Republic of Armenia: Staff Report for the 2019 Article IV Consultation and Request for a Stand-by Arrangement—Informational Annex

2019 Article IV Consultation and Request for a Stand-By Arrangement-Press Release; Staff Report; and Statement by the Executive Director for the Republic of Armenia


2019 Article IV Consultation and Request for a Stand-By Arrangement-Press Release; Staff Report; and Statement by the Executive Director for the Republic of Armenia

Fund Relations

(March 31, 2019)

Membership Status:

Joined 05/28/1992; Article VIII

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Latest Financial Arrangements:

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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

An update safeguards assessment was concluded in August 2014 with respect to the Extended Fund Facility approved in March 2014. The assessment found that the CBA maintained safeguards in its financial reporting practices, external audit mechanism, and internal audit function. However, the assessment recommended amendments to the central bank law to strengthen the CBA’s governance arrangements, and also to provide the CBA with marketable, interest-bearing government securities to cover its losses. In addition, the assessment noted that the CBA had investments in enterprises engaged in financial sector development and infrastructure, including a credit card processing company, a mortgage finance company, and a cash collection agency.

The CBA divested the Panarmenian bank, in line with the safeguards assessment’s recommendation, and in 2017 a new central bank law was enacted. While this new law enshrined the main principle of institutional autonomy, it needs to address other safeguards concerns, such as strengthening judiciary safeguards relating to the membership of Board members and the CBA’s non-core activities.

The CBA’s audits continue to be completed in a timely manner

Exchange Rate Arrangement

The de jure arrangement is “free floating.” The CBA intervenes in the foreign exchange market only to smooth excessive exchange rate volatility, defined as short-term, high-frequency exchange rate movements caused by speculative or trend-following elements rather than underlying macroeconomic fundamentals. The CBA intervenes anonymously mainly via auctions of foreign exchange, or openly in the interbank market, or through the stock exchange. The de facto arrangement is classified as “floating”. The official exchange rate is quoted daily as a weighted average of the buying and selling rates in the foreign exchange market.

Armenia maintains one multiple currency practice, which arises from a 2007 agreement between the MoF and CBA to settle some budgetary transactions at an agreed accounting ER throughout the fiscal year. The authorities are not requesting and staff does not recommend the Board’s approval to maintain this MCP.

Armenia maintains no other 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 previous Article IV consultation with Armenia was concluded on June 23, 2017.

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 June 26–July 11, 2018. The Financial Sector Stability Assessment report was approved by the Executive Board in November 2018. The most recent previous FSAP Update took place in 2012.

Resident Representative

Ms. Yulia Ustyugova, since August 2017.

Technical Assistance

The following table summarizes the Fund’s technical assistance (TA) to Armenia since 2012.

Armenia: Technical Assistance from the Fund, 2012–19

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World Bank and IMF Collaborations

(As of March 2019)

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

(As of March 2019)

1. The EBRD is the largest single investor in Armenia. To date, the Bank has committed almost €1,270 million in 175 projects in all major sectors of the economy. Private sector share of the cumulative investment is close to 90%. The Bank’s current portfolio in Armenia is close to € 320 million for 56 portfolio projects. Private sector share of the current portfolio is approx. 85%. Current portfolio composition is as follows: 22% energy, 51% financial institutions, 6% industry, commerce and agribusiness, and 21% infrastructure. The Bank’s annual investment in Armenia in 2018 was € 70 million.

EBRD Activities in Armenia

Fostering economic growth and employment by supporting small and medium enterprises (SMEs)

2. In the financial sector, the Bank has enhanced access to finance, particularly for SMEs, through dedicated credit lines to commercial banks and micro-credit organizations, direct debt, mezzanine and equity investments. The Bank partners with local financial institutions representing close to two-thirds of total bank assets. Through them, the Bank supports SMEs with focus on underserved segments (e.g. women-led businesses). Grant funding secured by the Bank helps local banks to expand their product range and allows to deliver technical assistance and capacity building. The Bank provides its partner banks with long term local currency to improve SMEs’ access to local currency funding. Armenia is one of the countries where the Bank’s Local Currency and Capital Markets Development Initiative has delivered sound results. The Bank’s trade finance facilitation programme promotes international trade to, from and within the Bank’s countries of operations. The Bank seeks to work with its partner banks in Armenia in view of sharing the risk of financing local companies through the EBRD Risk Sharing Facility. The Bank is also progressing towards launching, in 2019, the Armenia SME private equity fund.

Accelerating green economy transition by supporting the energy and natural resources sectors.

3. Energy and natural resources sector is an important pillar of the Bank’s partnership with Armenia. The Bank works with the Electric Network of Armenia (ENA) to support implementation of ENA’s investment program aimed at fundamental modernization of infrastructure. The Bank strongly supports efforts to scale up the share of renewable energy sources in Armenia. The Masrik-1 solar power plant project which the Bank works to co-finance in 2019 is expected to establish a benchmark for solar auctions in Armenia and to become the first utility-scale solar power plant in the region. Renewable energy auction design, implementation and funding represent the Bank’s strategic policy priority. In the mining sector, timely resolution of the situation around the Amulsar gold mine project where the Bank is co-investor, is important for the investor confidence.

