary Policy and Banking Sector

18. Monetary policy remains geared to bringing inflation to low single digits and developing the financial system.

Armenia: Inflation Spillovers

Shocks to global food prices have a strong impact on nonfood inflation in Armenia. Staff estimates of the passthrough from food to nonfood inflation suggest that three months after a 1 percent food price shock, nonfood prices rise by 0.3 percent. This pattern was evident in early 2011, as nonfood inflation picked up in the wake of the global rise of food prices.

uA01fig03

Commodity Food Prices and Inflation

Citation: IMF Staff Country Reports 2011, 178; 10.5089/9781455299768.002.A001

Sources: Armenian authorities; and Fund staff estimates
uA01fig04

Food, Nonfood Inflation

Citation: IMF Staff Country Reports 2011, 178; 10.5089/9781455299768.002.A001

  • The CBA will maintain a tight monetary stance until inflation pressures subside. The central bank expects to continue raising the policy rate if needed and to increase reserve requirements on foreign liabilities. Staff noted that future actions should be forceful, if inflationary pressures do not ease (Box 3).

  • Staff urged the CBA to bring liquidity conditions in line with the announced policy stance and thereby strengthen the interest rate channel. The CBA agreed with staff recommendations to publish its liquidity forecasts to inform market participants.

  • The CBA is committed to exchange rate flexibility, but expressed concern on possible inflationary impacts given high passthrough. Staff stressed the role that flexibility plays in providing signals.

  • Staff and the CBA agreed on the need to safeguard reserves in light of possible shocks and medium-term debt service payments (Box 4). NIR targets for June and December were increased. Intervention may be necessary in light of the thin market, aiming to smooth volatility and rebuild reserves.

  • The authorities pledged to remain vigilant against banking sector risks associated with dollarization. The CBA raised capital and provisioning requirements on foreign currency loans in September and January, respectively. The CBA pledged to take further steps as needed.

  • The CBA is continuing efforts to strengthen crisis preparedness and banking system resilience. The central bank is improving its stress testing to better capture real-financial linkages and will take further crisis preparedness and contingency planning actions, including a review of commercial bank contingency plans, formulation of an internal crisis management framework, and a crisis simulation involving commercial banks. The upcoming FSAP Update and a review of the legal regime for bank resolution will help further shape stability policy.

Armenia: Reserve Adequacy

uA01fig05

Gross International Reserves as of end-2010

Citation: IMF Staff Country Reports 2011, 178; 10.5089/9781455299768.002.A001

By most standard measures, Armenia’s gross reserves are at comfortable levels. However, they are expected to decline over the medium term with the unwinding of external crisis support. High dollarization also constitutes a risk, along with concentration of exports in mining and remittances on Russia.

A negative shock to remittances equivalent to that of 2009 could reduce reserves to three months of imports in 2013. A combined shock to both remittances and exports of 2009 magnitudes could imply a fall to just two months. Given Armenia’s vulnerabilities, the current level of reserves appears not unreasonably high.

uA01fig06

Projected International Reserves

Citation: IMF Staff Country Reports 2011, 178; 10.5089/9781455299768.002.A001

Sources: Armenian authorities; and Fund staff estimates.
uA01fig07

Reserves in Months of Prospective Imports

Citation: IMF Staff Country Reports 2011, 178; 10.5089/9781455299768.002.A001

C. Medium-Term Adjustment and Structural Reforms

19. Accelerating structural reforms is vital for addressing imbalances, sustainable growth, and poverty reduction.

Armenia: Structural Issues in Agriculture

Weather contributed to the 2010 collapse, but underlying weaknesses also played a role:

  • Limited access to financing. Loan terms (collateral, maturities, interest rates) do not match farmers’ capacity, leading to reliance on cash and volatile remittances.

  • Fragmentation. 97 percent of output is produced by household farms, averaging 1.1 hectares of arable land, a tenth of the EU average.

  • Outdated equipment. 95 percent of farm equipment is considered obsolete.

  • Limited arable and irrigated land. Just 47 percent of land is arable and one-third of arable land is unused. Just two-thirds of irrigable land is irrigated.

  • High dependence on imported fertilizer, feeds, and fuel.

  • Limited transport capacity. With borders with Turkey and Azerbaijan closed, limited road and rail access to Georgia and Iran is a constraint.

  • Low food safety standards. Standards are below international levels, constraining exports.

To tackle these, the government has launched an agricultural strategy for 2010–20, which aims to: expand use of arable land and improve yields by consolidating lands, modernizing technology, and upgrading infrastructure; and enhance the quality and capacity of food processing and marketing. The strategy also targets a new agriculture insurance system and new finance instruments.

  • Staff and the authorities agreed on the need for further reforms to boost competitiveness. The authorities highlighted measures to promote exports and to reduce the costs of trade, registering businesses, and obtaining construction permits. Progress has also been made in addressing obstacles to a free trade area (FTA) with the EU (product and sanitary standards, trade and investment regulations, competition rules). Staff welcomed these efforts, and stressed that an overall improvement in the investment climate was preferable to tax breaks or free zones, given risks of leakage and lower revenues. In agriculture, measures are being taken to address immediate concerns (e.g., distributing seeds), but significant structural weaknesses warrant comprehensive reforms (Box 5).

  • The authorities also agreed that creating more competitive domestic markets is essential. Staff expressed concern with possible distortions under a new law that would limit price increases of some staples. The authorities noted that the law was intended to deter aggressive pricing by firms with market power and agreed that distortions should be avoided. Amendments to the competition law enhancing the monitoring and enforcement power of the competition committee are a welcome step.

