## 1armea2019007

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### Context and program framework
- Board approved a 36-month Stand-By Arrangement (SBA) with access of SDR 180 million (139.75 percent of quota or about US$248.2 million) on May 17, 2019.
- Authorities intend to treat the SBA as precautionary.
- Staff supports completion of the first review; upon completion an additional SDR 25.714 million would be made available, bringing total accessible credit after review to about SDR 51.428 million.
- Mission dates: Discussion in Yerevan during September 19–30. Document dated December 6, 2019.

### Recent macroeconomic performance and outlook
- Growth and inflation
  - Real GDP growth: 7.1 percent in the first half of 2019; expected to exceed 6½ percent in 2019 overall.
  - Growth projection: projected to moderate to around 5 percent in 2020; medium-term growth expected around 4½ percent.
  - CPI inflation: 0.5 percent (y-o-y) in September 2019 (0.6 percent in August); CBA medium-term target 4 percent with a ±1.5 percent band.
  - Inflation expected to gradually pick up in 2020 as impact from lower food prices dissipates.
- External sector and reserves
  - 2018 current account deficit: 9.4 percent of GDP.
  - 2019 outlook: current account deficit expected to narrow; trade deficit expected to decline relative to GDP.
  - CBA FX purchases: around $500 million, net, in 2019 up to end-October.
  - Exchange rate: dram appreciated slightly in recent months.
- Fiscal developments
  - H1 fiscal revenue overperformance: almost 1 percent of GDP above budget target due to stronger growth, improved tax compliance, and reduced shadow economy.
  - Spending under-execution driven mainly by delays in capital expenditure (concern on foreign-financed capital spending under-execution).
  - End-2019 fiscal deficit: expected to be around 1½ percent of GDP assuming some catch-up in investment project execution.
  - Central government debt: projected to fall to around 50 percent of GDP by end-2019.
- Financial sector and monetary conditions
  - Banking sector: well capitalized and liquid with improved profitability.
  - NPLs: marginal increase to 5.5 percent of total loans (6.5?—see tables: March/June series listed).
  - Return on assets: 1.4 percent at end-July 2019.
  - Credit dollarization: declined to 50.8 percent through August 2019; deposit dollarization declined to 49.4 percent through August 2019.
  - Private sector credit growth: 15.1 percent (yoy) at end-August 2019 (16.4 percent at end-2018).
  - Deposit growth: 9.7 percent (yoy) at end-August 2019.

### Program performance, monitoring, and requests
- Program status: broadly on track.
- Quantitative performance criteria (end-June): all met, including NIR floor and program fiscal balance (flow, floor).
- Structural benchmarks (end-June): all four met.
- Indicative targets: all observed except end-June IT on social spending (end-June actual 27 versus target 30).
- End-September developments:
  - Time-bound action plan and communication strategy to reform FX reserve requirement regime (end-September SB) completed.
  - Two SBs not observed for end-September 2019 proposed to be reset (to December 2019 and March 2020); a new SB proposed in line with safeguards’ assessment.
  - Authorities requested: modification of one SB, resetting two SBs not observed, and a new SB; requested adjustment to the IT on social spending on technical grounds.
- IMF financing timetable under the SBA (sequencing and amounts)
  - May 17, 2019: SDR 25.714 million (cumulative 19.96 percent of quota).
  - September 30, 2019: SDR 25.714 million (cumulative 39.93 percent of quota).
  - March 31, 2020: SDR 25.714 million (cumulative 59.89 percent of quota).
  - September 30, 2020: SDR 25.714 million (cumulative 79.86 percent of quota).
  - March 31, 2021: SDR 25.714 million (cumulative 99.82 percent of quota).
  - September 30, 2021: SDR 25.714 million (cumulative 119.79 percent of quota).
  - March 31, 2022: SDR 25.716 million (cumulative 139.75 percent of quota).
  - Total: SDR 180.000 million (total percent of quota 139.75).

### Fiscal policy and public investment management
- 2020 budget and fiscal parameters
  - Draft 2020 budget targets a fiscal deficit of 2¼ percent of GDP (document also cites 2.3 percent in places).
  - Tax revenues expected to rise by ½ percent of GDP relative to 2019 due to strengthened tax administration and anti-corruption measures.
  - Current spending: set to remain a constant share of GDP; social assistance will increase slightly in nominal terms.
  - Capital spending: rises to 4.1 percent of GDP as implementation bottlenecks are gradually resolved; investment spending (2020 plan) AMD 288 billion (4.1 percent of GDP).
  - Current spending (2020 plan): AMD 1568 billion (22.1 percent of GDP).
- Tax policy and administration
  - June NA approved growth-friendly tax changes effective in 2020: flatten personal income tax, lower personal and corporate income tax rates, simplify special tax regimes; offsetting measures include new taxes on tobacco and gambling, indexation of excise tax rates to inflation, removal of selected tax exemptions, and increases in gambling and financial sector license fees.
  - Staff notes changes expected to be revenue neutral; urges authorities to take offsetting measures if revenues fall short.
  - SRC developed a comprehensive tax administration strategy for 2020–24 (June 2019 SB) including compliance strategy, taxpayer register cleansing, and performance management.
  - Tax potential analysis: estimated tax potential 24.7 percent of GDP; implied tax gap 4.0 percent of GDP from stochastic frontier analysis.
- Public investment management
  - Causes of under-execution: weaknesses in project planning and prioritization, uncertainties in project management structures, and delays due to anti-corruption efforts.
  - Actions: Ministry of Economy developing template to prioritize projects; World Bank TA and IMF PIMA follow-up planned.

### Monetary policy, reserves, and FX liquidity
- Monetary policy stance
  - CBA lowered policy rate from 5¾ to 5½ in September 2019.
  - Guidance: continue to anchor inflation expectations and ensure two-way exchange rate flexibility; IT framework remains appropriate anchor.
  - If inflation remains persistently low, further rate cuts should be considered provided they would not lead to capital outflow pressures.
- Reserves and FX management
  - CBA purchased about $500 million by end-October 2019 to build buffers and limit appreciation pressures.
  - Interventions to be limited to smoothing excessive fluctuations; exchange rate to be key shock absorber if inflows reverse.
- FX reserve requirement reform and liquidity standards
  - Time-bound action plan and communication strategy prepared; RR regime amended in October requiring commercial banks to convert FX reserve requirements from AMD to FX by an average of 3 percent annually.
  - Given favorable FX market conditions in 2019, authorities completed conversion of 6 percent of FX reserve requirements; remaining 12 percent conversion expected to be completed by mid-2024.
  - Draft regulations for LCR and NSFR: expected to come in force by 2020Q1 / March 2020; set 100 percent ratios for dram liabilities and 50–60 percent for FX liabilities, increasing over 3 years to satisfy Basel III requirements.
  - Staff recommended increasing dram reserve requirements and introducing their remuneration after re-denomination reform is complete.

### Financial sector resilience and capital markets
- Financial sector reforms
  - Implement Basel III capital buffers, greater liquidity buffers, recovery and resolution planning, strengthened stress testing, and consider debt service-to-income and stressed LTV ratios.
  - Recovery plan regulations and amended stress testing regulation effective from November 11, 2019.
  - Countercyclical and conservation buffers adopted with phased timelines (countercyclical enforced from July 2019; conservation and systemic buffers effective from January 2020).
- Capital market development
  - Draft capital market development program prepared (September 2019 SB); authorities requested postponement of associated SB to March 2020 to allow more time for institutional consolidation.
  - Constraints: ineffective regulatory and taxation regime, issuance size and transaction costs, high cost of capital market financing relative to banks, insufficient transparency for international investors.

### Governance, anti-corruption, and structural reforms
- Anti-corruption and governance
  - Legislation adopted to require establishment of a registry of beneficial ownership information (June 2019 SB).
  - Draft comprehensive anti-corruption strategy for 2019–23 approved by government on October 3, 2019.
  - Draft law on a single autonomous anti-corruption entity delayed (September 2019 SB not observed); to be submitted to NA by December 2019 (proposed reset).
  - Criminal Code revisions underway to eliminate embezzlement thresholds, introduce criminal liability for legal persons, amend statute of limitations, and retain liability in case of repayment for corruption crimes.
- Other structural reforms and social policies
  - Employment and inclusion: gender strategy 2019–23 approved; employment strategy/action plan expected by end-2019.
  - Minimum wage: increase of 25 percent effective January 1, 2020; minimum wage currently AMD 55,000 per month.
  - Education and health: draft Law on Higher Education and Science prepared; concept note for universal health coverage financing being developed.
  - Public procurement diagnostic completed with World Bank; PPP law adopted in June 2019 with secondary legislation underway; PPP database expected by June 2020.

