Program Note
Republic of Armenia
Last Updated: February 28, 2013
Current IMF-Supported Program
Three-year, SDR 266.8 (approximately US$404 million) arrangements under the Extended Fund (EFF) and Extended Credit facilities (ECF), approved by the IMF Executive Board in June 2010. With good performance, the Board concluded the Fifth Review in December 2012, enabling disbursement of about US$51 million. A mission to conduct discussions for the Sixth Review and a possible new arrangement is expected to take place during spring 2013.
Background
Activity recovered further in 2012, with growth reaching nearly 7 percent, underpinned by a strong policy response, favorable weather, strong mining exports, and sustained remittance flows. Headline inflation remains at the low end of the central bank’s target range of 4±1.5 percent, reflecting supportive monetary and fiscal policies, a good harvest, and favorable global price developments. Business environment reforms are proceeding, although they have not yet translated into significantly higher investment. The external current account deficit remains relatively high, and growth is expected to moderate in 2013 to 4.3 percent (trend). The main risks stem from a worsening of economic conditions in Europe and spillovers via Russia.
Role of the IMF
The EFF/ECF-supported program aims to achieve strong growth and poverty reduction, fiscal and external sustainability, and financial sector stability, with a focus on:
- Reducing the fiscal deficit, while protecting key social expenditures;
- Implementing reforms to improve the tax system, cast a wider tax net, and achieve gains in revenue administration;
- Ensuring greater exchange rate flexibility and strengthening of the monetary framework;
- Further strengthening financial sector supervision to maintain robust confidence in the banking system and improve its resilience to shocks; and
- Improving the business environment, enhancing competitiveness, and reducing poverty.
In addition to financial support, the IMF has a wide-ranging program of technical assistance with Armenia, focused in particular on tax policy and revenue administration, management of public finances, macroeconomic modeling and the inflation targeting framework, contingency planning in the banking sector, and statistics. In addition, a full update under the Financial Sector Assessment Program took place in 2012. The IMF is coordinating its efforts with other agencies, including the World Bank, the European Bank for Reconstruction and Development, the Asian Development Bank, the European Union, and bilateral partners.
Progress to Date
An IMF staff team visited Armenia in September 2012 to review performance, and found that the program is broadly on track, with most quantitative targets met and structural benchmarks implemented. Fiscal consolidation is moving forward, ensuring that public debt remains sustainable. The fiscal deficit came in well below program targets in 2012, mainly because a few large, externally financed infrastructure projects have been delayed. Credit to the economy continues to grow, particularly in foreign currency.
Challenges Ahead
The key challenge is to implement fiscal and external adjustment firmly, while protecting the poor and adjusting policies as needed should developments impede the recovery.
- Armenia’s economic growth remains dependent on continued growth in Russia, which in turn is influenced by the economic outturn in Europe and by global oil prices.
- Tax policy reforms are moving forward, but raising revenues is challenging. Further efforts will be needed in 2013 and beyond to limit spending compression. Sustained political consensus will be needed in support of these reforms.
- The banking sector is sound and well-capitalized, but foreign currency lending continues to grow rapidly, exposing banks to indirect credit risks. The Central Bank of Armenia is monitoring developments closely and stands ready to take steps to ensure that risks are well managed.
- While Armenia has ample international reserves, balance of payments pressures remain. Continued fiscal discipline, together with exchange rate flexibility and structural reforms will be needed to mitigate pressures, along with continued support from external partners.
- Protecting the poor during this period of consolidation will be critical. To this end, the authorities have committed to improving the efficiency and targeting of social spending.
Armenia is well placed to weather these challenges. The policy package being implemented by the authorities, combined with financial support from the IMF and other partners, should enable Armenia to restore and sustain strong economic growth, foster rising incomes and employment, and help reduce poverty.
