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IMF Country Report No. 19/154

REPUBLIC OF ARMENIA

2019 ARTICLE IV CONSULTATION AND REQUEST FOR A STAND-BY ARRANGEMENT—PRESS RELEASES; STAFF REPORT; AND STATEMENT BY THE EXECUTIVE DIRECTOR FOR THE REPUBLIC OF ARMENIA

June 2019

In the context of the Staff Report for the request for a Stand-by Arrangement, the following documents have been released and are included in this package:

  • Two Press Releases including a statement by the Chair of the Executive Board and summarizing the views of the Executive Board as expressed during its May 17, 2019 consideration of the staff report on issues related to the Article IV Consultation and IMF arrangement.

  • The Staff Report prepared by a staff team of the IMF for the Executive Board’s consideration on May 17, 2019, following discussions that ended on February 26, 2019 with the officials of the Republic of Armenia on economic developments and policies underpinning the IMF arrangement. Based on information available at the time of these discussions, the staff report was completed on May 3, 2019.

  • An Informational Annex prepared by the IMF staff.

  • A Statement by the Executive Director for the Republic of Armenia.

The documents listed below have been or will be separately released.

  • Letter of Intent sent to the IMF by the authorities of the Republic of Armenia*

  • Memorandum of Economic and Financial Policies by the authorities of the Republic of Armenia*

  • Technical Memorandum of Understanding*

  • Selected Issues Paper

  • *Also included in the abovementioned Staff Report

The IMF’s transparency policy allows for the deletion of market-sensitive information and premature disclosure of the authorities’ policy intentions in published staff reports and other documents.

© 2019 International Monetary Fund

Copies of this report are available to the public from

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Price: $18.00 per printed copy

International Monetary Fund

Washington, D.C.

© 2019 International Monetary Fund

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REPUBLIC OF ARMENIA

STAFF REPORT FOR THE 2019 ARTICLE IV CONSULTATION AND REQUEST FOR A STAND-BY ARRANGEMENT

May 3, 2019

Key Issues

Context. Since the 2014–16 regional economic slowdown, economic activity has recovered, while policies have remained broadly in line with staff’s advice. Supported by the upgraded fiscal rule, fiscal consolidation remains on track, and public debt has started to decline. Inflation is under control, the financial system remains stable, and pressures on the exchange rate have been limited. Nonetheless, important challenges remain. Importantly, the still-weak business climate and corruption constrain the economy’s capacity to grow sufficiently rapidly to tangibly reduce poverty and unemployment. Moreover, the economy continues to be vulnerable to external shocks; public debt, while declining, is relatively elevated; and enhancing revenue mobilization remains a critical priority. Recognizing these challenges, the new government has pledged to revitalize efforts to fight corruption, improve competition, strengthen revenue administration, and build resilience to shocks. It has requested a new Fund-supported program to help achieve these objectives and move Armenia toward a more dynamic market economy.

Key policies. The authorities’ efforts are centered on advancing structural reforms to generate higher, more inclusive, and resilient growth; and strong policies to maintain macroeconomic stability. They have announced a revenue-neutral growth-enhancing tax policy reform package, which includes measures to flatten the personal income tax profile, lower personal and corporate income tax rates, and simplify the special tax systems. They plan to accompany them by efforts to strengthen tax administration and reduce income inequality. Monetary policy will continue to focus on inflation targeting, supported by a flexible exchange rate.

Article IV discussions. Discussions focused on macroeconomic and structural policies to ensure macro and fiscal sustainability, foster higher and more broad-based growth, and strengthen resilience to shocks.

Elements of the new SBA. A 36-month SBA is proposed with access of 139.75 percent of quota (SDR 180.0 million). The arrangement is intended to be precautionary. It will provide insurance against external shocks and support the authorities’ efforts to strengthen economic fundamentals and policy frameworks. In the event of a shock, access to IMF financing will maintain a reserve cover above 85 percent of the IMF reserve adequacy metric.