### Risks, capacity to repay, and safeguards
- Capacity to repay
  - Fund staff view Armenia’s capacity to repay the Fund as adequate; full drawing of proposed access would not significantly affect total debt.
  - Illustrative scenario: reserves and exports may be respectively 25 and 3 percent lower after a shock, suggesting peak IMF payment obligation ratios of 5.6 percent and 1.8 percent of gross reserves and exports (instead of 4.2 percent and 1.7 percent in the table).
- Safeguards assessment
  - September 2019 Safeguards Assessment found CBA has a strong safeguards framework with well-established audit arrangements and financial reporting; recommended additional legal reforms and a 5–10-year strategy to phase out non-core CBA activities (September 2020 SB).
- Risk matrix (selected)
  - Global: Rising protectionism (Relative likelihood: High; Impact: Low/Medium); Sharp rise in risk premia (High; Low); Weaker global growth (Medium; Medium); Large swings in energy prices (Medium; Medium/High).
  - Country-specific: Regional conflict (Low; High/Medium); political economy risks and low inflation risk triggering IMF consultation if inflation falls below MPCC band.
  - Policy responses: maintain exchange rate flexibility, de-dollarization, strengthen banking supervision, diversify exports, accelerate structural reforms, and strengthen social safety nets.

### Key statistics and selected exact figures (as reported)
- SBA access: SDR 180 million (139.75 percent of quota or about US$248.2 million).
- Additional SDR on review: SDR 25.714 million; total accessible credit after review: about SDR 51.428 million.
- Real GDP growth: 7.1 percent (H1 2019); expected >6½ percent in 2019; ~5 percent in 2020; ~4½ percent medium-term.
- CPI inflation: 0.5 percent (y-o-y) in September 2019; CBA target 4 percent; ±1.5 percent band.
- Current account deficit: 9.4 percent of GDP in 2018.
- CBA FX purchases: around $500 million net in 2019 up to end-October.
- End-2019 fiscal deficit: expected around 1½ percent of GDP.
- Central government debt: projected around 50 percent of GDP by end-2019.
- Draft 2020 budget deficit target: 2¼ percent of GDP (also cited as 2.3 percent in program tables).
- Tax revenue increase (2020 vs 2019): ½ percent of GDP.
- Capital spending target: 4.1 percent of GDP (investment spending AMD 288 billion).
- NPLs: 5.5 percent of total loans (June series); NPLs also reported at 5.0 percent (2019), 5.2 percent end-October in some tables.
- Return on assets: 1.4 percent at end-July 2019.
- Credit dollarization: 50.8 percent through August 2019.
- Deposit dollarization: 49.4 percent through August 2019.
- Private sector credit growth: 15.1 percent (yoy) at end-August 2019 (16.4 percent at end-2018).
- Deposit growth: 9.7 percent (yoy) at end-August 2019.
- Real GDP (percent change, selected series): 2016 0.2; 2017 7.5; 2018 5.2; 2019 6.5; 2020 4.9.
- Gross international reserves (in millions of U.S. dollars, selected): 2018 2,259; 2019 2,357.
- Current account balance (percent of GDP, selected): 2018 -9.4; 2019 -8.0; medium-term target ~-6.0.
- Public and publicly-guaranteed (PPG) debt (percent of GDP, selected): 2018 55.8; 2019 53.6; 2024 50.0.

### Policy recommendations and priorities
- Maintain fiscal prudence while protecting social spending and allowing a measured rise in capital spending as implementation bottlenecks are resolved.
- Strengthen tax administration and revenue mobilization to realize estimated tax potential (tax potential 24.7 percent of GDP; implied tax gap 4.0 percent of GDP).
- Strengthen public investment management and accelerate execution of foreign-financed capital projects; adopt a PIM process and prioritize projects by economic returns.
- Deepen capital markets and improve liquidity management to enhance monetary policy transmission.
- Continue financial sector reforms (Basel III buffers, LCR/NSFR, recovery/resolution plans, stress testing) and advance de-dollarization efforts.
- Strengthen governance and anti-corruption measures, including beneficial ownership registry consolidation, Criminal Code reforms, and establishment of a single autonomous anti-corruption entity.
- Maintain exchange rate flexibility, limit FX intervention to smoothing operations, and build reserve buffers consistent with program NIR floor.

*International Monetary Fund — Executive Summary and staff report excerpts from content unit 1armea2019007 (December 6, 2019).*

### EXECUTIVE SUMMARY

### EXECUTIVE SUMMARY

### Context and Program Framework
- The Board approved a 36-month Stand-By Arrangement (SBA) with access of SDR 180 million (139.75 percent of quota or about US$248.2 million) on May 17, 2019.
- The Armenian authorities intend to treat the SBA as precautionary.
- Staff supports the authorities’ request for completion of the first review. Upon completion of the review, an additional SDR 25.714 million would be made available to Armenia, bringing the total accessible credit to about SDR 51.428 million.
- Mission dates: Discussion took place in Yerevan during September 19–30. Document dated December 6, 2019.

### Focus of Program Discussions
- Maintain fiscal prudence and strengthen public investment management.
- 2020 budget.
- Central Bank of Armenia’s (CBA) efforts to further strengthen the monetary policy framework and reform FX reserve requirements to strengthen bank resilience.
- Reforms to promote financial sector and capital market development.
- Efforts to strengthen economic governance.

### Program Performance and Benchmarks
- Program status: broadly on track.
- All end-June quantitative performance criteria (QPCs) were met, including NIR and fiscal balance targets.
- All four end-June structural benchmarks (SBs) were met.
- All indicative targets (ITs) were observed except for the end-June IT on social spending, which was marginally missed.
- A time-bound action plan and a communication strategy to reform the FX reserve requirement regime (an end-September SB) were completed.
- Two SBs were not observed for end-September 2019 and are proposed to be reset to December 2019, and March 2020 instead; a new SB is proposed in line with the recent safeguards’ assessment.
- Authorities requested: modification of one SB, resetting two SBs not observed, and a new SB; requested adjustment to the IT on social spending on technical grounds.

### Mission and Team
- Mission met with Deputy Prime Minister Grigoryan, Governor of the Central Bank of Armenia Javadyan, Minister of Finance Janjughazyan, Minister of Economy Khachatryan, State Revenue Committee Deputy Chairman Mashadyan, other senior officials, and private sector and civil society representatives.
- IMF team: A. Arvanitis (head), H. Tabarraei, M. El Said (MCD), Y. Ustyugova (Resident Representative), F. Raei (SPR), Y. Xiao (FAD). V. Janvelyan and L. Karapetyan (IMF Office) assisted. Sh. Harutyunyan (OED) attended most meetings. R. Al Farah and B. Laumann (MCD) provided assistance.

*Recent Developments and Outlook*

### Economic Growth and Inflation
- Real GDP growth: 7.1 percent in the first half of 2019.
- Growth outlook: expected to exceed 6½ percent in 2019 overall.
- Inflation: annual CPI inflation fell to 0.5 percent (y-o-y) in September (0.6 percent in August); remains below the ±1.5 percent band around the CBA’s medium-term target of 4 percent.
- Inflation is expected to gradually pick up in 2020 as the impact from lower food prices dissipates.

### External Sector and Reserves
- 2018 current account deficit: widened to 9.4 percent of GDP.
- 2019 outlook: current account deficit expected to narrow in 2019; trade deficit expected to decline relative to GDP.
- Drivers: deceleration of import growth (lower oil prices, slowdown in machinery and equipment imports); partly offset by weaker export growth due to lower commodity prices and weaker demand from major trading partners.
- CBA FX purchases: around $500 million, net, in 2019 up to end-October.
- Exchange rate: dram appreciated slightly in recent months.

### Fiscal Developments
- Fiscal revenue overperformance: H1 overperformed budget target by almost 1 percent of GDP due to stronger growth, improved tax compliance, and reduced shadow economy.
- Spending under-execution: mainly due to delays in execution of planned capital expenditure (foreign financed capital spending under-execution a concern).
- End-2019 fiscal deficit: expected to be around 1½ percent of GDP, assuming some catch-up in investment project execution; could overperform if stronger growth continues in 2019H2.
- Government cleared bulk of backlog with VAT refunds due to strong collections.