III. Program Issues

31. An Annual Progress Report on the Sustainable Development Plan has been prepared ahead of the new medium-term strategy expected to be completed later this year (Box 6).

Armenia: Annual Progress Report of the Sustainable Development Program

The Annual Progress Report (APR) of the Sustainable Development Program (SDP) for 2008–13 provides a comprehensive evaluation of outturns and performance relative to SDP benchmarks. As the APR sets out, with the impact of the global financial crisis on Armenia, many SDP goals became unattainable, and progress fell short in most sectors, including health, education, water and sanitation, and transport. Some areas fared better, including pensions and environmental protection. The APR notes that many targets will need to be revised in light of outturns and diminished fiscal space.

While the APR does not provide revised forecasts, its analysis is in line with the macroeconomic policy framework underlying Fund- and Bank-supported programs. The report asserts that the economic landscape has changed significantly, with key pre-crisis growth drivers—construction and consumption fueled by remittances and other inflows—unlikely to recover quickly or fully, public debt sharply higher, and new risks emerging, most notably from food price inflation. The APR calls for a “new model” that emphasizes greater productivity and competitiveness to drive diversification and export growth, supported by further reforms to public administration and institutions.

Given implementation shortfalls and the imperative to reduce the fiscal deficit, the APR could have provided updated targets more comprehensively across sectors, as well as more specific guidance on how spending programs should be re-prioritized over the remaining SDP period. For example, ambitious targets for increased coverage and size of a range of social and pension benefits set under the SDP in 2008 may now be unrealistic, and infrastructure spending priorities may need to be adjusted significantly in light of sharply lower fiscal space compared with 2008 estimates. A World Bank Public Expenditure Review, now nearing completion and focusing on health, education, transport, and the wage bill, will provide important inputs to the forthcoming full new medium-term strategy.

32. Program design and monitoring will remain broadly unchanged. The authorities are requesting modification of end-June performance criteria (PCs) for NIR and net domestic assets and for the program fiscal balance, in line with a revised definition that incorporates project loans. Structural benchmarks focus on tax policy and revenue administration, social policy, and monetary operations.

IV. Staff Appraisal

33. Policies have broadly delivered on program objectives. The recovery should pick up and broaden in 2011. Progress has been made toward reestablishing fiscal sustainability. The policy response to the pickup of inflation has been timely, and banking sector indicators continue to improve. The resumption of private inflows and credit has also been positive.

34. The economy is set to grow faster, but additional efforts are needed to strengthen medium-term growth potential, ensure job creation, and reduce poverty. Recent measures taken to reduce supply-side constraints—particularly for the EU FTA and in the agriculture sector—are welcome. Risks remain, however, and these efforts should be accompanied by comprehensive reforms to improve the business environment and agriculture. Promoting greater domestic competition would help improve external competitiveness.

35. Continuing consolidation will help maintain stability and reduce vulnerability. The adjustment has been excessively weighted to spending cuts, as tax reform progress has been disappointing. A decisive breakthrough in tax policy and revenue administration is needed, particularly given that elections in 2012–13 may make reforms more difficult. This would provide space for additional, well-targeted capital and social spending, and mitigate risks.

36. Continued implementation of sound policies should help ensure a smooth and orderly external adjustment. External pressures may reemerge, for example, from possible further strong global food and fuel price pressures or a fall in remittances. Together with sustained reforms, greater exchange rate flexibility will be essential to provide appropriate price signals and reduce incentives for an excessive build-up of foreign exchange exposure. Concerns with passthrough to inflation are understandable, but are best addressed by monetary policy actions to anchor expectations.

37. The CBA’s response to inflation has been appropriate, but active liquidity management is needed. Liquidity management efforts to keep market rates in line with the declared policy stance will strengthen the traction of monetary policy. Once again, risks to inflation remain from possible further global price pressures. The CBA should stand vigilant, and future monetary policy actions should be forceful, if inflation does not moderate.

38. While the banking sector remains sound, the CBA should continue its efforts to improve its resilience. Dollar lending is increasing bank vulnerabilities. The CBA is right to remain vigilant and step up monitoring and crisis preparedness.

39. All continuous and periodic quantitative PCs and indicative targets for end-December 2010 as well as all indicative targets for end-March 2011 were observed. Structural benchmarks were met on time. Staff recommends completion of the Second Review, approval of the request for modification of end-June 2011 PCs, and establishment of new PCs for end-December 2011.

Figure 1.
Figure 1.

Armenia: Selected Macroeconomic Indicators

Citation: IMF Staff Country Reports 2011, 178; 10.5089/9781455299768.002.A001

Sources: Armenian authorities; and Fund staff estimates
Table 1.

Armenia: Selected Economic and Financial Indicators, 2006–13

article image
Sources: Armenian authorities; and Fund staff estimates and projections.

Including the gas subsidy in 2006–08.

Based on government and government-guaranteed debt.

Excluding the special privatization account (SPA), but including the Russian project loan.

Gross international reserves in months of next year’s imports of goods and services, including the SDR holdings.

A positive sign denotes appreciation.

Table 2.

Armenia: Balance of Payments, 2008–16

(In millions of U.S. dollars, unless otherwise indicated)

article image
Sources: Armenian authorities; and Fund staff estimates and projections.

Gross international reserves include the SDR holdings.

Debt relief from the United Kingdom.

