Republic of Armenia: Staff Report for the 2012 Article IV Consultation, Fifth Reviews Under the Extended Fund Facility and Under the Extended Credit Facility, and Request for Waiver and Modification of Performance Criterion—Informational Annex

The postcrisis recovery in Armenia has accelerated, but challenges remain. Economic policies have been broadly consistent with IMF advice. Credit growth has been strong, especially in foreign currency (FX). The banking system is sound. The central bank (CBA) is improving the regulatory and supervisory framework in line with Financial SectorAssessment Program (FSAP) recommendations. Risks are mainly on the downside and come from potential external shocks, political uncertainties, and regional conflicts. Strong adjustment is continuing in 2012 with the deficit again expected to be lower than budgeted.


The postcrisis recovery in Armenia has accelerated, but challenges remain. Economic policies have been broadly consistent with IMF advice. Credit growth has been strong, especially in foreign currency (FX). The banking system is sound. The central bank (CBA) is improving the regulatory and supervisory framework in line with Financial SectorAssessment Program (FSAP) recommendations. Risks are mainly on the downside and come from potential external shocks, political uncertainties, and regional conflicts. Strong adjustment is continuing in 2012 with the deficit again expected to be lower than budgeted.

Fund Relations

(As of September 30, 2012)

Membership Status:

Joined 05/28/1992; Article VIII

General Resources Account:

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SDR Department:

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Outstanding Purchases and Loans:

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Latest Financial Arrangements:

In millions of SDR (09/30/2012)

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Projected Payments to Fund

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

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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. A safeguards monitoring visit to the CBA was completed in September 2012. The visit made recommendations to strengthen: (i) controls over management of foreign reserves and; (ii) CBA oversight arrangements.

Exchange Rate Arrangement

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.

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).

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.

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 was approved by the Executive Board in June 2012. The most recent previous FSAP update took place in 2005.

Resident Representatives

Mr. Guillermo Tolosa, since January 2010.

Technical Assistance

The following table summarizes the Fund’s technical assistance (TA) to Armenia since 2006.

Armenia: Technical Assistance from the Fund, 2006–12

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World Bank and IMF Collaboration—JMAP Implementation

(AS OF OCTOBER 18, 2012)

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Relations With the European Bank for Reconstruction and Development (EBRD)

(AS OF OCTOBER 18, 2012)

1. As of September 30, 2012, the EBRD had approved 109 projects in the power, transport, agribusiness, municipal and infrastructure, manufacturing and services, property, telecommunications, and financial sectors. Total commitments amounted to around EUR 562.3 million. During January-September 2012, the EBRD signed 8 projects with a total volume of EUR 43.0 million.

2. There are five 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 TA for the Hrazdan privatization prospectus and followed the privatization process. Second, in November 1994, the agreement on a EUR 21.8 million loan to build an air cargo terminal in Zvartnots airport was signed under a guarantee by the Armenian government. The airport was transferred to private management in 2002 (according to a concession agreement). The new management prepared a master plan for the development of the airport, which is expected to generate further cargo traffic for the cargo terminal. In April 2007, the EBRD approved a EUR 7 million loan to the State Committee for Water Systems, owner of the water and wastewater assets located in the small municipalities outside of Yerevan. The proceeds of this loan have been used to improve wastewater treatment in five municipalities located near Lake Sevan. In March 2010, EBRD signed a first EUR 5.0 million sovereign loan with Yerevan Metro Company. This project is providing emergency investments in the Yerevan Metro, covering immediate rehabilitation needs including safety upgrades and energy efficiency. The investment is part of a plan to improve and reform public transport services in the capital of Armenia. In August 2012, EBRD signed its second EUR 5.0 million sovereign loan with Yerevan Metro to primarily address issues related to water ingress into the tunnels.

3. Most of the Bank’s projects (93 percent) in Armenia are in the private sector. In addition to the loan to Electric Networks of Armenia (see section 5 below), the Bank approved an additional loan to Zvartnots International Airport in the amount of EUR 29.6 million (supplemented by investments from ADB and DEG). This project followed on from the successful completion, in May 2007, of the first phase of the Passenger Terminal, for which the Bank provided a EUR 14.8 million loan together with DEG (USD 10 million). This project involved the construction and purchase of equipment for the second phase of the Passenger Terminal complex at Zvartnots International Airport and facilitated the completion of Airport Terminal development reallocating all operations (arrivals and departures) from the old Airport building. The loan was a commercial facility with no sovereign support. Other private sector finance includes relatively smaller loans to private companies and equity participation in a number of companies in various sectors of the industry.