### Financial Sector and Monetary Conditions
- Banking sector: well capitalized, liquid, with improved profitability.
- Non-performing loans (NPLs): marginal increase to 5.5 percent of total loans.
- Return on assets: improved to 1.4 percent at end-July 2019.
- Dollarization: credit dollarization declined to 50.8 percent through August; deposit dollarization declined to 49.4 percent through August.
- Private sector credit growth: moderated to 15.1 percent (yoy) at end-August (16.4 percent at end-2018).
- Deposit growth: accelerated to 9.7 percent (yoy) at end-August.

### Medium-Term Outlook and Risks
- Growth projection: projected to moderate to around 5 percent in 2020; medium-term growth expected around 4½ percent.
- Consumption: expected to moderate as temporary buoy from preferential trade preferences fades.
- Investment: expected to strengthen as capital project execution improves.
- External position: projected to gradually converge to a 6 percent of GDP current account norm over the medium term, as export growth benefits from reforms.

*Program Implementation Details*

### Quantitative Targets and Indicative Targets
- All end-June QPCs met, including:
  - Net official international reserves (NIR) floor: Met.
  - Program fiscal balance (flow, floor): Met.
  - Budget domestic lending (cumulative flow, ceiling): Met.
  - External public debt arrears (stock, ceiling, continuous criterion): Met.
- MPCC inflation specification: end-June midpoint inflation Met.
- Indicative Targets (status at end-June):
  - Net domestic assets of the CBA (stock, ceiling): Met.
  - Avg. concessionality of newly contracted external debt (flow, floor, in percent): Met.
  - New government guaranteed external debt (stock, ceiling, in millions of USD): Met.
  - Social spending of the government (flow, floor): Not Met (end-June: actual 27 versus target 30 in table).

### Structural Benchmarks Implemented
- June 2019 SBs completed:
  - Draft PPP law submitted in March 2019 and adopted in June 2019; establishes reporting and monitoring and requires a ceiling on government exposure from PPPs; secondary legislation underway to specify the ceiling.
  - Action plan for 2020–24 Tax Administration Strategy developed and shared with staff (addresses IMF TA recommendations).
  - Draft law to establish a market evaluation procedure for real estate taxation submitted to the National Assembly.
  - Legislation adopted to require establishment of a registry of beneficial ownership information.
- September 2019 SB: action plan communicated to banks to gradually convert FX required reserves from AMD to FX starting (September 2019 SB), with 6 percent (out of 18) already this year and a further 3 percent every subsequent year (MEFP ¶16).

### Adjustments and Requests by Authorities
- Requested resets and modifications:
  - Reset an end-September 2019 SB to March 2020 to allow more time for technical consultations on a strategy to develop capital markets.
  - Reset an end-September 2019 SB on a draft law creating a single autonomous anti-corruption entity to end-December to align with a new anticorruption strategy for 2019–23 (approved by government on October 3, 2019).
  - New SB agreed to prepare an exit strategy to phase out CBA involvement in non-core central bank activities (development lending and subsidiaries) by end-June 2020 (in line with safeguards’ assessment).
  - Requested adjustment to the IT for end-2019 on social spending reflecting demand factors, with commitment to increase budgeted allocation in 2020.

*Policy Discussions — Fiscal Policy and Public Investment*

### Fiscal Stance and Debt
- 2017 upgraded fiscal rules guide policy; authorities on track to bring central government debt below 50 percent of GDP well before 2023 target.
- Central government debt projected to fall to around 50 percent by end-2019 following two years of fiscal overperformance.

### 2020 Budget and Fiscal Parameters
- Draft 2020 budget targets a fiscal deficit of 2¼ percent of GDP.
- Tax revenues expected to rise by ½ percent of GDP relative to 2019 due to strengthened tax administration and anti-corruption measures.
- Current spending: set to remain a constant share of GDP; social assistance spending will increase slightly in nominal terms.
- Capital spending: rises to 4.1 percent of GDP as implementation bottlenecks are gradually resolved.
- A budget in line with these objectives will be approved by the National Assembly by year-end.
- In case of revenue shortfalls, government committed to compensating measures while striving to protect social spending, including reducing ad hoc VAT and income tax exemptions and streamlining expenditures.

### Tax Policy and Administration Reforms
- June NA approved growth-friendly tax changes effective in 2020: flatten personal income tax, lower personal and corporate income tax rates, simplify special tax regimes; offsetting measures include new taxes on tobacco and gambling, indexation of excise tax rates to inflation, removal of selected tax exemptions, and increase in gambling and financial sector license fees.
- Staff notes changes expected to be revenue neutral; urges authorities to take offsetting measures if revenues fall short.
- Authorities finalizing 2019–20 tax reform strategy to remove tax arbitrage and rationalize tax expenditures.
- Progress toward market-price-based valuation for property taxation: law “On Establishing Market Evaluation Procedure for Real Estate Taxation” submitted to the National Assembly (June 2019 SB).

*Key Figures and Indicators (as reported in text)*
- SBA access: SDR 180 million (139.75 percent of quota or about US$248.2 million).
- Additional SDR on review: SDR 25.714 million; total accessible credit after review: about SDR 51.428 million.
- Real GDP growth: 7.1 percent (H1 2019); expected >6½ percent in 2019; ~5 percent in 2020; ~4½ percent medium-term.
- CPI inflation: 0.5 percent (y-o-y) in September 2019; CBA medium-term target 4 percent; ±1.5 percent band around target.
- Current account deficit: 9.4 percent of GDP in 2018.
- CBA FX purchases: around $500 million net in 2019 up to end-October.
- End-2019 fiscal deficit: expected around 1½ percent of GDP.
- Central government debt: projected around 50 percent of GDP by end-2019.
- Draft 2020 budget deficit target: 2¼ percent of GDP.
- Tax revenue increase (2020 vs 2019): ½ percent of GDP.
- Capital spending target: 4.1 percent of GDP.
- NPLs: 5.5 percent of total loans.
- Return on assets: 1.4 percent at end-July 2019.
- Credit dollarization: 50.8 percent through August 2019.
- Deposit dollarization: 49.4 percent through August 2019.
- Private sector credit growth: 15.1 percent (yoy) at end-August 2019 (16.4 percent at end-2018).
- Deposit growth: 9.7 percent (yoy) at end-August 2019.

_International Monetary Fund — Executive Summary (1armea2019007) — December 6, 2019._

### 2019. The government is currently reviewing the rate structure and nontaxable threshold for

### 1armea2019007 - 2019. The government is currently reviewing the rate structure and nontaxable threshold for

### Tax administration and revenue mobilization
- The State Revenue Committee (SRC) developed a comprehensive tax administration strategy for 2020–24 with strategic goals and deliverables to implement recent IMF TA recommendations, including:
  - developing a compliance strategy;
  - establishing procedures for cleansing and updating the taxpayer register;
  - developing a performance management process (June 2019 SB).
- The government intends to develop an action plan by December to improve tax compliance and raise the tax-to -GDP ratio over the medium term (December 2019 SB), informed by an ongoing comprehensive tax-potential study and to be assisted by upcoming IMF TA on microdata-based tax gap analysis (Annex II).
- Staff stress the need to ensure property tax implementation is effective and fair; authorities, supported by IMF TA, are developing mechanisms to mitigate the impact on the low-income population.
- Finding: The full impact of the fiscal package has already been incorporated in the program (see the last staff report).

### Fiscal rules, budget process, and public expenditure management
- Early experience with the new fiscal rules suggests refinements to the budget process are needed to improve implementation and smooth functioning.
- Current situation and concern:
  - The budgeted 2020 current expenditure level is higher than the path specified in the government’s implementation decree.
  - The budgeted current expenditure level is around 1½ percent of GDP above the ceiling implied by the expenditure decree.
  - The deviation is driven mainly by capital grants and subventions to local governments and municipalities, the impact of the national minimum wage increase, necessary social spending and national defense.
- Recommendations to safeguard credibility of fiscal rules:
  - Require the medium term expenditure framework (MTEF) to discuss available space for current expenditure increases consistent with the fiscal rules.
  - Require draft budget laws and decisions to disclose any implications they have for compliance with the fiscal rules (and associated decrees).
  - Regulate in-year budgetary amendments under well-defined criteria to limit the government’s broad powers to change appropriations without a supplementary budget.

