Fourth Reviews Under the Extended Fund Facility and Extended Credit Facility Informational Annex

This paper discusses findings of the Fourth Review of Armenia’s economic performance under a program supported by Extended Fund Facility and Extended Credit Facility Arrangements. Adherence to the policies agreed under the IMF-supported program has played an important role in helping Armenia restore solid growth. The 2011 fiscal deficit was well below program targets, reflecting restrained spending. The deficit is likely to be moderately higher in 2012, but still in line with the program, and with higher expected revenues allowing for increases in priority spending.


This paper discusses findings of the Fourth Review of Armenia’s economic performance under a program supported by Extended Fund Facility and Extended Credit Facility Arrangements. Adherence to the policies agreed under the IMF-supported program has played an important role in helping Armenia restore solid growth. The 2011 fiscal deficit was well below program targets, reflecting restrained spending. The deficit is likely to be moderately higher in 2012, but still in line with the program, and with higher expected revenues allowing for increases in priority spending.

Annex I. Armenia: Relations with the Fund

(As of March 31, 2012)

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 assessment made recommendations to strengthen oversight arrangements at the CBA.

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 multiple currency practices or 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–IMF mission assessed Armenia’s financial sector as part of a Financial Sector Assessment Program (FSAP) update during February 1–14, 2012. The Financial Sector Stability Assessment (FSSA) report will be presented to the Executive Board in May 2012. The most recent previous FSAP update took place in 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 2006.

Armenia: Technical Assistance from the Fund, 2006–12

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

(As of April 27, 2012)

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Annex III. Armenia: Relations with the European Bank for

Reconstruction and Development (EBRD)

(As of April 27, 2012)

1. As of January 31, 2012, the EBRD had approved 106 projects in the power, transport, agribusiness, municipal and infrastructure, manufacturing and services, property, telecommunications and financial sectors. Total commitments amounted to €516 million. During 2011, the EBRD signed 21 projects, with a total volume of €93 million.

2. The EBRD has four sovereign projects. First, the bank approved a sovereign–guaranteed loan of €54.8 million for construction of the Hrazdan Unit 5 thermal power plant in 1993. The EBRD had funded technical assistance for the Hrazdan privatization prospectus and followed the privatization process. Second, in 1994, an agreement on a €21.8 million loan under sovereign guarantee was signed to build an air cargo terminal at Zvartnots International Airport in Yerevan. The airport was transferred under a concession agreement to private management in 2002; 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 2007, the EBRD approved a €7 million loan to the State Committee for Water Systems, owner of the water and wastewater assets located in the small municipalities outside of Yerevan. The proceeds of this loan are being used to improve wastewater treatment in five municipalities located near Lake Sevan. In 2010, EBRD signed a €5.0 million sovereign loan with Yerevan Metro Company to provide for immediate rehabilitation needs, safety upgrades, and energy efficiency. The investment is part of a broader plan to improve and reform public transport services in the capital of Armenia.

3. Most of the EBRD’s projects (93 percent)in Armenia are in the private sector. The EBRD has provided a major loan to Electric Networks of Armenia (see section 5 below). The Bank has also approved an additional loan to Zvartnots airport of €29.6 million, supplemented by investments from the AsDB and DEG. This project follows the successful completion in May 2007 of the first phase of the new passenger terminal, for which the Bank provided a €14.8 million loan together with DEG ($10 million). The second phase involves construction and purchase of equipment for the passenger terminal and will facilitate completion of terminal development and relocation of all arrival and departure operations from an older 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 firms in various sectors of the economy.

In 2010, the Bank committed €53 million to Armenia through 25 transactions, including the sovereign loan to Yerevan Metro. The portfolio for 2010 comprised sixteen projects with financial institutions, six in agribusiness, one each in manufacturing and property, and the sovereign metro project. Two loans to financial institutions are in dram and two loans were syndicated. During January–October 2011, the Bank committed an additional €69 million through sixteen transactions: eleven in the financial institutions sector, two in telecoms, and one each in natural resources, agribusiness and municipal infrastructure. In July 2011, the EBRD committed €6.5 million under a sovereign project to improve water supply and sanitation in 17 settlements in Armenia. As part of this project, the EIB will provide a sovereign loan of €6.5 million and the EU NIF will provide a €7 million grant.

