Second Reviews Under the Extended Fund Facility and Extended Credit Facility, and Request for Modification of Performance Criteria

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.


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.

Annex I. Armenia: Relations with the Fund

(As of May 31, 2011)

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

II. General Resources Account:

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III. SDR Department:

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IV. Outstanding Purchases and Loans:

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V. Latest Financial Arrangements:

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VI. Projected Payments to Fund

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

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VII. Safeguards Assessment

Under the Fund’s safeguards assessment policy, an update safeguards assessment of the Central Bank of Armenia (CBA) was completed in November 2010 with respect to the current EFF/ECF arrangements. The update safeguards assessment found that the CBA maintains a sound safeguards framework And made recommendations to further strengthen oversight arrangements.

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 2010 Article IV consultation with Armenia was concluded on December 1, 2010. 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 a 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, 2002–11

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

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Annex III. Armenia: Relations with the European Bank for

Reconstruction and Development (EBRD)

(As of May 1, 2011)

1. The EBRD’s current country strategy was approved in May 2009. Key priorities are: (i) the financial sector; (ii) the 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.

2. As of April 30, 2011, the EBRD had approved 99 projects in Armenia in the power, transport, agribusiness, municipal and infrastructure, manufacturing and services, property, telecommunications and financial sectors. Total commitments amounted to approximately EUR 397 million.

3. The EBRD committed EUR 53 million to Armenia in 2010 through 25 transactions, of which one was a sovereign loan to Yerevan Metro Company. The portfolio for 2010 comprised 16 projects in the financial institutions sector, 6 in agribusiness, 1 each in manufacturing and property, and the sovereign project with Yerevan Metro Company. Notably, two loans to financial institutions are in local currency, and two loans were syndicated. In the beginning of 2011 (January–April), the Bank committed an additional EUR 17 million through 8 transactions, six in the financial institutions sector, one in telecoms and one in natural resources

4. 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. 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. Second, in November 1994, an 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 a concession agreement). The new management has prepared a master plan for development of the airport, which is expected to generate further 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 water and wastewater assets located in small municipalities outside of Yerevan. The proceeds of this loan are being used to improve wastewater treatment in five municipalities located near Lake Sevan. In March 2010, EBRD signed a EUR 5.0 million sovereign loan with Yerevan Metro Company. This project will provide emergency investments in the Yerevan Metro, including safety upgrades and energy efficiency. The investment is part of a larger plan to improve and reform public transport services in the capital of Armenia.

5. Most of the EBRD’s projects in Armenia are in the private sector. In addition to a loan to Electric Networks of Armenia (see paragraph 9 below), the EBRD approved an additional loan to Zvartnots International Airport of EUR 29.6 million, which will 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 EBRD provided a EUR 14.8 million loan together with a loan from DEG (USD 10 million). The new project involves construction and purchase of equipment for second phase of the passenger terminal complex at Zvartnots and will facilitate completion of the terminal with all arrivals and departures relocated from the old airport building. The loan was a commercial facility with no sovereign support. Other private sector finance includes smaller loans to private companies and equity participation in of companies in various sectors.

6. In the banking sector, the first equity participation, in the Commercial Bank of Greece-Armenia (EUR 1.1 million), was approved in 1999. There are now four local banks where the EBRD participates in equity: Armeconombank, Byblos Bank Armenia, Ararat Bank and Procredit Bank. The EBRD also acquired an equity stake in an Armenian nonbank financial intermediary, Cascade Insurance and Reinsurance Company, an insurance subsidiary of Cascade Capital Holding.

7. The Armenia Multi-Bank Framework Facility II (AMBFF II), was established to provide loans and equity to commercial banks and leasing companies in Armenia. It was originally approved by the EBRD Board on March 8, 2006 in an amount of USD40 million.The facility was extended by another USD80 million on November 9, 2007. In late 2009, the EBRD approved a further USD100 million extension to AMBFF II, in order to support increased financial intermediation and the development of the financial sector in Armenia, in particular, to contribute to economic development by providing medium- to long-term funding to selected Armenian financial intermediaries. Another extension of this facility is being discussed at present. The facility will seek to develop new products for financial institutions, including provision of local currency loans, agricultural credit lines, and mortgage financing. Additional technical assistance will be provided to partner banks.

8. The EBRD expanded its relationship with the partner banks in Armenia from four to twelve (two EBRD clients, Ameria Bank and Cascade Bank, merged in 2010). Nine banks were provided with new credit facilities under the AMBFF. One institution (Armeconombank) was provided with a mortgage facility, and the first leasing facility in Armenia was signed with ACBA Leasing in 2008 for EUR 5.9 million. A co-financing facility with six local banks was also extended, resulting in 14 sub-loans to Armenian corporates. By means of co-financing lines, the EBRD has entered new sectors, such as healthcare and telecoms, and has significantly expanded its portfolio of agribusiness loans. A trade facilitation program with the purpose of facilitating access of Armenian banks to trade financing was also made available to nine Armenian banks.