### Public investment management and execution of foreign-financed capital spending
- Causes of recent under-execution of investment projects:
  - weaknesses in project planning and prioritization;
  - uncertainties created by existing project management structures;
  - delays in decision making by implementation agencies amid anti-corruption efforts.
- Actions under way:
  - With World Bank TA, the Ministry of Economy is developing a template to prioritize public investment projects by economic returns and government objectives.
  - Staff urged clarification of project management structures, alignment with international best practice, and review of viability of projects with chronic delays.
  - Follow-up IMF PIMA TA planned for year-end to provide further recommendations for incorporation into the program.

### Social spending, labor participation, and income support
- Social spending strategy:
  - Use active labor policies to encourage greater labor force participation;
  - Use well targeted social benefits to eradicate extreme poverty.
- Ongoing measures:
  - Working with the World Bank, the government is studying ways to enhance adequacy and targeting of social benefits.
  - Expanded maternity benefits, especially in rural areas.
  - Plan to use a World Bank model to analyze distributional effects of future fiscal reforms.
- Labor market and wage policy:
  - The NA approved an increase in the minimum wage by 25 percent effective January 1, 2020.
  - The minimum wage, currently at AMD 55,000 per month, has not been adjusted since 2015.
  - Staff note decisive structural reforms are critical to offset any competitiveness impact and cited that direct fiscal impact is contained (share of public employees with salaries close to minimum wage implying a direct impact of 0.01 percent of GDP).
- Social protection strengthening:
  - With World Bank assistance, the authorities plan to adopt a social assessment system for families, create integrated social centers across regions, and conduct multi-dimensional surveys to strengthen targeting of social assistance programs.

### Monetary policy, inflation targeting, and reserves
- Monetary policy stance and inflation:
  - After a modest pickup in Q1, core and headline inflation declined in Q2 and Q3.
  - The CBA lowered the policy rate, for a second time in 2019, from 5¾ to 5½ in September.
  - While CPI inflation fell to 0.5 percent (y-o -y) in September, Armenia’s inflation data shows strong seasonality with a considerable pickup in Q4, and the expectation is for end-year inflation to be within the MPCC band.
  - If inflation remains persistently low, further rate cuts should be considered, provided they would not lead to capital outflow pressures.
- Reserves accumulation and exchange rate policy:
  - To build buffers and limit appreciation pressures on the dram, the CBA purchased $500 million by end-October 2019.
  - Staff and authorities agreed interventions should be limited to smoothing excessive fluctuations; if inflows reverse, the exchange rate should be the key shock absorber to protect competitiveness and maintain adequate international reserves.
- Enhancing the inflation-targeting framework:
  - CBA is preparing a strategy to develop domestic capital markets by end-March 2020 (SB).
  - MOF will step up coordination with line ministries to regularly provide accurate daily cash-flow forecasts to the CBA.
  - CBA will continue seven-day repos; the three-month repo will be used for structural liquidity management and only on an occasional basis.

### Financial sector resilience and macroprudential measures
- Progress and planned reforms:
  - CBA prepared a time-bound action plan and communication strategy to reform the FX reserve requirement (RR) regime.
  - Introduction of separate LCR and NSFR for domestic and foreign currencies to boost liquidity buffers.
  - Regulations prepared for bank recovery plans; all commercial banks required to develop recovery plans acceptable to the central bank; CBA will prepare resolution plans (RRP) for all systemic banks.
  - Regulations to strengthen stress testing approved by the CBA board.
  - Basel III capital buffers adopted and effective in 2019Q2, including a capital conservation buffer, a surcharge for domestic systemically-important banks, and a countercyclical capital buffer (calculated quarterly).
  - Considering adoption of a debt service-to -income ratio subject to data adequacy; working toward adoption of a stressed Loan-To-Value (LTV) limit to address credit risk from unhedged FX exposures and facilitate de-dollarization.
- Box 1 key actions on FX liquidity buffers:
  - Draft regulations for LCR and NSFR with calibration of limits and communication strategy; regulations expected to come in force by 2020Q1, setting 100 percent ratios for dram liabilities and 50–60 percent for FX liabilities; ratios to increase over 3 years until they satisfy Basel III requirements.
  - RR regime amended in October requiring commercial banks to convert FX reserve requirements from AMD to FX by an average of 3 percent annually.
  - Given favorable FX market conditions in 2019, authorities completed conversion of 6 percent of FX reserve requirements; remaining 12 percent conversion expected to be completed by mid-2024.
  - Staff recommended an increase in dram reserve requirements, and introduction of their remuneration, after re-denomination reform is complete.

### Capital market development
- The authorities prepared a draft capital market development program (September 2019 SB), expected to be endorsed by responsible entities by early 2020 (MEFP ¶17).
- The plan reviews legal, regulatory, and taxation frameworks for derivatives and proposes measures to enhance development.
- Enhanced CBA-MOF coordination aims to support money market development; collaboration produced a favorable tax regime for securities and removal of unfavorable tax conditions for foreign investors.
- Box 2 identifies constraints to capital market development: absence of effective regulatory and taxation regime; reluctant issuers and investors due to issuance size and transaction costs; high cost of capital market financing relative to banks; insufficient transparency for international investors.
- Staff proposed postponing the SB to March 2020 to allow more time for institutions to finalize their views.

### Governance, anti-corruption, and investment climate
- Anti-corruption and governance measures:
  - Enacted a law to establish a registry of beneficial ownership information, prioritizing the extractive sector (June 2019 SB); requires consolidation with other laws to ensure FATF standards compliance on beneficial ownership.
  - Started revising the Criminal Code to eliminate application of thresholds to embezzlement offences, introduce criminal liability for legal persons, amend statute of limitations to commence at discovery, suspend/terminate at decision of first instance court, and retain criminal liability in case of repayment for corruption crimes (notably in tax cases).
  - Drafted a comprehensive anticorruption strategy for 2019–23 (approved in October 2019).
  - The September 2019 SB for drafting a law for a single autonomous anti-corruption entity was not observed; the law will be submitted to the NA with a slight delay (by December 2019), and staff proposes postponing this SB to December 2019.
  - Public procurement: diagnostic completed with WB help; need to develop a strategic procurement framework.
- Investment and business environment reforms:
  - Authorities working to create an investment support office within the Ministry of Economy.
  - Developing a new business environment action plan to address core regulatory issues identified in the 2019 World Bank Doing Business Report (February 2020 SB).
  - Conducting an efficiency review and consolidation of existing SME support programs (April 2020 SB).
  - Developing framework to strengthen financial reporting and auditing, including establishing a new public oversight body and the Chamber of Accountants and Auditors (March 2020 SB).
- Labor, education, and inclusion:
  - Approved a gender strategy for 2019-2023 to raise female labor force participation and overcome gender discrimination.
  - Employment strategy and action plan expected to be finalized and approved by end-2019 (December 2019 SB).
  - Progress on a comprehensive education reform strategy (June 2020 SB); a draft law prepared to reform tertiary education management and establish organizational and financial autonomy of higher education institutions (December 2018 SB).

*Republic of Armenia — International Monetary Fund*

### 26.      Capacity to repay the Fund is adequate. Although the authorities intend to treat the

### 1armea2019007 - 26.      Capacity to repay the Fund is adequate. Although the authorities intend to treat the

### Capacity to repay and access
- The Fund staff view Armenia’s capacity to repay the Fund as adequate.
- Although the authorities intend to treat the arrangement as precautionary, the full drawing of the proposed access would not significantly affect the level of total debt, which is mostly concessional, and Armenia would have adequate capacity to repay the Fund (Table 7).
- Footnote observations: Since drawing would typically occur after a shock, the macroeconomic variables in the table would likely be worse than under the baseline presented in the table; for example, based on the illustrative scenario used to determine access at the time of the SBA arrangement request, reserves and exports may be respectively 25 and 3 percent lower, suggesting peak IMF payment obligation ratios of 5.6 percent and 1.8 percent of gross reserves and exports, instead of 4.2 percent and 1.7 percent in the table. These considerations suggest caution in interpreting Table 7, but do not materially impact staff’s current view of Armenia’s capacity to repay.