Developing municipal and transport infrastructure

4. In the context of municipal infrastructure, the Bank signed Yerevan street lighting project, Kotayk solid waste project, provided loan towards construction of a solid waste landfill in Yerevan, participated in a landmark international syndication for Zvartnots International Airport, supported an energy efficient street lighting and city street rehabilitation programme in Gyumri. Bearing in mind Armenia’s public borrowing headroom, the Bank is committed to appraising further transport and municipal projects which are strongly supported by the authorities, and to working with the government to enhance private participation in public service provision and to mobilize investment grants, policy advisory and capacity building assistance.

Industry, Commerce and Agribusiness

5. The Bank supports high value-added corporates through direct investment (debt, equity, mezzanine), typically combined with significant hands-on capacity building assistance, helping smaller clients grow their businesses by providing crucial financial and technical support to implement capex intensive business plans. The Bank’s ability to scale up the number and the volume of its private sector deals in areas of manufacturing and services, property and tourism, information and communication technologies and agriculture depends on the quality and scope of private investments in Armenia.

Advice for Small Business (ASB)

6. Through tailored business advice and know-how provision to SMEs, the Bank seeks to improve SMEs-level strategy formulation, operations efficiency, financial reporting, marketing, and energy efficiency. Most ASB clients in Armenia increase their turnover, improve productivity, see job creation and secure external funding to finance growth. In 2017, the Bank signed with the European Union a framework agreement on establishment of “SME Finance and Advice Facility” targeting improvement of business and investment climate for SMEs in Armenia, increasing business opportunities and access to finance for local SMEs.

Policy dialogue

7. The Bank continues to support the Business Support Office (the BSO) which the bank established to promote partnership and policy dialogue between the state and the private sector in Armenia. Other areas of policy dialogue in Armenia include local currency and capital market development, insolvency legislation, judicial capacity building, public private partnership legislation etc.

Relations with the Asian Development Bank (ASDB)

(As of March 2019)

1. Armenia joined the AsDB in September 2005. The AsDB’s first Country Partnership Strategy for Armenia for 2014–18 (endorsed by the AsDB’s Board on 27 January 2015) focuses on three sectors: (i) transport, (ii) water supply and other municipal services, and (iii) energy. As of January 1, 2017, Armenia was reclassified as a Group C country eligible for market-based ordinary capital resources only. The Country Partnership Strategy for 2019–23 is being prepared for the AsDB Board consideration in September 2019.

2. As of March 20, 2019, the AsDB cumulative sovereign lending amounted to $1,140.0 million for 20 loans. In 2017, AsDB approved a policy-based loan with two subprograms for Public Efficiency and Financial Markets Program to help the Government further strengthen fiscal sustainability and support the development of financial markets in Armenia through better public debt management and fiscal risk management. Subprogram 1 ($40 million) was approved in 2017 and subprogram 2 ($50 million) was approved in 2018.

3. In 2016, the AsDB approved a Policy-Based Loan of $90 million for phase 2 of the Infrastructure Sustainability Support Program, which focuses on improvements in infrastructure operations and sustainability. In 2016, AsDB also approved financing of $50 million for the Armenia-Georgia Border Regional Road (M6 Vanadzor-Bagratashen) Improvement Project. The road project will support the rehabilitation and upgrading 51.5 kilometers of the two-lane highway in northern Armenia and will enhance international connectivity, reduce the cost of transport, and improve facilities and safety. It has collaborative cofinancing of $56.4 million from the European Investment Bank (EIB).

4. In 2015, the AsDB approved a Results-Based Loan of $88.5 million for the Seismic Safety Improvement Program. The program supports the government in seismic strengthening and renovation of priority school buildings and will improve seismic safety planning and management competencies.

5. In 2014, the AsDB approved a $37 million loan for the Power Transmission Rehabilitation Project to help the government diversify energy sources and rehabilitate and upgrade electricity transmission and distribution networks. The Infrastructure Sustainability Support Program ($49 million) was approved in August 2014 and helped improve road and water service provision through results-based public management and financing reforms.

6. In 2011, the AsDB approved a $400 million multi-tranche financing facility (MFF) for the Sustainable Urban Development Investment Program, which aims to help Armenia upgrade its urban transport services, to improve living conditions, and bolster economic opportunities in selected secondary cities. The Tranche 1 for $48.64 million (approved in 2011) and the tranche 2 for $112.97 (approved in 2015) of the MFF will help improve and extend the urban infrastructure and to strengthen the institutional capacity in Yerevan.