Based on government and government-guaranteed debt.

Table 3.

Armenia: Monetary Accounts, 2007–11

(In billions of drams, unless otherwise indicated)

article image
Sources: Central Bank of Armenia; and Fund staff estimates and projections.

At the program exchange rate.

Following the agreement between the CBA and the Ministry of Finance, the issue of new CBA bills was terminated in 2008.

Ratio of foreign currency deposits to total deposits (in percent).

Ratio of foreign currency deposits to broad money (in percent).

Discrepancy between the fiscal and monetary accounts in 2009Q3-Q4, 2010, and 2011 is exp lained by government lending to the economy through commercial banks.

Table 4.

Armenia: Financial Soundness Indicators for the Banking Sector, 2007–11

(In percent, unless otherwise indicated)

article image
Source: Central Bank of Armenia.
Table 5.

Armenia: Central Government Operations, 2008–13

(In billions of drams)

article image
Sources: Ministry of Finance, Central Bank of Armenia, and Fund staff estimates and projections.

Discrepancy between the fiscal and monetary accounts in 2009Q3-Q4, 2010, and 2011 is explained by government lending to the economy through commercial banks.

Includes IMF budget support.

The program balance is measured as below-the-line overall balance minus net lending. From 2010 to 2011Q1, it is measured as in 2009 less project financing.

Table 6.

Armenia: Central Government Operations, 2008–13

(In percent of GDP, unless otherwise specified)

article image
Sources: Ministry of Finance, Central Bank of Armenia, and Fund staff estimates and projections.

Discrepancy between the fiscal and monetary accounts in 2009Q3-Q4, 2010, and 2011 is explained by government lending to the economy through commercial banks.

Includes IMF budget support.

The program balance is measured as below-the-line overall balance minus net lending. From 2010 to 2011Q1, it is measured as in 2009 less project financing.

Table 7.

Armenia: Medium-Term Macroeconomic Framework, 2008–16

(In percent of GDP, unless otherwise specified)

article image
Sources: Armenian authorities; and Fund staff estimates and projections.

A negative figure indicates an increase.

Table 8.

Armenia: Fund Disbursements and Timing of Reviews under a Three-year EFF/ECF Blend

article image
Source: Fund staff estimates and projections.
Table 9.

Armenia: Indicators of Capacity to Repay the Fund, 2011–19 1/

article image
Source: Fund staff estimates and projections.

Indicators cover both GRA and ECF credit.

Total debt service includes IMF obligations.

Table 10.

Armenia: Structural Benchmarks for Future Implementation Under the EFF/ECF

article image

Appendix I. The Crisis and Armenia’s Children

Poverty in Armenia increased with the crisis, rising from 23.5 percent in 2008 to 34.5 percent in 2009. The rate for children is higher, 38.1 percent, with 4.5 percent below the extreme poverty line (3.6 percent for the population as a whole). Child poverty links short-term macroeconomic fluctuations with long-term performance: with malnutrition, limited health service, and school absence, poor children will not likely develop their full physical and intellectual capacity, weakening Armenia’s long-term potential.

With the increased share of poor families, social protection coverage decreased. Only one poor family in four received family benefits, and just 58 percent of extremely poor families were reached. However, without family benefits, the poverty rate would have been 4 percentage points higher, and 31 percent of children who are not poor would have been so classified without family benefit income.

Armenia: Child Poverty Rates With and Without Family Benefit Income

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Source: UNICEF Armenia. Child weights used.

Armenia: Child Poverty Rates With and Without Family Benefit Income

(Recipient Households)

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Source: UNICEF Armenia. Child weights used.

Program commitments to maintain family benefit spending likely prevented a further deterioration. To reach the more than 12,000 extremely poor families not currently receiving family benefits, UNICEF Armenia estimates that an additional 0.1 percent of GDP would be needed (excluding additional administrative costs).

Attachment I. Armenia: Letter of Intent

The Acting Managing Director

International Monetary Fund

Washington, D.C. 20431

Yerevan, May 30, 2011

Dear Acting Managing Director:

1. Armenia continues its path of recovery and stabilization in spite of the emergence of fresh challenges. Most sectors of the economy grew in 2010, with public finances improving considerably. The financial sector is expanding rapidly and continues to be well capitalized. However, agriculture sector developments locally and internationally have hampered economic growth and fueled inflation. In this context, our longer-term challenges regarding structural rigidities and social protection and development have become all the more critical.

2. Performance under our program supported by arrangements under the Extended Fund and Extended Credit facilities (EFF/ECF) has been very strong. The program is on track with all continuous and periodic quantitative performance criteria and indicative targets for end-December 2010 as well as all indicative targets for end-March 2011 observed. The structural benchmarks were also met.

3. This Letter of Intent (LOI) describes policies we intend to implement for the remainder of 2011. Our near-term macroeconomic policies will continue to be geared towards containing macroeconomic pressures while avoiding major disruptions to the still fragile recovery. We remain committed to our reform program aimed at economic growth and poverty reduction, fiscal and debt sustainability, and developing a sound financial system.

I. Recent Developments and Outlook

4. The economic recovery has been relatively weak and uneven across sectors, with headline inflation reaching exceptional levels. In 2010, mining, industry, trade, and transportation grew strongly, supported by a recovery of external and domestic demand and increased financial intermediation. In contrast, agricultural production dropped sharply due to unfavorable weather conditions and underlying structural weaknesses in the sector. This resulted in weaker-than-expected overall GDP growth. Consumer prices increased to 11.5 percent in March, mainly driven by a surge in food prices, attributable both to domestic supply constraints and high global food prices, with some initial signs of second-round effects also observed. The fiscal deficit has narrowed considerably, due to expenditure restraint in spite of higher prices. Both trade and remittance inflows have rebounded, but the current account deficit remains high. Banks remain well capitalized and liquid, and credit to the economy is booming, notably in foreign currency.