4. In the banking sector, the EBRD’s first equity participation, in the Commercial Bank of Greece–Armenia (€1.1 million), was approved in late 1999. At present, there are 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 a non–bank financial intermediary, Cascade Insurance and Reinsurance Company, a subsidiary of Cascade Capital Holding.

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 approved by the EBRD’s Board on March 8, 2006 for an amount of $40 million. The facility was extended by an additional $80 million on November 9, 2007. In late 2009, the EBRD approved a further $100 million extension to AMBFF II (AMBFF II Extension II) to support increased financial intermediation and financial sector development and to contribute to economic development by providing medium to long–term funding to selected Armenian financial intermediaries. Another extension of the facility is now being discussed. The facility will seek to develop new products for financial institutions, including local currency loans, agricultural credit lines and mortgage financing. Additional technical assistance will be provided to partner banks.

The EBRD has expanded its partner bank relationships from four to twelve (two EBRD clients, Ameria and Cascade banks, merged in 2010). Nine banks were provided with new credit facilities under the AMBFF. Armeconombank was provided with a mortgage facility, and the first leasing facility in Armenia was signed with ACBA Leasing in 2008 for €5.9 million. A co–financing facility with six local banks was extended, resulting in 14 sub–loans to Armenian corporates. By co–financing lines, the EBRD has entered new sectors such as healthcare and telecoms and has significantly expanding its portfolio of agribusiness loans. A trade financing facilitation program was also made available to nine Armenian banks. In the beginning of 2012, the EBRD signed a €2.2 million loan in a local currency with Finca Armenia, a micro–financing institution.

5. Supporting development of renewable energy is another core activity of the EBRD. The EBRD has joined 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 a direct lending facility, with two projects signed. In addition to renewable energy, the EBRD has participated in other segments 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 €42 million loan with Electric Networks of Armenia to modernize and upgrade the obsolete low–voltage infrastructure and improve energy efficiency.

6. The EBRD launched Turn Around Management (TAM) and Business Advisory Service programs in Armenia in 2003 to support micro, small, and medium–sized enterprises. Since 2003, BAS has completed 828 projects in the amount of €3.162 million, as well as 40 Market Development Activity projects. TAM delivered more than 20 projects. The programs were originally funded by the EU–TACIS program, but are now funded from the ETC Fund.

7. Projects identified by the EBRD for future development are well diversified across sectors, and include several larger transactions. Additional opportunities are expected in infrastructure, including public sector projects (mainly municipal). The EBRD is exploring projects in public transport, water, sanitation and solid waste treatment. The Bank has launched a $25 million program to finance projects for industrial energy efficiency and renewable energy through local banks. In October 2010, the first $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.

8. As part of inspection reform and doing business programs, the EBRD is assisting the government to improve the business environment. The EBRD is actively supporting the preparation of a corporate governance code alongside the Ministry of Economy, the CBA, the Stock Exchange and IFC. The Bank is also providing assistance to the Public Services Regulatory Commission for telecommunications sector regulation. This assistance is being financed by the Government of Finland.

9. The EBRD’s current country strategy was approved in May 2009. The key priorities of the EBRD for the coming years 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) investments in alternative energy and municipal infrastructure and (iv) policy dialogue with the government, other multilateral and bilateral donors, and other stakeholders. A new EBRD country strategy for Armenia is currently being prepared for the period 2012–15 should be approved by mid 2012.

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

(As of April 27, 2012)

1. The AsDB country operational business plan (COBP) for 2012’13 was endorsed by the Bank’s Board of Governors in November 2011. The COBP will support the government’s Sustainable Development Program (SDP—the government’s poverty reduction strategy program) and help the authorities continue to counter economic vulnerabilities revealed by the crisis. The indicative focus areas under the COBP are: (i) urban development; (ii) regional cooperation; and (iii) private sector development. In 2012, the AsDB started preparing the first Country Partnership Strategy, to cover 2013–17.

2. As of May 1, 2012, the AsDB had approved loans for eight projects in the transport, municipal infrastructure, finance, and general budget support sectors. Total commitments amounted to $482.56 million for sovereign and $108.0 million for non–sovereign loans. One non–sovereign loan was provided to Armenia International Airports (ArIA) for the Zvartnots Airport Expansion Project (Phase 2). The loan finances the construction of a new terminal building and purchase of equipment to supplement the existing concourse building. In November 2011, the ADB approved a non–sovereign lending program totaling $65 million to enable commercial banks to expand their lending to small and medium–size enterprises.