7. In 2009, the AsDB approved a $500 million MFF to fund the North–South Road Corridor Investment Program. In 2009, the AsDB approved Tranche 1 ($60 million) for improving the Yerevan-Ashtarak section of the road. Tranche 2 ($170 million) approved in 2010 finances the upgrade of the road between Ashtarak and Talin. In 2013, the AsDB approved Tranche 3 for $100 million to finance continuing construction of the road to Gyumri (additional co-financing is provided by the European Investment Bank).

8. The AsDB has approved $376.4 million in non-sovereign financing in Armenia for eleven private sector transactions. The AsDB’s current portfolio of non-sovereign operations covers utilities and other infrastructure services, financial institutions, and agribusiness. In 2018, the bank approved a $32 million loan to agribusiness and logistics company, Spayka, for development of high-efficiency horticulture as part of an integrated supply chain to reach international markets. Also, in 2018, the AsDB approved a financing facility of $68.4 million for the construction and operation of a combined cycle thermal power plant in Yerevan. The project will deliver key energy infrastructure, generate employment during construction and operation, and create conditions for greater private sector participation in Armenia’s energy sector.

9. In 2017, the AsDB approved a $80 million debt financing facility for Electric Networks of Armenia CJSC for Distribution Network Rehabilitation, Efficiency Improvement, and Augmentation project. In 2017, the AsDB also approved a $30 million senior loan to support the expansion of Ameriabank’s SME portfolio and an equity investment of $30 million to support Ameriabank’s future growth plans.

10. In 2016, the AsDB approved a $6 million loan to a universal credit organization to expand lending to small and medium-size enterprises and the agriculture sector, primarily outside of the capital Yerevan. In 2013, the AsDB signed a $25 million loan with International Energy Corporation to rehabilitate and improve the reliability and safety of Sevan-Hrazdan Cascade Hydropower, in a program co-financed with the European Bank for Reconstruction and Development (EBRD). The AsDB’s Trade Finance Program works with four banks in Armenia and has supported over $170.5 million in trade through 601 transactions as of December 2018.

11. In addition to financing projects and programs, the AsDB is also involved in advisory services and capacity development. These include technical assistance (TA) programs for export-and innovation- led industrial development, schools seismic strengthening, social sectors reforms, public efficiency and financial markets development, and analysis of Armenia’s economic opportunities associated with trade regimes. Armenia is also included in a number of AsDB’s multi-country TA projects, providing assessments and development plans on topics of common interest across countries.

Statistical Issues

(As of March 2019)


1. Data provision by Armenia is broadly adequate for surveillance but has some shortcomings. 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 since then. The IMF 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.

2. Data provision is adequate and sufficient for program monitoring. Program series, as defined in the Technical Memorandum of Understanding (TMU) are provided with the required timeliness. Monetary statistics include data on some branches in Nagorno-Karabakh (as identified in the above-mentioned data ROSC). The proposed program’s monetary variables, as specified in the TMU based on these statistics, are defined on a consistent manner and in line with previous programs approved by the Board.

Real Sector Statistics

3. 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. As of 2015, the NSS has been preparing the national accounts under the methodology of the System of National Accounts 2008 (2008 SNA). GDP under this new methodology have been extended back to 2012, and there are plans to also cover earlier years.

4. 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.

5. The quality of source data and compilation procedures in national accounts needs to improve further. The size of household survey data is too small to appropriately calculate household consumption expenditure and some of exports data are underreported, which leads to underestimation of net exports. On the expenditure approach, changes in inventories are mainly derived as a residual and consequently volatile enough to cause for concern in economic analysis. In addition, the production approach has data collection issues, particularly in measuring agricultural outputs. Collecting the data in an inconsistent way has contributed to volatility in measured agricultural output.

6. 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 and instead 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. Since 2012, NSS has discontinued compiling GDP on average prices of 2005 and instead they just published GDP for 2009–12 on average prices of year 2008. 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. The CPI is currently computed using 2015 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

7. 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 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. Since 2010 these PIU accounts also are being moved gradually to the TSA. 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.

8. 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, teachers, and doctors are reported in the category of goods and services and other expense, 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.

9. Since 2018, the balance of the single taxpayer accounts has been removed from government tax revenues, but this change has not been reflected in individual tax categories. Rather, there is a residual item reflecting the lump sum adjustment. As a result, the classifications of the tax components and total tax revenues are not fully consistent.

10. 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

11. 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.

12. 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

13. 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.

14. The coverage of external sector data has improved in recent years, although some recent delays have emerged with the transitions towards the Eurasian Economic Union (EEU). Trade statistics are provided on a timely basis, and trade data by origin, destination, and commodity are generally available within a month. However, reporting problems have arisen since 2015 with EEU trade data. Export and import data are produced from customs records. Trade data within EEU may be subject to incomplete coverage and under-invoicing. 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.

15. 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 5, 2019)

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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, extra-budgetary 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: 2019 Article IV Consultation and Request for a Stand-By Arrangement-Press Release; Staff Report; and Statement by the Executive Director for the Republic of Armenia
Author: International Monetary Fund. Middle East and Central Asia Dept.