5. The economy is set to recover at a faster pace in 2011, with the pickup driven mostly by a recovery in agricultural production. High oil prices will likely increase remittances from Russia. We expect agricultural production to recover strongly at around 9—10 percent, on the back of improved weather conditions and measures taken by the government to support the agricultural sector. However, growth in other sectors is expected to remain moderate, particularly in construction, a key pre-crisis growth driver, with overall GDP projected to grow by around 4.6 percent.

6. The medium-term outlook will continue to be challenging, as external demand and remittances are likely to recover only gradually, while FDI and private investment remain weak. GDP growth is expected to be around 4−4½ percent over 2012−13. Barring further shocks, inflation is expected to revert to the CBA’s target band of 4 ± 1½ percent during the first half of 2012. Public debt is also expected to fall to around 41 percent of GDP by 2013 under the medium-term expenditure framework. On the basis of structural reforms, fiscal consolidation, and inflation reduction, the current account deficit is expected to be reduced considerably.

II. The Program for 2011
A. Fiscal Policy and Debt Sustainability

7. We continue to focus on reducing the deficit to help ease inflationary pressures, address external imbalances, and ensure fiscal and debt sustainability. In 2010, we were able to reduce our deficit by nearly 3 percentage points of GDP to just under 5 percent. Building on this success, we will further reduce the deficit to 3.9 percent of GDP in 2011, and we expect a deficit of 3.2 percent of GDP in 2012. We will continue down this consolidation path and project to reach a deficit target of 2.4 percent of GDP by the end of our program. Our goal of improving the revenue-to-GDP ratio by 0.4 percentage points per annum remains, as does our commitment to save at least half of tax revenue overperformance relative to EFF/ECF projections. As in the past, we will continue to prioritize fiscal consolidation, adjusting spending as needed, informed by the ongoing Public Expenditure Review.

8. We will implement a further set of measures to increase our low tax-to-GDP ratio. The centerpiece is to phase in an increase in excise taxes over four years from 2012. Since 2002, excise tax yields have been substantially eroded—by 2 percentage points of GDP—by the effects of inflation on unadjusted tax rates. At the same time, we will introduce legislative changes to automatically update specific tax rates in response to annual inflation beginning in 2012 (Structural benchmark, August 2011). Further, to strengthen collections from property taxes, we will work to align cadastre values with recent property sales. This will involve, among other actions, providing cadastral passports for older buildings and ensuring consistent recording of all property sales with the State Committee of the Real Property Cadastre. We will adjust the specific tax on cars annually for inflation, and further revise upwards the rates on luxury and sport utility vehicles for 2012 (Structural benchmark, December 2011). More broadly, we are at the beginning stages of developing a detailed strategy paper on a broader tax reform plan (Structural benchmark, December 2011). The strategy will build on recent technical assistance received from the Fund.

B. Monetary and Exchange Rate Policy

9. We will continue to take decisive action to contain inflation. In light of the food price shocks and some signs of second-round effects, we have responded vigorously by raising our policy rate by 125 bps, increasing reserve requirements on foreign liabilities, and stepping up communication to explain the exogenous and expected temporary nature of the shock. With agriculture set to rebound, international food price inflation decelerating, and inflation expectations broadly anchored, we believe that inflation will start to decline, gradually returning to within the target band in the next 7-10 months. However, if inflationary pressures persist, we stand ready to increase the policy rate further with supporting steps to tighten liquidity conditions.

10. We remain committed to a floating exchange rate. Our interventions in the foreign exchange market will continue to aim at smoothing large exchange rate movements, while not resisting fundamental trends. We also aim to continue guarding international reserves as a buffer against exogenous shocks. We intend to lock in strong performance on international reserves by increasing our program targets for the remainder of 2011, in comparison with targets set at the time of the First Review. We will communicate clearly and act accordingly to ensure that market participants recognize the two-way risks in the foreign exchange market.

11. We will continue to strengthen the status of the CBA policy rate as the market reference rate. Recognizing that persistent excess liquidity weakens the impact of policy rate changes on the economy, we will step up liquidity management in dram markets so that market rates will move in line with the policy rate. To this end, we have conducted reverse repo operations and if conditions warrant, will restart the issuance of central bank bills. In addition, we will develop a deposit auction to enable the CBA to absorb liquidity with greater flexibility (Structural benchmark, September 2011). We will also improve our communications on liquidity management by publishing liquidity forecasts with the indication and T-bill issuance for liquidity management (Structural benchmark, December 2011). To enhance further the interest rate channel, we are also pursuing initiatives to develop the market for dram instruments such as supporting the efforts by NASDAQ OMX Armenia to develop term interbank markets.