In the first three quarters of 2012 the Bank committed EUR 43 million to Armenia through 8 transactions, including 5 projects in the financial institutions sector, 1 in equity funds, 1 sovereign project with Yerevan Metro Company, and 1 in natural resources sector. In early 2012, EBRD together with other international financial institutions supported the creation of the Caucasus Growth Fund. This fund will be managed by the Small Enterprise Assistance Funds (SEAF), a global fund manager, and will be the first institutional quality fund to provide debt and equity to SMEs in the Caucasus region.

4. In the banking sector, a first equity participation in the Commercial Bank of Greece-Armenia (EUR 1.1 million) was approved in late 1999. Now there are four local banks where EBRD participates in equity: Armeconombank, Byblos Bank Armenia, Ararat Bank and Procredit Bank.

The Armenia Multi-Bank Framework Facility II (AMBFF II), established to provide loans and equity to commercial banks and leasing companies in Armenia, was approved by the EBRD Board in March 2006 for an amount of $40 million, and then extended for another $80 million in November 2007. In late 2009, the EBRD has approved a further $100 million extension to AMBFF II in order to support increased financial intermediation and the development of the financial sector in Armenia and to contribute to economic development by providing medium to long-term funding to selected Armenian financial intermediaries. Another extension to this Facility of $100 million was approved in mid-2011. The Facility will seek to develop new products for financial institutions, including provision of local currency loans, agricultural credit lines and mortgage financing. Additional TA will be provided to partner banks.

The EBRD expanded its relationship with partner banks in Armenia from four to twelve (taking into account that 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 Bank has entered such new sectors as healthcare and telecoms, in addition to significantly expanding 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.

As of end September 2012, the EBRD has disbursed about EUR 50 million equivalent in local currency financing to Armenian commercial banks and microfinancing institutions. The Currency Exchange (TCX) provides the Armenian dram hedge to the EBRD. In parallel, the EBRD and IMF are assisting the government and the CBA to implement reforms aiming to facilitate financing in dram, reduce the level of dollarization, and foster the development of local capital markets.

5. Supporting development of renewable energy is another core activity of the Bank. To that end, the EBRD joined forces with the WB, USAID, and Cascade Credit (a financing arm of Cafesdjian Foundation) to launch the Armenian Renewable Energy Programme (AREP). The Bank’s participation took the form of a loan to Cascade Credit. The Bank also continued to finance renewable energy projects on its own through a Direct Lending Facility, with two such projects signed. In addition to renewable energy, the Bank returned to the mainstream segment of the sector, seeking to support post-privatization development with a loan to the Armenian privately-owned power distribution company. In April 2009, the EBRD signed a EUR 42 million loan with Electric Networks of Armenia to upgrade and modernize obsolete low-voltage infrastructure and improve energy efficiency.

6. The EBRD launched the Enterprise Growth Programme (EGP) and Business Advisory Service programs in Armenia in 2003 to support micro, small, and medium-sized enterprises. Since 2003, BAS has completed 916 projects in the amount of EUR 5.9 million, as well as 45 Market Development Activity (MDA) projects. EGP has delivered more than 25 projects. Among the donors are Canada, Taipei China, the United Kingdom, the EU, EU - Eastern Partnership Multi-Beneficiary Technical Assistance, the United States, the Early Transition Countries Fund (ETCF), the EBRD, EBRD Shareholder Special Fund (ESSF).

7. 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. TA has been put in place financed by the Government of Austria. The Bank has also launched a TA program to review and amend the legal, regulatory, institutional, operational and technical frameworks for energy efficiency in the residential sector. At a later stage, the EBRD will offer financing and capacity building to a selected number of commercial banks to support investments in this sector. The residential sector in Armenia is a large energy consumer with significant potential for energy savings and carbon emission reductions.

8. As part of inspection reform and doing business programs, the EBRD is assisting the government improve the business environment. The EBRD is actively promoting and supporting the preparation of a corporate governance code in cooperation with the Ministry of Economy, the Central Bank, the Stock Exchange and the 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 2012. The key priorities of the EBRD for the coming three years are: (i) developing the financial sector and improving access to finance; (ii) improving municipal and urban transport infrastructure; (iii) developing agribusiness and high value-added, export-oriented industrial companies; and (iv) improving the regulatory and institutional framework for sustainable energy and increasing value added in the mining sector.