9. Supporting development of renewable energy is another core activity of the EBRD. To that end, the EBRD joined forces with the World Bank, USAID, and Cascade Credit (a financing arm of the Cafesdjian Foundation) to launch the Armenian Renewable Energy Programme (AREP). The EBRD’s participation took the form of a loan to Cascade Credit. The EBRD also continued to finance renewable energy projects on its own through direct lending facility, with two projects signed. In addition to renewable energy, the EBRD returned to the mainstream segment of the energy sector, seeking to support post-privatization development with a loan to the 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.

10. The EBRD launched turn around management (TAM) and business advisory service (BAS) programs in Armenia in 2003, originally funded by the EU-TACIS program, but now funded from the ETC Fund. The programs support micro, small, and medium-sized enterprises. Since 2003, BAS has completed 784 projects in the amount of EUR 2.979 million, as well as 39 market development activity (MDA) projects. TAM has delivered more than 20 projects.

11. Projects identified by the EBRD for future development are well diversified across sectors, and include several relatively large transactions. Additional business opportunities are offered in the infrastructure sector, including projects in the public sector (mainly municipal). The EBRD is exploring opportunities in transportation, water, sanitation and solid waste treatment. The Bank has launched a USD 25 million program to finance projects for industrial energy efficiency and renewable energy through local banks. In October 2010, the first USD 3.0 million, energy efficiency credit line was signed with Anelik Bank. Technical assistance has been put in place, financed by the Government of Austria.

12. As part of programs to reform the inspection regime and improve the business environment, the EBRD is assisting the government by supporting preparation of a corporate governance code, along with the Ministry of Economy, the CBA, the Stock Exchange and the International Financial Corporation. The EBRD is also providing assistance to the Public Services Regulatory Commission for telecommunications sector regulation. This assistance is being financed by the Government of Finland.

Annex IV. Armenia: Relations with the Asian Development Bank (ADB)

(As of May 1, 2011)

1. The ADB’s economic report and the interim operational strategy for 2006-09 for Armenia were approved in 2006. The country operational business plan (COBP) for 2011-13 has been prepared and submitted to the government for endorsement. This COBP supports the government’s Sustainable Development Program (SDP—the government’s poverty reduction strategy program) and will help the authorities counter the economic vulnerability revealed by the crisis. The indicative focus areas under this COBP are (i) urban development; (ii) regional cooperation; and (iii) private sector development. In third quarter of 2011, the Bank is planning to prepare the first Country Partnership Strategy for the next 5 years.

2. As of May 1, 2011, the ADB had approved nine projects in the transport, municipal infrastructure, and general budget support sectors. Total commitments amounted to USD 441.9 million for sovereign and USD 40.0 non-sovereign loans. The only non-sovereign loan, amounting to USD 40 million was provided to Armenia International Airports (ArIA) for the Zvartnots Airport Expansion Project (Phase 2). The project will finance the construction of a new terminal building and purchase of equipment to supplement the existing concourse building.

3. The first ADB sovereign loan was a rural roads project (USD 30.6 million) for rehabilitation of 220 km of roads approved in November 2007. The second was a water supply and sanitation loan (USD 36 million) for repair and replacement of the water supply infrastructure in small towns and villages approved in December 2007. The third was a supplementary loan (USD 17.3 million) to the rural roads project approved in November 2008, to finance an increase in project cost from higher construction materials prices, domestic inflation, and appreciation of the dram. The fourth was a crisis recovery support program loan (USD 80 million) approved in July 2009, to protect budgetary social expenditures. The next two loans were tranches 1 (USD 60 million) and 2 (USD 170 million) of the North-South Road Corridor investment program approved in October 2009 and December 2010, respectively. Tranche 1 is providing for rehabilitation of 18.4 km of the four-lane Yerevan-Ashtarak highway and safety enhancement of a four-lane road between Yerevan and Ararat. Tranche 2 is providing for upgrading the Ashtarak-Talin road section from two-lane to four-lane first category road. The final loan was the first tranche (USD 48.6 million) of the Sustainable Urban Development investment program approved in April 2011. The project will provide for construction of two missing road links of the Yerevan inner bypass and strengthen institutional and management capacity of Yerevan Municipality and urban transport service providers.

4. Except for the North-South Road Corridor investment program Tranche 2 loan, all approved loans are from the ADB concessional window under the Asian Development Fund (ADF). The Tranche 2 loan is from the ADB’s nonconcessional window under ordinary capital resources.

5. In addition to loan projects, the ADB is also involved in non-lending operations, mostly advisory and capacity development technical assistance. This is mostly research-oriented: Armenia’s Transport Outlook, a transport sector masterplan for 2011-2020; and Institutional Modernization to Improve the Business Environment, to assist the government with introduction of an online business registry system. The advisory technical assistance may lead to loan projects.

