Statement at the Conclusion of an IMF Staff Mission to ArmeniaPress Release No. 11/137
April 15, 2011
A mission from the International Monetary Fund (IMF) headed by Ms. Veronica Bacalu, Deputy Division Chief in the IMF’s Middle East and Central Asia Department, visited Yerevan from March 31-April 12, 2011. The team assessed developments and prospects, as well as performance under the authorities’ economic reform program supported by Extended Fund Facility (EFF)/Extended Credit Facility (ECF) arrangements. Performance continues to be positive, and the team reached staff-level agreement on targets and measures through the rest of 2011. The IMF’s Executive Board is expected to consider Armenia’s request for the completion of the Second Review of the EFF/ECF-supported program in June 2011. Upon Board approval of the review, a disbursement of SDR 36.2 million (about US$56 million) would be made available to Armenia. The total financial commitment under the IMF-supported program amounts to SDR 266.8 million (about US$410 million). The First Review and the subsequent disbursement of SDR 36.2 million (about US$55 million) was completed in December 2010.
The Armenian economy continues to recover from the crisis, although new challenges have emerged. In the second half of last year, agricultural output collapsed, and overall economic growth fell below expectations to 2.1 percent. Disruptions to local agricultural output compounded the effects of higher prices in international commodities markets, triggering a sharp increase in food and fuel prices in Armenia. Overall inflation rose to 11.5 percent in March, in light of the large share of food in the Armenian consumption basket. At the same time, Armenia’s external trade balance and remittances have rebounded. Credit growth has also been rapid. Against this background, other sectors of the Armenian economy have had a solid performance, including industry and services. These trends are likely to continue into 2011, and with improved conditions in agriculture, growth is poised to increase to 4.6 percent.
With the potential of spillovers from food inflation to other prices in Armenia, the inflationary environment will likely remain challenging for some months. However, with strong policies, including recent steps to tighten monetary policy and the Central Bank’s commitment to a flexible exchange rate, overall inflation should moderate and return to the CBA’s target band in the first half of next year. Armenia’s external imbalances are also expected to recede, albeit at a moderate pace, supported by structural reforms and fiscal consolidation.
The fiscal balance has improved significantly, with the overall deficit coming down to below 5 percent in 2010 from around 8 percent in 2009. In order to ensure debt sustainability, the deficit is expected to contract to less than 4 percent in 2011, and further in 2012 and beyond. So far, the fiscal consolidation has not involved any significant increase of tax revenues as envisaged. Therefore, in light of the critical need for enhanced fiscal space for the government to more effectively support private sector growth and poverty reduction, the mission had extensive discussions on new tax policy and revenue administration reform strategies to be implemented over the short and medium term.
Armenia continues to make progress improving its business environment. Recent initiatives to reduce the cost of complying with taxes and setting up businesses are likely to have a positive impact. Also, continuous efforts regarding financial sector development and the commitment to financial stability are achieving visible results. Reforms are set to continue in this area going forward.
During the visit, the IMF team met with a wide spectrum of counterparts in Armenia—government officials, parliamentarians, central bank officials, and representatives of the international community, the banking and business sectors, and civil society. The mission would like to thank the authorities and other Armenian representatives for their hospitality, fruitful collaboration, and open discussions. The IMF team looks forward to continuing the close cooperation with the authorities under the current program.