Relations With the Asian Development Bank (ASDB)

(AS OF OCTOBER 18, 2012)

1. The AsDB’s economic report and the interim operational strategy for 2006–09 for Armenia were approved in 2006. The country operational business plan (COBP) for 2012–13 was endorsed by AsDB’s Board of Governors in November 2011, and an update of the COBP for 2012–13 is expected to be approved in the fourth quarter of 2012. A new COBP is pending completion of the AsDB’s new Country Partnership Strategy for Armenia, expected to be approved in the fourth quarter of 2013. The indicative focus areas of the updated COBP are (i) regional cooperation, (ii) private sector development, and (iii) infrastructure.

2. As of October 15, 2012, the AsDB had approved loans for eight projects in the transport, municipal infrastructure, finance, and general budget support sectors. Total commitments amounted to $482.6 million for sovereign and $108.0 million for non-sovereign loans. One non-sovereign loan was provided to Armenia International Airports for the Zvartnots Airport Expansion Project (Phase 2). The loan financed the construction of a new terminal building and purchase of equipment to supplement the existing concourse building. In November 2012, AsDB approved a non-sovereign lending program totaling $65 million for four commercial banks to expand lending to small and medium-size enterprises (SMEs).

3. The first AsDB sovereign loan ($30.6 million), approved in November 2007, financed rehabilitation of 220 km of rural roads. The second loan ($36 million), approved in December 2007, financed repair and replacement of water supply infrastructure in small towns and villages; in April, 2012, 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 cost from higher construction materials prices, domestic inflation, and appreciation of the dram. The fourth was a crisis recovery support program loan ($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 financing 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 financing an upgrading of the Ashtarak-Talin road section from two lanes to four lanes. The final loan was the first tranche ($48.6 million) of the Sustainable Urban Development Investment Program approved in April 2011. The loan finances 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’s concessional window under the Asian Development Fund (AsDF). The Tranche 2 loan for the North-South road is from the AsDB’s non-concessional window under ordinary capital resources (OCR).

5. Two additional sovereign loans are expected to be approved by the AsDF’s Board in 2012: (i) the Women’s Entrepreneurship Support Sector Development Program (total of $40 million ADF), to support business development services for women, capacity development, and policy reforms through a program loan to the government ($20 million), and to finance the expansion of SME lending to women’s businesses by commercial banks in a program administered by the German Armenian Fund of the CBA ($20 million); and (ii) Tranche 3 of the North–South Road Corridor Investment Program, to finance continuing construction of the road to Gyumri (amount of financing still to be determined).

6. 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.

7. In addition to financing projects and programs, the AsDB is also involved in advisory services and capacity development. The AsDB provided TA to develop Armenia’s Transport Outlook, a transport-sector master plan for 2011-2020; and to assist the government in introducing an online business registry system. Armenia is also included in a number of AsDB’s multi-country TA projects, providing assessments and development plans in topics of common interest across countries.

Statistical Issues

(As of October 24, 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 TA 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 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 has started 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 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 with the SNA. The NSS received IMF TA on estimating quarterly GDP from discrete data sources only and is using statistical techniques that conform to international standards. Recent publications of the NSS have reflected this effort. The NSS has 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 of the IMF STA 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 the 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. 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. A February data 2009 ROSC mission recommended development of an approach to include household expenditure on owner-occupied dwellings in the CPI calculations.

Government finance statistics

5. The budget execution reporting system compiles 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.

6. 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.

7. Since 2008, government finance statistics meet the classification requirements of the Government Finance Statistics Manual 2001 (GFSM 2001) for the central government.

Monetary and financial statistics

8. Monetary and financial statistics are provided on a timely basis. Data on the accounts of the 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.

9. 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 on both the IMF and CBA websites.

External sector statistics

10. In 2009, the Armenian authorities decided to transfer the responsibility for compiling the balance of payments, international investment position (IIP), and external debt statistics from the NSS to the CBA. The February 2010 STA mission provided advice 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 IMF STA mission in October 2011 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.

11. The coverage of external sector data has improved in recent years. Trade statistics are provided on a timely basis, and trade data by origin, destination, and commodity are generally available within a month. Price data for exports and imports are less readily available. Quarterly balance of payments statistics are generally available with a three-month lag. However, for remittances, 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 that would allow for collecting data on all cross-border payments and receipts going through the banking system.

12. 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 October 24, 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).

Republic of Armenia: 2012 Article IV Consultation and Fifth Reviews Under the Extended Fund Facility and Under the Extended Credit Facility, and Request for Waiver and Modification of Performance Criterion—Staff Report; Press Release; Public Information Notice; and Statement by the Executive Director for Republic of Armenia
Author: International Monetary Fund. Middle East and Central Asia Dept.