12. We remain determined to reduce dollarization, given that it weakens the monetary transmission mechanism. We have continued to raise the proportion of dram denominated reserve requirements for foreign liabilities to increase the spread between dram and foreign currency deposits. The increase in reserve requirements on foreign liabilities is intended to make dram deposits more attractive. While this has reduced deposit dollarization, foreign currency loans continue to grow rapidly in the context of abundant foreign currency liquidity. We acknowledge that successful dedollarization will ultimately hinge on our commitment to a flexible exchange rate policy and economic and price stability. We will remain vigilant to ensure that near-term dedollarization measures do not disrupt financial intermediation

C. Financial Sector Stability and Development

13. We are committed to preserving the stability of the banking system and deepening financial intermediation. Despite rapid credit growth, mostly in foreign currency, we remain confident of the soundness of the Armenian banking system, as banks remain liquid and well-capitalized. Nonetheless, recognizing that the high level of dollarization poses significant risks to financial stability, we raised capital and provisioning requirements on foreign currency loans in September 2010 and January 2011, respectively. We will continue monitoring FX-induced credit risk and foreign currency liquidity risk of banks and take further steps to limit vulnerability as needed.

14. We continue efforts to enhance the resilience of the banking system. In line with the Fund’s technical assistance recommendations, we will enhance our supervisory framework with a more forward-looking assessment of potential risks. To this end we are improving our stress testing methodology, with a view to capturing linkages between the real and financial sectors. We have established a permanent internal financial stability committee which meets quarterly to assess developments and the outlook for the financial sector. The forthcoming FSAP Update will help shape financial stability policy to increase the resilience of the banking sector.

15. We will strengthen our crisis preparedness and contingency planning. We have issued a regulation requiring banks to set up contingency plans for liquidity and solvency support. The banks have already submitted plans, and the supervision arm of the CBA will review their coverage and adequacy. We are also drafting a crisis management framework that will identify the roles and responsibilities of each party in the CBA and the steps that will be taken in the event of a crisis. The framework is expected to be completed by September and approved by management by the end of the year. We have also developed scenarios for a crisis simulation exercise and will carry out drills before the end of the year.

III. Structural Reforms
A. Fiscal Reforms

16. We have reduced the costs of tax compliance. We have made tax reporting and payment less frequent, and reduced the number of forms needed. We have extended the e-filing system to over 4,000 taxpayers, and are expecting to operate electronic processing of tax returns and automated invoice processing by end-2011. We have improved the quality of taxpayer services, and are studying the introduction of a tax mediator/reconciler to improve the fairness of the tax system.

17. We have made progress in the area of tax administration. We finalized manuals in tourism, real estate, and transport using cash register machines for tax audits for usage starting January 2011. We increased the number of large taxpayers (LTPs) covered by the large taxpayer office by about 100 through December 2010 with a view to ensuring that LTPs’ contribution in terms of total domestic revenues is continuously increasing compared to the previous year and in line with international best practices. We adopted a government decree establishing a mechanism for implementing a fully functional risk management approach in VAT refund processing. This will be fully operational by June 2011 (Structural benchmark, June 2011).

18. Notwithstanding this progress, we will enhance our tax administration reforms efforts. We will develop a Three-Year Strategic Plan for Tax Administration (2012-15) to map out our transition towards a more efficient and fairer tax system. As a first step towards achieving this broader reform effort, we will establish a taxpayer registry. The registry should help us to begin to make progress with the large stock of outstanding VAT credits. Establishing the registry is expected to take a number of steps, including: compiling existing taxpayer information; cross-checking this with supplementary data source and eliminating duplicates; identifying non-filers; and making contact with taxpayers. Completion of these steps would constitute establishment of the registry (Structural benchmark, December 2011). We are working to enhance information sharing between the Ministry of Finance and the State Revenue Committee to strengthen our assessment of revenue developments and our capacity for tax policy and revenue administration. Work in this area will commence with formation of a joint revenue analysis and forecasting committee to undertake an inventory of tax data now available and production of a new tax database for analysis of trends and policy initiatives.

B. other Structural Reforms

19. We have stepped up our efforts to improve the business environment. We established a “one-stop shop” and an electronic business registration system, which have significantly reduced the cost and time for business registration. From January, we have also reduced substantially the number of licenses required for various business activities. Notably, the time and cost for obtaining construction permits have decreased significantly. Furthermore, measures such as easing the requirement of certificates of origin for exports and reducing the time required for custom formulation for imports have reduced the cost of trading across borders. In addition, we are working with the European Union to undertake customs reform aimed at improving compliance and governance, while speeding clearance. We passed amendments to the Law on Competition to enhance the power of the Competition Commission, through strengthened inspections, improved methodologies, and increased penalties for monopolistic behaviors. In the area of anti-money laundering and combating the financing of terrorism (AML/CFT), we will submit to parliament later this year a package of bills to amend relevant laws and address shortcomings.

20. We are developing an export promotion strategy. We are in the process of creating an export-oriented free-economic zone for the agricultural sector and high-tech industry. We will take steps to strictly limit leakage and loss of fiscal revenues from any free zones. We will also take measures to address the obstacles identified by the European Commission in February 2009 to prepare for a Deep and Comprehensive Free Trade Area with the EU (e.g., product and sanitary standards, non EU-aligned trade and investment regulations, and competition rules). A negotiation team has been established with the Ministry of Economy as coordinator, aiming to start negotiations with the EU as soon as possible.

21. We continue to work to shield the most vulnerable from the effects of the crisis and food price shock. Notwithstanding the difficult fiscal situation, we met our social expenditure targets, and we will further increase the social spending on the Family Benefit Program and lump-sum financial aid by 16 percent in 2011 (indicative target). In addition, we introduced a targeted gas price subsidy for the poor covered by savings in other areas and an interest rate subsidy for the agricultural sector paid for by a contingency item in the budget.1 Moreover, in order to further improve the registration process, coverage, and provisioning of social assistance, we adopted in January a decree on introducing an integrated system for the provision of social protection services, followed by a time-bound action plan in March. We will submit the amendments to Parliament in October (structural benchmark, December 2011).