Approved By:

Thanos Arvanitis and Nathan Porter

Discussions were held during February 12–26, 2019. The mission met with Prime Minister Pashinyan, Deputy Prime Minister Grigoryan, Governor of the Central Bank of Armenia Javadyan, Minister of Finance Janjughazyan, Minister of Economy Khachatryan, State Revenue Committee Chairman Ananyan and other senior government officials, as well as representatives of the private sector and civil society. The team comprised H. Samiei (head), H. Tabarraei, and S. Yoon (MCD), Y. Ustyugova (Resident Representative), F. Raei (SPR), and Y. Xiao (FAD). S. Pompe and A. French (LEG) joined the mission to discuss governance-related issues. V. Janvelyan and L. Karapetyan (IMF Office) assisted the team. R. Doornbush and Sh. Harutyunyan (OED) attended most of the meetings. H. Bukhari and B. Laumann (MCD) provided assistance.

Contents

  • CONTEXT

  • RECENT DEVELOPMENTS

  • OUTLOOK AND RISKS

  • ARTICLE IV DISCUSSIONS

  • A. Fiscal Policy: Promoting Growth-Friendly Fiscal Consolidation

  • B. Monetary Policy: Strengthening the Inflation Targeting Framework

  • C. Financial Sector Policy: Enhancing Resilience and Promoting Deepening

  • D. External Sector Policy: Maintaining External Stability

  • E. Structural Reforms: Advancing Sustainable and Inclusive Growth

  • THE NEW STAND-BY ARRANGEMENT

  • A. Objectives

  • B. Program Modalities

  • C. Capacity to Repay

  • STAFF APPRAISAL

  • BOXES

  • 1. Implementation of Main Recommendations of the 2017 Article IV Consultation

  • 2. Macroeconomic Effects of Structural Reforms

  • 3. SME Access to Finance in Armenia

  • 4. Corruption and Governance

  • 5. Women’s Role in the Economy

  • FIGURES

  • 1. Real Sector Developments

  • 2. External Developments

  • 3. Fiscal Developments

  • 4. Monetary Developments

  • 5. Financial Developments

  • TABLES

  • 1. Inclusive Growth Indicators

  • 2. Selected Economic and Financial Indicators, 2016–23

  • 3. Balance of Payments, 2016–23

  • 4a. Central Government Operations, 2016–23 (in billions of Armenian drams)

  • 4b. Central Government Operations, 2016–23 (in percent of GDP)

  • 5. Monetary Accounts, 2016–20

  • 6. Financial Soundness Indicators for the Banking Sector, 2015–19

  • 7. Medium-Term Macroeconomic Framework, 2016–24

  • 8. Fund Disbursements and Timing of Reviews Under an SBA

  • 9. Indicators of Capacity to Repay the Fund, 2018–24

  • ANNEXES

  • I. Revised Fiscal Rules

  • II. Ex-Post Peer Review Assessment

  • III. Risk Assessment Matrix

  • IV. Illustrative Adverse Scenario

  • V. Public Debt Sustainability Analysis

  • VI. External Sector Assessment

  • VII. Effects of Armenia’s Accession to Eurasian Economic Union

  • APPENDICES

  • I. Letter of Intent

    • Attachment I. Memorandum of Economic and Financial Policies (MEFP)

    • Attachment II. Technical Memorandum of Understanding (TMU)

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REPUBLIC OF ARMENIA

STAFF REPORT FOR THE 2019 ARTICLE IV CONSULTATION AND REQUEST FOR A STAND-BY ARRANGEMENT—INFORMATIONAL ANNEX

May 3, 2019

Prepared By

The Middle East and Central Asia Department (In Consultation with Other Departments)

Contents

  • FUND RELATIONS

  • WORLD BANK AND IMF COLLABORATIONS

  • RELATIONS WITH THE EUROPEAN BANK FOR RECONSTRUCTION AND DEVELOPMENT

  • RELATIONS WITH THE ASIAN DEVELOPMENT BANK

  • STATISTICAL ISSUES

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Press Release No. 19/173

FOR IMMEDIATE RELEASE

May 17, 2019

International Monetary Fund

Washington, D.C. 20431 USA

Telephone 202–623–7100

Fax 202–623–6772

www.imf.org

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Press Release No. 19/190

FOR IMMEDIATE RELEASE

May 31, 2019

International Monetary Fund

700 19th Street, NW

Washington, D. C. 20431 USA

Telephone 202–623–7100

Fax 202–623–6772

www.imf.org