### Safeguards assessment for the Central Bank of Armenia (CBA)
- A recent update Safeguards Assessment concluded in September 2019 found that the CBA has a strong safeguards framework (MEFP ¶22).
- Strengths noted:
  - Well-established internal and external audit arrangements.
  - Well-established financial reporting practices.
  - CBA Law amended in 2017 per previous safeguards recommendations and enshrines provisions of institutional autonomy.
- Recommended further actions:
  - Additional CBA Law reforms to strengthen financial and institutional autonomy and reinforce independent oversight of the CBA Board.
  - Authorities will prepare a 5–10-year strategy for the central bank to diminish and, in an orderly manner, eventually completely phase-out its involvement in non-core central banking activities, including development lending and association in mortgage companies, in collaboration with relevant stakeholders (September 2020 SB).

### Risks to the program
- Key external risks:
  - Adverse geopolitical developments.
  - A protracted slowdown in major trading partners.
  - Large swings in commodity prices.
  - Stress resulting from global financial volatility or trade tensions (Annex I).
- Key domestic considerations:
  - Faster progress on the reform agenda could generate upside performance by expanding Armenia’s economic potential.
  - Risk that inflation remains low and falls below +/- 1½ percentage point around the mid-point MPCC target for end-December, which would trigger a consultation with the IMF Board.
  - Political economy risks might constrain the authorities’ ability to follow through on their reform program.
- Mitigating factors:
  - The authorities’ long track record of sound macroeconomic policies is expected to continue, supporting reform implementation.
  - Authorities have committed to contingency measures in the event of fiscal revenue shortfalls (see ¶10).
- Overall assessment: Risks to the program are manageable.

### Staff appraisal — recent performance and outlook
- 2019 performance:
  - The Armenian economy continued to grow strongly in 2019, supported by a stable macroeconomic environment.
  - GDP growth is projected to exceed 6½ percent and inflation remains low.
  - Budget revenue performance is strong.
  - Financial conditions are stable.
  - The exchange rate has appreciated somewhat on the back of private inflows.
- Medium-term outlook:
  - Economic growth projected to moderate in line with the current estimate of potential growth.
  - Inflation projected to gradually pick up towards the official target.
  - Current account deficit expected to narrow.
  - Public debt expected to fall below 50 percent of GDP.

### Fiscal policy and public investment management
- 2020 budget stance:
  - Maintains the effort to reduce public debt while supporting growth in 2020.
  - Tax revenues expected to rise reflecting continued effort to strengthen tax administration and tackle the shadow economy.
  - Current spending remains a constant share of GDP compared with 2019, while allowing a nominal increase in social spending.
  - Capital spending is expected to rise as implementation bottlenecks are gradually resolved.
- Policy recommendations:
  - Maintain momentum for reforms despite fiscal overperformance.
  - Priorities include continued revenue mobilization efforts and completion of remaining steps to reform property taxation.
  - Strengthen the budgetary process to safeguard the credibility of the recently revised fiscal rules and avoid future deviations.
  - Keep spending plans aligned with the fiscal rule, including by requiring greater transparency in the budget process and refining the institutional framework as needed.
  - Strengthen implementation of foreign-financed capital spending projects and develop a sound public investment management (PIM) process.

### Monetary policy
- Guidance:
  - Monetary policy should continue to focus on anchoring inflation expectations, while ensuring two-way exchange rate flexibility.
  - The CBA’s IT framework has served Armenia well and remains an appropriate anchor for monetary policy.
- Measures to strengthen effectiveness:
  - Deeper capital markets.
  - Greater exchange rate flexibility.
  - Improved liquidity management.
- Recent actions and implications:
  - Favorable FX market conditions allowed the CBA to reinforce reserve buffers.
  - Allowing two-way exchange rate flexibility and limiting intervention to periods of disorderly market conditions should help Armenia ensure its ongoing adjustment to external shocks.

*Republic of Armenia — IMF staff appraisal excerpts from the referenced content unit.*

### 33.      The authorities’ financial sector reform plans will enhance Armenia’s resilience to

### 1armea2019007 - 33.      The authorities’ financial sector reform plans will enhance Armenia’s resilience to

### Financial sector reform plans and near-term actions
- Authorities drawing on FSAP recommendations to strengthen bank resilience by implementing:
  - (i) Basel III capital buffers;
  - (ii) greater liquidity buffers including through reform to FX reserve requirements;
  - (iii) clearer commercial bank recovery plans.
- Authorities committed to prepare a plan to develop capital markets and to review existing SME assistance schemes.
- Deeper capital markets and improved financial literacy identified as important to foster better financial intermediation.

### Fund support under the Stand-By Arrangement (SBA)
- Staff supports authorities’ request for completion of the first review.
- Upon completion of the first review, an additional SDR 25.714 million would be made available to Armenia, bringing the total accessible credit to about SDR 51.428 million.
- The Armenian authorities continue to view the SBA as precautionary.

### Real sector developments (highlights from figures)
- Growth in 2018 was mainly driven by private demand.
- Preliminary data show strong growth performance in 2019H1 on the back of stronger than anticipated activity in the Service and manufacturing sectors.
- Both food and non-food inflation are below expectations.
- Armenia’s per capita income growth is high compared with peers.
- Robust GDP growth helped poverty rates fall significantly.
- Employment growth increased in recent years, although unemployment remains high.

### External sector developments (highlights)
- The current account deficit which widened in 2018 seems to have stabilized recently.
- Current account has been financed mainly by private inflows recently, while loan disbursements to public sector were significantly lower as project execution slowed.
- Exchange rate has appreciated somewhat recently.
- Reserve coverage has been adequate according to various metrics and is expected to remain as such.
- Exports have more than doubled since 2010 and are somewhat more diversified.
- Imports of capital goods and durables which had declined over 2015–16 picked up again in 2018.

### Fiscal developments (highlights)
- Following the 2014 external shock, central government public debt peaked at end-2017 before falling in 2018–19.
- Revenues had been stable and started to increase following the 2016 tax code change and tax administration efforts.
- Current expenditure had been contained recently, while capital expenditure under-executed during 2017–19.
- Cyclically adjusted deficit shrunk as a result of the recent consolidation.

### Monetary and financial developments (highlights)
- The CBA lowered its policy rate by 25 basis points in January for the first time since January 2017.
- Credit-to-GDP gap is estimated to be marginally negative.
- Exchange rate slightly appreciated in 2019H1 despite CBA’s intervention.
- Profitability is increasing with stable monetary and financial conditions.
- Given stable exchange rates, credit dollarization has fallen; deposit dollarization has declined as well.
- Base money growth in 2018 was mainly due to the increase in NDA; main NDA component was growth in claims on economy.

### Key statistics and projections (selected exact figures from tables)
- Real GDP (percent change): 2016 0.2; 2017 7.5; 2018 5.2; 2019 6.5; 2020 4.9; 2021 4.5; 2022 4.5; 2023 4.5; 2024 4.5.
- Gross domestic product (in billions of drams): 2016 5,067; 2017 5,564; 2018 6,005; 2019 6,541; 2020 7,095; 2021 7,636; 2022 8,283; 2023 8,992; 2024 9,751.
- Gross international reserves (in millions of U.S. dollars): 2016 2,204; 2017 2,314; 2018 2,259; 2019 2,357; 2020 2,363; 2021 2,405; 2022 2,457; 2023 2,646; 2024 2,669.
- Current account balance (in percent of GDP): 2016 -2.1; 2017 -3.0; 2018 -9.4; 2019 -8.0; 2020 -7.9; 2021 -7.5; 2022 -7.1; 2023 -6.4; 2024 -6.0.
- Central government total revenue and grants (in percent of GDP): 2018 21.4; 2019 21.2; 2020 22.3; 2021 23.5; 2022 23.9; 2023 23.8; 2024 24.0.
- Central government total expenditure (in percent of GDP): 2018 27.0; 2019 26.0; 2020 24.1; 2021 25.0; 2022 26.2; 2023 25.7; 2024 25.9.
- Overall balance (above-the-line, in percent of GDP): 2016 -5.6; 2017 -4.8; 2018 -1.8; 2019 -1.5; 2020 -2.3; 2021 -1.9; 2022 -1.9; 2023 -1.9; 2024 -1.9.
- Public and publicly-guaranteed (PPG) debt (in percent of GDP): 2016 56.7; 2017 58.9; 2018 55.8; 2019 53.6; 2020 53.5; 2021 52.6; 2022 51.6; 2023 50.7; 2024 50.0.
- Nonperforming loans to gross loans (percent): 2015 7.8; 2016 6.7; 2017 5.5; 2018 4.8; 2019 5.0; Mar (year) 5.4; June (year) 5.5.
- Total regulatory capital to risk-weighted assets (percent): 2015 16.2; 2016 20.0; 2017 18.6; 2018 17.7; 2019 17.9; Mar (year) 17.4; June (year) 17.3.