22. We are finalizing an Annual Progress Report on our Sustainable Development Plan, and work has started on an updated strategy paper which will set out our vision for our nation’s economic growth and social development over the long term.

IV. Conclusion

23. Given our strong program implementation, we request the completion of the second review of the EFF/ECF program and the associated disbursement of SDR 36.2 million. We also request modification of the end-June performance criteria for net international reserves and net domestic assets, as well as for the program fiscal balance in accordance with a revised definition. In addition, we request the establishment of performance criteria for end-December 2011. We will maintain a close policy dialogue with the Fund and stand ready to take additional measures, as appropriate, to ensure the achievement of the government social and economic objectives under the EFF/ECF program. We will continue to consult with the Fund on the adoption of measures, and in advance of revisions of the policies contained in the LOI, in accordance with the Fund’s policies on such consultation. We will also provide the Fund with information it requests for monitoring progress during program implementation. The program’s quantitative performance criteria and indicative targets, as per attached Technical Memorandum of Understanding and structural benchmarks are set out in Tables 1 and 2. The third review is expected to be completed on or after September 30, 2011. The fourth review is expected to be completed on or after March 30, 2012.

Table 1.

Armenia: Quantitative Targets for 2010–11 1/

(In billions of drams, at program exchange rates, unless otherwise specified)

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Sources: Armenian authorities; and Fund staff estimates.

All items as defined in the TMU.

The net official international reserves balance excludes the total IMF disbursement received by Armenia on March 31.

Indicative target.

Below-the-line overall balance excluding net lending and project financing until March 2011. Below-the-line overall balance excluding net lending from June 2011.

Assessed on a calendar year basis.

Defined as 100 percent of the budgeted amount of the family benefit program and lump-sum financial aid.

Table 2.

Armenia: Structural Benchmarks Under the EFF/ECF Arrangement

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24. We authorize the IMF to publish this Letter of Intent and its attachments, as well as the accompanying staff report.

Very truly yours,

/s/

Tigran Sargsyan

Prime Minister

Republic of Armenia

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Attachment II. Armenia: Updated Technical Memorandum of Understanding

1. This memorandum sets out the understandings between the Armenian authorities and the IMF staff regarding the definition of performance criteria and indicative targets, their adjusters, and data reporting requirements for the three-year EFF/ECF Arrangement as per the Letter of Intent dated May 20, 2011 (LOI).

2. For program monitoring purposes, all foreign currency-related assets, liabilities, and flows in the monetary accounts will be evaluated at program exchange rates. The program exchange rate of the Armenian dram to the U.S. dollar is set at 385 dram per one U.S. dollar. The cross-rates for other foreign currencies are provided in Table 1.

I. Quantitative Targets

3. The program sets performance criteria and indicative targets for defined test dates (see Table 1 in the May 20, 2011 LOI). The program sets the following performance criteria:

  • Floor on the net official international reserves (NIR) of the Central Bank of Armenia (CBA);

  • Ceiling on the net domestic assets (NDA) of the CBA;

  • Ceiling on external public debt arrears (continuous); and

  • Floor on the program fiscal balance;

The program sets the following indicative targets:

  • Ceiling on reserve money;

  • Floor on average concessionality of new debt; and

  • Floor on social spending of the government.

4. The net official international reserves (stock) of the Central Bank of Armenia (CBA) will be calculated as the difference between total gross official international reserves (excluding commercial bank required and excess reserves at CBA in FX) and gross official reserve liabilities.

  • Gross official international reserves are defined as the CBA’s holdings of monetary gold (excluding amounts pledged as collateral), holdings of Special Drawing Rights (SDRs), including the August 28, 2009 General Allocation and the September 9, 2009 Special Allocation, the country’s reserve position at the IMF, and holdings of convertible currencies in cash or in nonresident financial institutions (deposits, securities, or other financial instruments). Gross reserves held in the form of securities and other financial instruments are marked to market. Excluded from gross reserves are the balance on the government’s Special Privatization Account (SPA), capital subscriptions in foreign financial institutions and illiquid foreign assets, any assets that are pledged, collateralized, or otherwise encumbered, claims on residents, claims in foreign exchange arising from derivatives in foreign currencies vis-à-vis domestic currency (such as futures, forwards, swaps, and options), precious metals other than gold, assets in nonconvertible currencies, and illiquid assets.

  • Official reserve liabilities shall be defined as the total outstanding liabilities of the government and the CBA to the IMF and convertible currency liabilities of the CBA to nonresidents with an original maturity of up to and including one year, as well as commitments to sell foreign exchange arising from derivatives (such as futures, forwards, swaps, and options).

NIR is monitored in U.S. dollars, and, for program monitoring purposes, assets and liabilities in currencies other than the U.S. dollar shall be converted into dollar-equivalent values using the exchange rates as specified in Table 1.

5. Reserve money is defined as the sum of currency issued, required and excess reserves, and current and time deposit accounts of certain resident agents. Liquidity absorbing transactions under reverse repurchase agreements, foreign currency swaps, and securities issued by the CBA are excluded from the reserve money definition. The ceiling will be considered as met if the outcome is within AMD 5 billion of the indicative target sets in Table 1 attached to the Letter of Intent dated May XX, 2011.