3. The first AsDB sovereign loan ($30.6 million) was approved in November 2007 and financed rehabilitation of 220 km of rural roads. The second was a water supply and sanitation loan ($36 million) for repair and replacement of water supply infrastructure in small towns and villages, approved in December 2007. In April, 2012, the AsDB approved additional financing of $40 million to continue the project. The third was a supplementary loan ($17.3 million) to the rural roads project, approved in November 2008, to finance an increase in project costs from higher construction materials prices, domestic inflation, and appreciation of the dram. The fourth was a crisis recovery support program loan of $80 million, approved in July 2009, to protect budgetary social expenditures. The next two loans were Tranches 1 ($60 million) and 2 ($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 ($48.6 million) of the Sustainable Urban Development Investment Program approved in April 2011. The project provides for construction of two missing road links of the Yerevan inner bypass and strengthening of institutional and management capacity of the Yerevan municipality and urban transport service providers.

4. With the exception of the North–South Road Corridor Tranche 2 investment program loan, all approved sovereign loans are from the AsDB concessional window under the Asian Development Fund (ADF). The Tranche 2 loan is from the AsDB’s non–concessional window under ordinary capital resources.

5. In addition to loan projects, the AsDB is also involved in non–lending operations, mostly advisory services and capacity development technical assistance. This is mostly research–oriented and includes: Armenia’s Transport Outlook, a transport–sector master plan for 2011’20; and Institutional Modernization to Improve the Business Environment, to assist the government with introduction of an online business registry system. Armenia is also included in a number of AsDB regional TA projects aimed at sustained growth. Some of the regional TA projects provide assessments and development plans in specific areas. The advisory TA may lead to loan projects.

6. To increase efficiency and long–term cooperation, the AsDB has offered a new instrument: project funding under the Multi–Finance Facility (MFF). The MFF allows approval of long–term sector assistance with disbursement in tranches. Under the MFF, the AsDB has approved $500 million for the North–South Road Corridor investment program. Funds will be available for 7 years, and Armenia will request them in tranches. The first and second $60 million and $170 million tranches have been approved. A $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. The first $48.6 million tranche was approved in May 2011.

7. In 2011, AsDB signed trade finance agreements under AsDB’s Trade Finance Program with six banks in Armenia, a move that is expected to further bolster the country’s trade sector and help ensure sustainable economic growth.

Annex V. Armenia: Statistical Issues

(As of April 27, 2012)


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 supported this process through technical assistance from the Statistics Department (STA), the Fiscal Affairs Department (FAD), and the Monetary and Capital Markets Department (MCM). 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 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 is currently working to produce GDP data at current and at constant prices to be fully in accordance of the System of National Accounts. The NSS received IMF technical assistance on estimating quarterly GDP from discrete data sources only and using statistical techniques that conform to international standards. Recent publications of the NSS have reflected this effort. The NSS discontinued compiling GDP volume measures at the prices of the corresponding quarter of the previous year. The compilation procedures now use only average prices of 2005. The NSS also adopted the recommendation by the IMF statistics mission to 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 are essential for analysis of business cycle. As of January 2011, the NSS also started compiling a monthly indicator of economic activity (IEA), following international best practices. The monthly GDP compilation was discontinued. The monthly IEA is an implicit volume index compiled by aggregation of monthly volume indices of output using gross output weights.

5. The CPI covers 11 large population centers and Yerevan. Since January 2011, the CPI has been computed using 2010 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.

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. The CBA also produces the financial soundness indicator table every month, published both in the IMF Statistics and CBA websites.

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. 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. The responsibilities of compiling external sector statistics were de facto transferred to the CBA in January 2011, and since then, the CBA has compiled balance of payments, external debt, and IIP data for 2011. The transfer of responsibilities was smooth and during the short period after the transfer, the CBA undertook a number of important actions aimed at improving the compilation system. A follow up mission took place in October 2011, which undertook a comprehensive assessment of the institutional arrangements, data sources, methodology, and compilation practices for external sector statistics employed by the CBA, and advised on areas for improvement including further developing data sources and compilation practices.

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 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. There are also concerns with regard to the collection of data on international trade in services, specifically on import of services. The CBA is currently considering the implementation of an international transactions reporting system (ITRS) that would allow for collecting data on all cross-border payments and receipts going through the banking system.

13. Quarterly data on the international investment position are published by the CBA 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 April 27, 2012)

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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-à–vis nonresidents.

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