Republic of Armenia: First Review Under the Stand-by Arrangement—Press Release; Staff Report; and Statement by The Executive Director for the Republic of Armenia

First Review under the Stand-By Arrangement-Press Release; Staff Report; and Statement by the Executive Director for the Republic of Armenia

Abstract

First Review under the Stand-By Arrangement-Press Release; Staff Report; and Statement by the Executive Director for the Republic of Armenia

Recent Developments and Outlook

1. The post-velvet revolution government remains determined to move ahead with ambitious reforms. By year-end they intend to have in place a national plan to modernize and transform the economy. The plan will lay-out 26 sectoral strategies which will aim to strengthen governance and the anticorruption framework, improve the business environment, develop human capital, and improve social protection. The authorities believe that steadfast reform implementation in these areas is key to revitalize the Armenian economy, create better opportunities for all citizens, and improve the standards of living.

2. These efforts take place against a broadly favorable economic environment. Real GDP grew by 7.1 percent in the first half of 2019. The better-than-expected performance was driven by strong private consumption growth and with manufacturing and services sectors leading economic activity (Figure 1 and Table 1). Preliminary indicators point to continued strong economic performance in the second half, with growth expected to exceed 6V2 percent in 2019 overall. Driven partly by lower food prices, annual CPI inflation fell to 0.5 percent (y-o-y) in September (compared to 0.6 percent in August) and remains below the ±1.5 percent band around the Central Bank of Armenia’s (CBA) medium-term target of 4 percent.

Figure 1.
Figure 1.

Armenia: Real Sector Developments

Citation: IMF Staff Country Reports 2019, 397; 10.5089/9781513524689.002.A001

Sources: National authorities, IMF World Economic Outlook, and IMF staff calculations.
Table 1.

Armenia: Selected Economic and Financial Indicators, 2016–24

article image
Sources: Armenian authorities; and Fund staff estimates and projections.

Gross international reserves in months of next year’s imports of goods and services, including the SDR holdings.

3. The current account deficit is expected to narrow in 2019. In 2018 the current account deficit widened sharply (to 9.4 percent of GDP), owing to rapid import growth (Table 2). However, monthly trade data to end-August 2019 point to a deceleration of import growth on the back of a lower oil prices and a slowdown in imports of machinery and equipment (the driver of import growth in 2018). The impact of weaker imports was partly offset by weaker export growth due to lower commodity prices and weaker demand from major trading partners (Russia and EU).1 Overall, the trade deficit is expected to decline relative to GDP in 2019. Against relatively strong private flows, the dram appreciated slightly in recent months, notwithstanding opportunistic FX purchases by the CBA (around $500 million, net, in 2019 up to end-October), to build up its reserves position.

Table 2.

Armenia: Balance of Payments, 2016–24

(In millions of U.S. dollars, unless otherwise indicated)

article image
Sources: Armenian authorities; and Fund staff estimates and projections.
uA01fig01

Current Account Balance

(4-quarter moving sum, percent of GDP)

Citation: IMF Staff Country Reports 2019, 397; 10.5089/9781513524689.002.A001

Sources: National authorities, and IMF staff calculations.
uA01fig02

Gross International Reserves and Exchange Rate

Citation: IMF Staff Country Reports 2019, 397; 10.5089/9781513524689.002.A001

4. The fiscal position has been stronger than expected at program approval, but under-execution of foreign financed capital spending remains a concern. Fiscal revenue overperformed the budget target in H1 by almost 1 percent of GDP due to better than expected growth and—reflecting stronger tax compliance and a reduced shadow economy—strong performance in VAT, income and excise tax revenues.2 Spending remained lower than budgeted, mainly due to delays in the execution of planned capital expenditure (see below). As a result, assuming some catch-up in the implementation of investment projects—the end-2019 fiscal deficit is expected to be around 1½ percent of GDP, although if stronger-than-expected growth continues in 2019H2, the fiscal may overperform.

5. Domestic financial conditions are stable and financial soundness indicators remain sound (Tables 4 and 5). The banking sector remains well capitalized, liquid and its profitability has somewhat increased. Non-performing loans (NPLs) remain low despite a marginal increase to 5.5 percent of total loans, while the return on assets improved to 1.4 percent at end-July 2019. Reflecting ongoing macroeconomic and financial conditions stability, both credit and deposit dollarization declined somewhat (to 50.8 percent and 49.4 percent through August, respectively). Overall private sector credit growth moderated to 15.1 percent (yoy) at end-August (compared to 16.4 percent at end-2018), supported by robust demand for consumer loans and mortgages. Deposit growth accelerated to 9.7 percent (yoy) at end-August.

Table 3a.

Armenia: Central Government Operations, 2016–24

(In billions of Armenian drams)

article image
Sources: Ministry of Finance, Central Bank of Armenia, and Fund staff estimates and projections.

In 2016, an additional subsidy of AMD 2 billion is assumed to cover the electricity tariff differential for households and SMEs.

Includes acquisition of military equipment.

EFSD financing ($100 million in 2015–17).

The program balance is measured as below-the-line overall balance minus net lending.

Sum of overall balance (above the line), interest expense, and domestic and external net lending.

Table 3b.

Armenia: Central Government Operations, 2016–24

(In percent of GDP, unless otherwise specified)

article image
Sources: Ministry of Finance, Central Bank of Armenia, and Fund staff estimates and projections.

In 2016, an additional subsidy of AMD 2 billion is assumed to cover the electricity tariff differential for households and SMEs.

Includes acquisition of military equipment.

EFSD financing ($100 million in 2015–17).

The program balance is measured as below-the-line overall balance minus net lending.

Sum of overall balance (above the line), interest expense, and domestic and external net lending.

Table 4.

Armenia: Monetary Accounts, 2016–20

(In billions of drams, unless otherwise indicated)

article image
Sources: Central Bank of Armenia; and Fund staff estimates and projections.

Ratio of foreign currency deposits to total deposits (in percent).

Ratio of foreign currency deposits to broad money (in percent).

Table 5.

Armenia: Financial Soundness Indicators for the Banking Sector, 2015–19

(In percent, unless otherwise indicated)

article image
Source: Central Bank of Armenia.