Statement at the Conclusion of an IMF Mission to Armenia

Press Release No. 07/214
October 1, 2007

A International Monetary Fund (IMF) mission led by Ms. Marta Castello-Branco, visited Yerevan during the period September 5-19, 2007, to conduct discussions for the fifth review under the Poverty Reduction and Growth Facility (PRGF) arrangement, and to seek understandings on the 2008 budget. Mr. Lorenzo Pérez, Deputy Director of the IMF, also participated in the concluding policy discussions. The mission met with government officials, Central Bank of Armenia (CBA) staff, business representatives, and the international donor community. A key task of the mission was to reach understandings on an appropriate policy framework for the remainder of 2007 and 2008, in light of the need to manage large-scale foreign exchange inflows and to deal with emerging expenditure pressures associated with the planned pension increases and a potential hike in import gas prices in 2009.

The mission issued the following statement at the conclusion of the mission on September 18, 2007:

"Economic performance remains strong, with double-digit growth, low inflation, and a further improvement in tax collection. The outlook for 2008 and beyond remains positive, in view of favorable investment prospects and availability of external grants. Import growth continues to outpace export growth, but strong inflows of remittances should dampen the impact of the appreciating dram on the current account deficit. Since foreign exchange inflows are expected to persist, to maintain external competitiveness the authorities need to keep prudent monetary and fiscal policies, and remove structural impediments to economic growth.

"The PRGF-supported program remains on track. Program measures will continue to focus on maintaining macroeconomic stability and on implementing structural reforms to strengthen tax administration and improve financial intermediation.

"A prudent fiscal stance in recent years has contributed to low inflation, high growth, and low public debt. Going forward, continued sound fiscal policy will be essential for maintaining macroeconomic stability and external competitiveness, as well as encouraging foreign investment. At the same time, increasing the tax revenue/GDP ratio in a transparent and nondiscretionary manner will be crucial to finance infrastructure projects, expand essential poverty-reducing services, and improve the business environment.

"Inflation remains well within the authorities' target band (4 ±1.5 percent), but the central bank should stand ready to tighten monetary policy if high food and energy import prices exert inflationary pressure. The recent pick-up in credit growth is a positive development and, together with the expected entry of new foreign banks, should help increase financial intermediation. To avoid possible risks related to a rapid expansion of bank credit, the CBA should continue to hold banks to high prudential standards and encourage further improvement in banks' risk management and in borrower transparency (through strengthened corporate governance and accounting, and an effective credit bureau.

"While the business environment has improved markedly, several recent surveys highlight important remaining challenges, particularly regarding tax administration, access to credit, and domestic competition. Addressing these shortcomings will be crucial to enhance productivity and improve Armenia's competitiveness. The entry of new banks and the acceleration in credit growth are good news in that regard. However, further action is needed to strengthen tax administration and to encourage domestic competition. To that end, the mission considers as top priorities:

• To make serious efforts to modernize tax administration, while increasing efficiency, transparency, and fairness in tax collection. Discretionary means, such as the accumulation of unprocessed VAT refunds and requests for advance tax payments should not be used for achieving revenue targets.

• To look for ways to reduce monopolistic practices in the import business, with a view to increasing the pass-through of exchange rate changes to domestic prices.

• To allow current tax exemptions to expire, while not introducing new exemptions or tax amnesties. International experience has shown that what is crucial to encourage enterprise development is removing existing barriers and bottlenecks in order to create a level playing field and further improve the business environment."


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