### IMF financing timetable under the SBA (exact sequencing and amounts)
- May 17, 2019: Board approval of the arrangement — SDR 25.714 million (cumulative 19.96 percent of quota).
- September 30, 2019: Observance of end-June 2019 performance criteria and continuous performance criteria, and completion of first review — SDR 25.714 million (cumulative 39.93 percent of quota).
- March 31, 2020: Observance of end-December 2019 performance criteria and continuous performance criteria, and completion of second review — SDR 25.714 million (cumulative 59.89 percent of quota).
- September 30, 2020: Observance of end-June 2020 performance criteria and continuous performance criteria, and completion of third review — SDR 25.714 million (cumulative 79.86 percent of quota).
- March 31, 2021: Observance of end-December 2020 performance criteria and continuous performance criteria, and completion of fourth review — SDR 25.714 million (cumulative 99.82 percent of quota).
- September 30, 2021: Observance of end-June 2021 performance criteria and continuous performance criteria, and completion of fifth review — SDR 25.714 million (cumulative 119.79 percent of quota).
- March 31, 2022: Observance of end-December 2021 performance criteria and continuous performance criteria, and completion of sixth review — SDR 25.716 million (cumulative 139.75 percent of quota).
- Total: SDR 180.000 million (total percent of quota 139.75).

*Source: IMF staff report excerpts and associated figures and tables from the provided content unit.*

### Annex I. Risk Assessment Matrix

### 1armea2019007 - Annex I. Risk Assessment Matrix

### Global Risks: nature, relative likelihood, possible impact, and policy responses
- Rising protectionism and retreat from multilateralism
  - Relative likelihood: High
  - Possible impact if realized: Low/Medium
  - Key contextual note: Russia is Armenia’s main trading partner; other EEU members aim to expand the EEU; Armenia recently signed a treaty for more cooperation with the EU; economic relationship with China and Iran is expanding.
  - Policy response:
    - Prepare and implement contingency plans for potential trade and financial spillovers.
    - Maintain exchange rate flexibility.

- Sharp rise in risk premia (abrupt deterioration in market sentiment)
  - Relative likelihood: High
  - Possible impact if realized: Low
  - Key contextual note: DSA suggests that Armenia’s external debt is not sensitive to interest shocks given that most of debt is concessional.
  - Policy response:
    - Continue the de-dollarization efforts.
    - Maintain exchange rate flexibility.
    - Strengthen banking supervision and provision in the event of higher NPLs in dollar.

- Further build-up of financial vulnerabilities (encouraged risk-taking as monetary policy eases)
  - Relative likelihood: High
  - Possible impact if realized: Low
  - Key contextual note: Recurrence of banking stress, including deterioration in asset quality.
  - Policy response:
    - Continue to implement financial reforms, including strengthening banking regulation and supervision.
    - Conduct asset quality reviews and adjust provisioning accordingly.

- Weaker-than-expected global growth (synchronized slowdown)
  - Relative likelihood: Medium
  - Possible impact if realized: Medium
  - Transmission: shocks from U.S., Europe, China, and large stressed emerging economies can interact to produce synchronized and prolonged slowdown.
  - Key contextual note: Mining exports and remittances could be hit if economic growth in major trading partners slows down.
  - Policy response:
    - Diversify export destination and products.
    - Accelerate structural reforms to improve the business climate for FDI.
    - Strengthen social safety nets to cushion the impact of shocks.

- Intensification of geopolitical tensions and security risks (e.g., in the Middle East)
  - Relative likelihood: High
  - Possible impact if realized: Medium
  - Key contextual note: Intensification of tension in neighboring countries in the Middle East and renewed sanctions on Iran could potentially reduce trade and investment.
  - Policy response:
    - Accelerate structural reforms and prepare contingency plans for potential spillovers.
    - Strengthen social safety nets to mitigate shocks on vulnerable sectors.

- Large swings in energy prices
  - Relative likelihood: Medium
  - Possible impact if realized: Medium/High
  - Possible impact on Armenia: Negative indirect effects via major trading partners.
  - Policy response:
    - Diversify trade partners.
    - Improve the business climate for international investors.

- Cyber-attacks on critical global financial systems and infrastructure
  - Relative likelihood: Low
  - Possible impact if realized: Low/Medium
  - Key contextual note: A widespread cyber-attack has not been reported in Armenia yet; deeper analysis needed to determine system interconnectedness and vulnerabilities.
  - Policy response:
    - Adopt a risk‑based regulatory approach to ensure relevant risks are regulated—whether stemming from traditional banks or created by technology.

- Higher frequency and severity of natural disasters
  - Relative likelihood: Medium/Low
  - Possible impact if realized: Medium
  - Possible impact on Armenia: Negative impact on infrastructure, agriculture and water resources, increasing vulnerability to climate variability.
  - Policy response:
    - Address infrastructure gaps.
    - Further develop private insurance markets.
    - Institute appropriate social safety nets.

Notes on risk-likelihood terminology (staff subjective assessment):
- "Low" indicates a probability below 10 percent.
- "Medium" indicates a probability between 10 and 30 percent.
- "High" indicates a probability between 30 and 50 percent.

### Country-Specific Risks
- Regional conflict: risks from sharp, renewed regional tensions
  - Relative likelihood: Low
  - Possible impact if realized: High/Medium
  - Possible impact: Severe impacts, including possible regional military action.
  - Policy response:
    - Continue with dialogue.
    - Prepare and implement contingency plans.

---

### Annex II. Tax Revenue Potentials — overview
- Purpose: assess Armenia’s tax capacity potential and policies to increase revenues to create room for social spending and investment in human and physical capital.
- Method: stock-taking of recent revenue mobilization, benchmarking against peers, and a stochastic frontier analysis estimating a tax gap of around 4 percent of GDP.

### Background and recent developments in tax revenues
- Long-run trend:
  - Tax collections increased from 14.3 percent of GDP in 2005 to 20.7 percent of GDP in 2018.
  - It is estimated that tax revenues increase by 1 percentage point in 2019.
- Drivers of past increase: implementation of comprehensive tax policy and administration reforms, including a change of the personal income tax (PIT) system in 2013.
- Policy/administrative challenges noted:
  - Large accumulation of unpaid VAT refunds.
  - Delayed indexation of certain tax bases (e.g., excises).
  - Expansion of presumptive taxation (e.g., increasing the VAT threshold).
  - Elimination of minimum profit tax.
  - Reduction in turnover tax for traders.
  - Net effect: tax revenues largely stagnant since 2013 because of these problems and external shocks.
- Ongoing tax policy reform starting on 2020 (introduced after a new tax code in 2016):
  - Main elements include flattening the PIT system, reducing PIT and CIT rates, streamlining micro-enterprise taxation, cancelling scheduled reduction of VAT threshold.
  - Offsetting revenue measures: new excise taxes on tobacco and gambling, indexing excise tax rates to inflation, removing selected tax exemptions, increases in some government fees.
  - Expected net impact on revenues: broadly neutral.
- Tax administration strengthening:
  - SRC developed a medium-term comprehensive tax administration strategy in May 2019 with an action plan to eliminate bottlenecks and implement IMF TA recommendations.
  - In June 2019, the MoF submitted a law to modernize Armenia’s real estate taxation.

### Benchmarking Armenia’s tax performance
- 2018 tax-to-GDP ratio: 20.7 percent of GDP, close to the peer average of 20.7 percent of GDP.
- Revenue component comparisons:
  - PIT: relatively high, near the top end of the country distribution.
  - Customs duties: higher than average.
  - CIT, VAT, and excises: below respective average levels seen in peers.
  - CIT productivity: appears below the average of peers; Armenia’s CIT productivity is toward the lower end of the distribution.