6. Net domestic assets are defined as reserve money minus NIR, minus commercial bank required and excess reserves at CBA in FX, plus medium and long-term foreign liabilities (i.e. liabilities with a maturity of one year or more) of the CBA, minus the balance of outstanding Fund purchases credited to the government account at the CBA. NDA is composed of net CBA credit to the general government; outstanding credit to domestic banks by the CBA (including overdrafts) minus liabilities not included in reserve money and other items net.

7. External public debt arrears are defined as all unpaid debt-service obligations (i.e., payments of principal and interest) arising in respect of public sector loans contracted or guaranteed, including unpaid penalties or interest charges associated with these obligations that are overdue beyond 30 days after the due date.1 The ceiling on external payment arrears is set at zero.

8. The program fiscal balance is cumulative from the beginning of the fiscal year and is measured from the financing side as the negative of the sum of net domestic banking system credit to the central government, net domestic nonbank financing, and net external financing to the central government. Should a general subsidy or any other fiscal transaction be introduced off-budget, the overall balance will be measured including the subsidy and other fiscal transactions as part of government spending

  • Net banking system credit to the central government equals the change during the period of net credit to the central government.

  • Net nonbank financing equals the sum of: (1) the change during the period of outstanding treasury bills and bonds to nonbanks (including accrued interest for treasury bills and excluding accrued interest for treasury bonds);2 (2) any other disbursement or transaction that increases nonbanks’ claims on the central government plus withdrawals from the special privatization account or the treasury sub-account containing privatization proceeds in drams, less amortization paid by the central government to private resident nonbank agents.

  • Net external financing equals total debt-increasing disbursements from nonresidents to the central government (including Fund net purchases credited directly to the government accounts at the CBA) less total amortization from the central government to non-residents. All foreign currency-denominated transactions are recorded in drams using the prevailing exchange rate at the time of the transaction.

9. External and domestic net lending, which are recorded as financing items, are excluded from the calculation of the program fiscal balance. This effectively treats net lending as an expenditure item when loans are made and as a revenue item when the loans are repaid.

10. Some project implementation units maintain accounts at the CBA. Grants received by these units are recorded in the fiscal accounts as external grants on the revenue side and as foreign-financed capital expenditure on the expenditure side. In addition, any loans to finance investments that are intermediated through the banking system are recorded in the financial accounts as a financing item below the line and are thus excluded from net lending. Under previous Technical Memoranda of Understanding, these activities were excluded from the calculation of the program fiscal balance. This treatment reflected lags in receiving information from project implementation units and on project loans intermediated through the banking system. With the shift to semi-annual program reviews with the EFF/ECF arrangement and consolidation of the accounts of these units in the Treasury, there is no longer a need for such exclusion, and these activities are now fully accounted for in the program fiscal balance.

11. Foreign currency proceeds from selling enterprises are deposited into the Special Privatization Account (SPA). The SPA is held at the CBA and the proceeds are invested abroad together with the CBA’s international reserves. These proceeds are included in the definition of the monetary accounts of the CBA as part of net foreign assets with a counter entry in other items net. Any budgeted withdrawal from the SPA will be accounted for as privatization proceeds used to finance the budget and will be recorded below the line. Any unanticipated withdrawal from the SPA will be recorded below the line as privatization receipts; these withdrawals, however, will be replenished during the same fiscal year. Domestic currency proceeds from selling enterprises to residents are deposited in a sub-account of the treasury single account and are also treated as a financing item and recorded below the line.

12. The program sets an annual indicative floor of 30 percent on average concessionality of new debt on a disbursement basis on debt with nonresidents with original maturities of one year or more contracted and guaranteed by the public sector.

  • The monitoring of the average concessionality target is done on a disbursement-by-disbursement basis and consistent with the methodology used in the DSA to calculate the original average concessionality target. In particular, the discount rate and the exchange rates used in the DSA should be used for the monitoring. The concessionality of floating interest rates will be assessed based on the interest rates as of June 1 of the preceding year.

  • The public sector comprises the general government, the central bank, and nonfinancial public enterprises (enterprises and agencies in which the government holds a controlling stake—typically owns more than 50 percent of the shares, but which are not consolidated in the budget).

  • For program purposes, the guarantee of a debt arises from any explicit legal obligation of the public sector to service a debt in the event of nonpayment by the debtor (involving payments in cash or in kind), or from any implicit legal or contractual obligation of the public sector to finance partially or in full any shortfall incurred by the debtor.

13. The program sets a floor on social spending of the government. For the purposes of the program, social spending of the government is defined as 100 percent of the budgeted amount of the family benefit program and lump-sum financial aid.

II. Adjustors

14. The quantitative performance criteria and indicative targets under the program are subject to the following adjusters, calculated, where relevant, using program exchange rates:

  • Changes in reserve requirements: The ceiling on the NDA of the CBA and the ceiling on reserve money will be adjusted downward (upward) by the amount of banks’ reserves freed (seized) by any reduction (increase) of the reserve requirement ratio on both domestic currency and foreign currency liabilities relative to the baseline assumption as per the following formula: ΔNDA = ΔrB, where B denotes the level of liabilities subject to reserve requirements in the initial definition and Δr is the change in the reserve requirement ratio.

  • KfW and World Bank loan disbursements: the ceiling on the NDA of the CBA will be adjusted upward (downward) by the full amount of any excess (shortfall) of disbursements from the KfW and World Bank loans directed at SME financing compared to programmed amounts (Table 2). The floor on NIR will be adjusted upward (downward) by the cumulative amount of any excess (shortfall) of these disbursements compared to program amounts.