6. To increase efficiency and long-term cooperation, the ADB has offered a new instrument: project funding under the Multi-Finance Facility (MFF). The MFF allows approval of long-term sector assistance to be disbursed in tranches. Under the MFF, the ADB has approved USD 500 million for the North-South Road Corridor investment program. The funds will be available for 7 years, and Armenia will request them in tranches. The first and second USD 60 million and USD 170 million tranches have already been approved. A USD 400 million MFF to help the government finance a share of the Sustainable Urban Development investment program will be available for a ten-year period from 2011 to 2020.

Annex V. Armenia: Statistical Issues

(As of May 1, 2011)


1. Data provision by Armenia has shortcomings, but is broadly adequate for surveillance. In November 2003, Armenia subscribed to the Special Data Dissemination Standard (SDDS), and 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 (STA), the Fiscal Affairs Department, and the Monetary and Capital Markets Department. An 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 outstanding issues in national accounts, balance of payments, and monetary and financial statistics. A follow up STA mission in September 2010 provided further guidance, focusing on improving the accuracy of annual and quarterly GDP estimates. Further improvements in real, fiscal, and external sector statistics would be desirable to facilitate enhanced design and monitoring of economic policies.

Real sector statistics

2. The National Statistics Service (NSS) compiles and disseminates annual and quarterly national accounts. The NSS also compiles and disseminates annually a full set of accounts (up to financial accounts) for the total economy and by institutional sectors. The NSS is developing a plan for implementing the System of National Accounts 2008 (2008 SNA).

3. The accuracy of the annual estimates of the national accounts is undermined by the lack of exhaustive source data for informal activities and of appropriate price and volume indicators, particularly for construction activities. Construction output volume measures are derived by deflating current values with a price index for output, which uses weights and base year prices from a survey in 1984. To improve volume measures of construction, the NSS should start compiling a new construction output price index based on more sound methodology. Until the new construction price index becomes available, the NSS should use other indicators for deriving construction aggregates at constant prices. The NSS should also implement new surveys to derive a proper benchmark for informal activities.

4. The NSS compiles discrete quarterly GDP estimates by production and by expenditure approaches at current and at constant prices. The production-side estimates at current prices are derived partially from cumulative source data (from business statistics surveys) and partially from discrete data sources. The NSS validates and reconciles data from different sources, but the underlying problems associated with de-cumulating the cumulative output data distort the quarterly pattern. The NSS compiles and disseminates two sets of quarterly GDP volume measures—one at the prices of corresponding quarter of the previous year and the other at average prices of 2005. The first set does not constitute a time series since it does not allow a comparison of different periods. A multitopic IMF statistics technical assistance mission in January 2010 suggested that the NSS discontinue compiling these data. The compilation procedures for the second set (volume measures at average prices of 2005) need to be improved. The January 2010 mission also suggested that the NSS compile only one set of quarterly GDP estimates—quarterly GDP at previous-year average prices—and derive time series through chain-linking. These estimates would be conceptually consistent with the annual data. They would also allow comparisons between different periods, which is essential for analysis of business cycle.

5. The CPI covers 11 large population centers and Yerevan. 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 development of an approach to include household expenditure on owner-occupied dwellings in the CPI calculations.

Government finance statistics

6. The budget execution reporting system compiles government finance 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 and monthly data on central government operations are disseminated one month after the reporting period. 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 respective budgetary institutions. A treasury single account (TSA) was introduced in 1996, and all bank accounts held by budgetary institutions were closed, except for project implementation units (PIU) that are required by donors to operate with commercial bank accounts. These PIU accounts are being moved gradually to the CBA. 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 since 2003 report data on cash flows and balances to the MoF. 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.

7. The budget presentation and the classification of items under the economic and functional classification of expenditures need to be made more transparent; for instance, the data have been subject to frequent reclassification, and wages for military personnel are reported in the 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 nonfinancial assets. The reconciliation of central government with general government operations is done by the NSS in cooperation with the MoF.

8. Since 2008, government finance statistics meet the classification requirements of the Government Finance Statistics Manual 2001 (GFSM 2001) for central government. Plans for improvement of the MoF envisage further progress in 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

9. Monetary and financial statistics are provided on a timely basis. 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 a 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 a one-week lag.

10. Responding to an IMF 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 has also been established by STA to share the SRF data with the IMF’s Middle East and Central Asia Department.

External sector statistics

11. 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. Transfer is expected in 2011. The February 2010 mission agreed with the authorities on an action plan aimed at ensuring a smooth institutional transfer of responsibility, as well as consistency and continuity in the production of the external sector statistics. A follow up mission is scheduled for later in 2011.

12. 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. Remittance data obtained from surveys 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 improved 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.

13. 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: Common Indicators Required for Surveillance

(As of May 27, 2011)

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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, extrabudgetary funds, and social security funds) and state and local governments.

Including currency and maturity composition.

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

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