### Estimating Armenia’s tax capacity (stochastic frontier analysis)
- Sample: 70 middle-income countries, panel data covering 2001–15; net oil-exporting countries excluded.
- Model specification (as in Fenochietto and Pessino (2010)):
  - Ti,t = α + βxi,t + ei,t - ui,t
  - Ti,t: tax revenue to GDP ratio for country i at time t.
  - xi,t: control variables (degree of openness, level of education, institutional factors such as corruption and governance).
  - ui,t: inefficiency (failure to reach maximum possible tax collection).
  - Tax capacity: predicted value from the econometric model.
  - Tax gap: difference between actual tax revenue and tax capacity.
- Key result:
  - Armenia’s estimated tax potential: 24.7 percent of GDP.
  - Implied tax gap: 4.0 percent of GDP.
- Interpretation:
  - All control variables except the old-dependency ratio are significant with expected signs: less dependence on agriculture, higher trade openness, better control of corruption, and higher public education spending increase tax potential.
  - Closing the estimated tax gap could raise revenues by about 4 percent of GDP.
  - If shadow economy shrinks and institutional governance improves, tax capacity can increase further.
- Caveats:
  - No distinction made between tax policy gap and tax administration gap due to data limitations.
  - Result should be regarded from macroeconomic perspective and is complementary to microdata-based analysis.

### Regression results of the stochastic frontier model (summary)
- Dependent variable: Log of Tax Revenue/GDP
- Coefficients and P-Values:
  - Trade Openness: .002 (P-Value 0.000*)
  - Share of agriculture in value-added: -.022 (P-Value 0.000*)
  - Old-dependency ratio: .006 (P-Value 0.168)
  - Control of Corruption: .094 (P-Value 0.036*)
  - Public Education Spending: .031 (P-Value 0.001*)
  - Constant: 3.11 (P-Value 0.000*)
- Sample size and outputs:
  - Number of observations: 263
  - Number of countries: 70
  - Armenia's estimated tax potential (percent of GDP): 24.7
  - Tax Policy and Administration Gap (percent of GDP): 4.0
- Note: * Significant at 1, 5 or 10 percent level

### Reform areas and policy recommendations to increase revenues
- Tax policy directions:
  - Broaden the tax base and level the playing field by eliminating exemptions.
  - Address narrow CIT base, nonuniform effective tax rates, and extensive tax exemptions.
  - Move toward a tax system with uniformly applied tax rates to reduce aggressive tax planning opportunities (e.g., domestic transfer pricing).
  - Note: agricultural sector receives the largest share of preferential treatment.
- Tax administration directions:
  - Sustain efforts to fight evasion and reduce the shadow economy.
  - Implement SRC action plan to enhance risk management, strengthen fundamental functions and processes, and deliver effective tax administration.
  - Evidence of recent progress: government’s overperformance in tax collections suggests some success in reducing the shadow economy.
- Real estate taxation:
  - Potential to generate more revenue via real estate taxation.
  - Draft law on establishing market evaluation system on real estate taxation expected to have a positive impact on resources for public goods provision and inclusive growth when implemented.
- Additional forthcoming work:
  - An upcoming IMF TA mission will help the authorities to estimate the VAT tax gap using microdata.

*Source: 1armea2019007 - Annex I. Risk Assessment Matrix and Annex II. Tax Revenue Potentials*

### 9.      Over time, improving economic and institutional fundamentals will further enlarge

### 9.      Over time, improving economic and institutional fundamentals will further enlarge

### Tax revenue capacity and governance
- Armenia’s tax revenue frontier can be further enlarged by strengthening institution and fighting corruption and improving other economic fundamentals.
- Econometric finding: a further gain of 1 percentage points in the control of corruption indicator can improve the tax to GDP ratio by 0.09 percent.

### Recent economic performance and outlook
- Real GDP growth: 7.1 percent growth in 2019H1.
- Inflation: 0.6 percent in August.
- Central bank policy rate: lowered by 25 basis points to 5.5 percent in September.
- Exchange rate and FX: exchange rate appreciated somewhat on the back of private inflows; de-dollarization continued.
- Fiscal H1 performance: 2019H1 fiscal balance is estimated to have been in surplus.
- Tax revenue: exceeded the budget target by almost 1 percent of GDP in H1.
- Spending: remained well below plans, mainly due to delays in execution of capital expenditure.
- Current account: preliminary figures point to narrowing of the current account deficit.
- Growth projections: Real GDP growth is projected at somewhat above 6½ percent in 2019; program assumes growth will gradually moderate to around 4½–5 percent in 2020.
- Inflation outlook: projected to gradually pick up in 2020 and return to the CBA’s target of 4 percent.
- Current account medium-term: expected to gradually converge to around 6 percent of GDP.

### Fiscal policy and fiscal projections
- 2019 end-year fiscal deficit: expected to be around 1½ percent of GDP.
- 2020 budget fiscal deficit: will be limited to 2.3 percent of GDP.
- Tax revenue: expected to rise by ½ percent of GDP compared to 2019.
- Investment spending (2020 plan): AMD 288 billion (4. 1 percent of GDP).
- Current spending (2020 plan): AMD 1568 billion (22.1 percent of GDP).
- Budget timetable: aim to adopt the 2020 budget by end-December; pass formal procedures in National Assembly and expected to be approved by end of the year.
- Contingency: in the event of any revenue shortfall, the government stands ready to take compensating measures while striving to protect the social spending envelope.

### Structural fiscal reforms and tax administration
- Tax reform package: adopted by NA in June; will take effect in January 2020.
- Tax reform strategy: finalize strategy for 2019–23 to remove tax arbitrage and rationalize tax expenditures.
- Individual tax returns: prepare an action plan by December 2019 to introduce individual tax returns by end-2021.
- Property taxation: law "On Establishing Market Evaluation Procedure for Real Estate Taxation" submitted to NA (June 2019 SB); expected approval by end-2019; start tax collections under new regime in 2021; electronic tax management module for property tax by September 2020.
- SRC tax administration strategy: comprehensive strategy for 2020–24 including compliance strategy, taxpayer register cleansing, and performance management; comprehensive tax potential study and microdata-based tax gap analysis with IMF TA; action plan (December 2019 SB) to improve tax compliance and raise tax-to-GDP ratio.

### Public investment management and capital spending
- Commitment to improve implementation of foreign financed capital projects and develop a PIM process.
- MOE established a department to develop a template to prioritize public investment projects by economic returns and government objectives.
- IMF TA on PIMA follow-up welcomed.

### Expenditure management, fiscal risks, and transparency
- Budget process reforms: transition to program budgeting in the 2020 cycle; introduce rolling-base budgeting; streamline budget process to eliminate repetition and inconsistencies between MTEF and annual budget cycles.
- PPP framework: PPP law submitted in June and approved; drafting secondary legislation for implementation; create PPP database expected to be finalized by June 2020.
- Fiscal transparency: Fiscal Transparency Evaluation report published; forthcoming IMF TA for GFS2014 implementation.
- Public procurement: diagnostic completed with World Bank support.

### Social spending and human capital
- Working group established to enhance adequacy and targeting of social benefits.
- MOF staff training on WB distributional model; expanding maternity benefits, especially in rural areas.
- Increased funding for education and health in the 2020 budget.
- Labor market measures: adopted gender strategy for 2019–23; employment strategy and action plan expected to be finalized and approved by end-2019.
- Minimum wage: decided to raise the minimum wage by about 25 percent effective from January 1, 2020.

### Public debt and external financing
- Medium-term objective: reduce public debt below 50 percent of GDP.
- External market access: successfully placed a $500 million 10-year Eurobond in September to rollover Eurobond maturing in 2020H2.

### Monetary policy framework and FX management
- CBA mandate: balance price and financial stability; consider policy rate appropriate; monitor developments and stand ready to act to achieve 4 percent inflation target.
- Exchange rate regime: committed to flexible exchange rate regime; aim to strengthen international reserves adequacy; FX purchases used to reinforce reserve buffers and combat disinflationary trends.
- CBA interventions: once transitory factors dissipate, interventions limited to smoothing excessive volatility and mitigating transitory pressures.
- Liquidity management: MOF to continue sharing cash flow forecast data with CBA; CBA to continue seven-day repos and offer three-month repos on occasional basis for structural liquidity management.

### Financial sector reforms and macroprudential measures
- FX reserve requirement reform: action plan envisages conversion of the remaining 12 percentage points, by an average of 3 percentage points a year, to be completed by mid-2024, subject to admissible market conditions.
- Capital buffers (Basel III): introduced capital conservation and countercyclical capital buffers and surcharge for domestic systemically-important banks; board decision effective from April 2019 with gradual timeline; countercyclical capital buffer enforced starting from July 2019; conservation and systemic buffers will become effective starting from January 2020.
- Liquidity standards: drafting regulations to introduce LCR and NSFR for all currencies; draft communicated to banks; regulation expected to come in force by March 2020; will set 100 percent ratios for LCR in all currencies and 50 percent for FX liabilities which will increase over 3 years to reach 100 percent.
- Recovery plans and stress testing: regulations on recovery plans and amended stress testing regulation; CBA board decision effective from November 11, 2019.
- Macroprudential framework: considering strengthening to mitigate risks from rapid retail credit growth and unhedged FX exposures; decisions expected by end-year.