  • Budget support grants to the public sector are defined as grants received by the general government for direct budget support from external donors and not related to project financing.

  • Budget support loans to the public sector are defined as disbursements of loans from bilateral and multilateral donors for budget support and Fund purchases credited directly to the government accounts at the CBA.

  • Project financing to the public sector is defined as disbursements of loans from bilateral and multilateral donors for public sector projects.

  • The floor on NIR will be adjusted upward (downward) by the cumulative amount of any excess (shortfall) of budget support loans or budget support grants (excluding Fund disbursements to the government) compared to program amounts (Table 3). The floor on NIR will be adjusted downward for any external public debt amortization amounts in excess of program amounts.

  • The ceiling on NDA will be adjusted downward by the amount of any excess of budget support loans or budget support grants compared to program amounts (Table 3).

  • The floor on the program fiscal balance on a cash basis will be adjusted upward (downward) by the cumulative total amount of the budget support grants received in excess (to account for a shortfall) of the program amounts (Table 3), subject to a cap of $25 million in either direction. The floor on the program fiscal balance on a cash basis will also be adjusted downward (upward) by the cumulative total amount of the project financing received in excess (to account for a shortfall) of the program amounts (Table 3), subject to a cap of $50 million in either direction.

Table 1.

Armenia: (Program) Exchange Rates of the CBA

(As of December 31, 2008 in U.S. dollars per currency rates)

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Table 2.

Armenia: KFW and IBRD SME Loan Disbursements, 2010–11 1/

(In millions of U.S. dollars)

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Cumulative from the end of the previous year.

Table 3.

Armenia: External Disbursements to the Public Sector in 2010–11 1/

(In millions of U.S. dollars)

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Cumulative from the end of the previous year.

III. Data Reporting

15. The government will provide the IMF the information specified in the following table.

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IV. Guidelines on the Indicative Benchmark with Respect to the Definition of External Debt

For program purposes, the definition of debt is set out in Executive Board Decision No. 12274, Point 9, as revised on August 31, 2009 (Decision No. 14416-(09/91)).

  • (a) For the purpose of this guideline, the term “debt” will be understood to mean a current, i.e., not contingent, liability, created under a contractual arrangement through the provision of value in the form of assets (including currency) or services, and which requires the obligor to make one or more payments in the form of assets (including currency) or services, at some future point(s) in time; these payments will discharge the principal and/or interest liabilities incurred under the contract. Debts can take a number of forms, the primary ones being as follows:

    • (i) loans, that is, advances of money to obligor by the lender made on the basis of an undertaking that the obligor will repay the funds in the future (including deposits, bonds, debentures, commercial loans, and buyers’ credits) and temporary exchanges of assets that are equivalent to fully collateralized loans under which the obligor is required to repay the funds, and usually pay interest, by repurchasing the collateral from the buyer in the future (such as repurchase agreements and official swap arrangements);

    • (ii) suppliers’ credits, that is, contracts where the supplier permits the obligor to defer payments until some time after the date on which the goods are delivered or services are provided; and

    • (iii) leases, that is, arrangements under which property is provided which the lessee has the right to use for one or more specified period(s) of time that are usually shorter than the total expected service life of the property, while the lessor retains the title to the property. For the purpose of the guideline, the debt is the present value (at the inception of the lease) of all lease payments expected to be made during the period of the agreement excluding those payments that cover the operation, repair or maintenance of the property.

  • (b) Under the definition of debt set out in point 9 (a) above, arrears, penalties, and judicially awarded damages arising from the failure to make payment under a contractual obligation that constitutes debt are debt. Failure to make payment on an obligation that is not considered debt under this definition (for example, payment on delivery) will not give rise to debt.
1

Food comprises 48.5 percent of the consumer basket.

2

See Appendix II of Country Report 10/350.

1

During April 1, 2011—March 31, 2012, the natural gas tariff for targeted vulnerable people is reduced to AMD100/cubic meter, from AMD132/cubic meter, up to a usage of 300 cubic meters in total during this period (the regular tariff of AMD132/cubic meter is charged to the use of natural gas exceeding 300 cubic meters).

1

The public sector is defined following the Government Financial Statistics Manual (GFS 2001) and System of National Accounts (1993 SNA). It includes the general government and nonfinancial public enterprises (as defined in paragraph 12).

2

Domestic nonbank holdings of treasury bills and treasury bonds are defined as total outstanding treasury bills and bonds less holdings by the banking system and the State Fund for Social Insurance.

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Cover IMF Staff Country Reports
Republic of Armenia: Second Reviews Under the Extended Fund Facility and Extended Credit Facility, and Request for Modification of Performance Criteria: Staff Report; Staff Supplement; Press Release on the Executive Board Discussion; and Statement by the Executive Director for the Republic of Armenia.
Author:
International Monetary Fund
Volume/Issue:
Volume 2011: Issue 178
Publisher:
International Monetary Fund
ISBN:
9781455299768
ISSN:
1934-7685
Pages:
69
DOI:
https://doi.org/10.5089/9781455299768.002

FX Excess Reserves

(in million USD)

Banks’ Foreign Liabilities, NonresidentDeposits and Dollarization

Commodity Food Prices and Inflation

Food, Nonfood Inflation

Gross International Reserves as of end-2010

Projected International Reserves

Reserves in Months of Prospective Imports
Figure 1.

Armenia: Selected Macroeconomic Indicators