### Capital market development and related timelines
- Draft capital market development program prepared (September 2019 SB); further diagnostic and framework review ongoing.
- Request to postpone structural benchmark on capital market strategy to March 2020 to allow consolidation of institutional views.

### Other structural reforms
- Investment facilitation: working on creating an Investment Support Office within MOE; will rely on efficiency review of existing SME support programs.
- Education reform: drafted Law on Higher Education and Science to reform tertiary education management; plan to submit draft law to NA by end-2019 (December 2019 SB).
- Health reform: developing a concept note for universal health coverage financing system.

*Source: 1armea2019007 - 9.      Over time, improving economic and institutional fundamentals will further enlarge (IMF PDF chapter).*

### 20. We are making good progress in strengthening our anti-corruption framework. In

### 20. We are making good progress in strengthening our anti-corruption framework. In

### Anti-corruption actions and near-term deliverables
- Delivered on the June 2019 SB related to the establishment of a registry of beneficial ownership information.
- Started work on revising the Criminal Code to:
  - eliminate threshold amounts on embezzlement;
  - introduce criminal liability for legal persons, in line with the Fund advice;
  - review and amend the statute of limitations term for corruption cases so that it commences at the point of discovery (not at the time of the completion of the act) and is suspended/terminated at the time of the decision of the first instance court;
  - retain criminal liability in case of repayment for corruption crimes, notably in tax cases.
- Drafted a comprehensive anticorruption strategy for 2019–23, expected to be approved by the government by October 2019; the strategy will guide the overall institutional anti-corruption framework, including the role of a single autonomous anti-corruption entity.
- A draft law on a single autonomous anti-corruption entity, combining all detection and investigative functions, will be submitted to the NA by December 2019 (with the September 2019 SB noting a slight delay).
- Ensured continuity of the asset declaration system in 2019 while finalizing legal arrangements for transfer of functions from CEHRO to the newly created CPC.

### Program monitoring and safeguards (overview)
- Program monitoring instruments:
  - quantitative performance criteria (PCs);
  - indicative targets (ITs) (Table 1);
  - a monetary policy consultation clause (MPCC);
  - structural benchmarks (Table 2).
- Review schedule:
  - second review expected on or after March 31, 2020, assessing performance as of end-December 2019;
  - third review expected on or after September 30, 2020, assessing performance as of end-June 2020.
- CBA safeguards:
  - IMF safeguards assessment mission completed in September 2019 confirmed the CBA maintains a strong safeguards framework with well established external and internal audit arrangements and sound financial reporting practices.
  - Prepare a medium to long-term exit strategy for the CBA to phase out involvement in non-core central banking activities in an orderly manner and in collaboration with relevant stakeholders (September 2020 SB).

### Quantitative performance criteria and indicative targets (high-level)
- Program PCs include:
  - Floor on the net official international reserves (NIR) of the Central Bank of Armenia (CBA).
  - Floor on the program fiscal balance.
  - Ceiling on domestic budgetary lending.
  - Ceiling on the stock of external public debt arrears (continuous criterion).
- Program ITs include:
  - Ceiling on the net domestic assets (NDA) of the CBA.
  - Floor on average concessionality of newly contracted external debt.
  - Ceiling on new government guaranteed external debt.
  - Floor on social spending of the government.
- MPCC: Headline inflation.

### Selected numeric program references and test-date mechanics
- Program exchange rate of the Armenian dram to the U.S. dollar for monitoring purposes: 483.75 dram per one U.S. dollar.
- Budgetary ER to be used for foreign currency-denominated transactions included in the 2020 budget: 476.46 drams per one US dollar.
- MPCC headline inflation definition and band:
  - Headline inflation defined as year-on-year rate of change of the Consumer Price Index as measured by Armenia’s National Statistics Service.
  - MPCC considered met if headline inflation falls within a range of +/- 1½ percentage point around the mid-point target specified in Table 1 in the LOI/MEFP.
  - Consultation with the IMF Board would be triggered for end December 2019 test date if inflation falls below 1 percent or is above 4 percent.
- NDA and NIR measurement notes:
  - NIR monitored in U.S. dollars; assets and liabilities in other convertible currencies converted using convertible exchange rates in Table 1.
  - NIR = total gross official international reserves (excluding commercial bank required and excess reserves at CBA in FX) minus gross official reserve liabilities.
  - Gross official international reserves include monetary gold (excluding pledged collateral), SDRs (including allocations specified), reserve position at the IMF, and holdings of convertible currencies in cash or in nonresident financial institutions; securities and other financial instruments are marked to market.
  - Exclusions from gross reserves: balance on the government’s Special Privatization Account (SPA), capital subscriptions in foreign financial institutions, illiquid foreign assets, pledged/collateralized assets, claims on residents, derivatives claims in foreign currency vis-à-vis domestic currency, precious metals other than gold, assets in nonconvertible currencies, and illiquid assets.
- External public debt arrears PC:
  - Defined as external debt obligations of the government not paid when due per contractual terms (accounting for contractual grace periods).
  - Ceiling on external payment arrears set at zero; monitored continuously and any occurrence must be immediately reported to the Fund.
- Program fiscal balance definition:
  - Cumulative from the beginning of the fiscal year, measured from the financing side as the negative of the sum of net domestic banking system credit to the central government, net domestic nonbank financing, and net external financing to the central government.
  - Net banking system credit = change during the period of net credit to the central government.
  - Net nonbank financing = change in outstanding treasury bills and bonds to nonbanks (including accrued interest for treasury bills and excluding accrued interest for treasury bonds) plus other nonbank transactions increasing claims on central government plus withdrawals from SPA less amortization to private resident nonbank agents.
  - Net external financing = debt-increasing disbursements from non-residents to the central government less amortization to non-residents; includes privatization proceeds from non-residents in foreign currency not held in SPA.
  - External and domestic net lending (financing items) are excluded from the calculation of the program fiscal balance; net lending treated as expenditure when loans are made and as revenue when repaid.
- Specific exclusion:
  - Transactions related to the extension of the operating life of the Metsamor nuclear power station (lending from the Russian Federation to the MoF of Armenia and from MoF to Armenian Nuclear Power Plant JSC) will be excluded from the program fiscal deficit measure.

### Structural benchmarks (selected, from Table 2)
- Met structural benchmarks:
  - Adopt legislation to require establishment of a registry of beneficial ownership information, adequately resourced and staffed, with verification starting with companies in the extractive industry (MoJ) — June 2019 — Met.
  - Create an action plan to implement key recommendations from IMF TA on tax administration (State Revenue Committee) — June 2019 — Met.
  - Submit draft law "On Establishing Market Evaluation Procedure for Real Estate Taxation" to NA (Deputy Prime Minister’s Office) — June 2019 — Met.
  - Submit a PPP law to the NA (MoE) — June 2019 — Met.
  - Prepare time-bound action plan and communication strategy to boost foreign currency liquidity buffers (CBA) — September 2019 — Met.
- Not observed / to be reset:
  - Submit a draft law on a single autonomous anti-corruption entity (MoJ) — September 2019 — Not observed; dates proposed to be reset to December 2019.
  - Develop a capital market development program (CBA, MoF, MoE) — September 2019 — Not observed; dates proposed to be reset to March 2020.
- Newly proposed benchmark:
  - Prepare a medium-term exit strategy to phase out the CBA involvement in non-core central bank activities (CBA) — September 2020 — Newly proposed benchmark.
- Other upcoming benchmarks (dates and agencies specified in Table 2):
  - Design an action plan to improve tax compliance (Deputy Prime Minister’s Office) — December 2019.
  - Develop framework for strengthening financial reporting and auditing to establish public oversight body and Chamber of Accountants and Auditor (MOF) — March 2020.
  - Prepare annual action plan to improve business environment (MoE) — February 2020.
  - Conduct efficiency review of existing government SME support programs (MoE with CBA support) — April 2020.
  - Develop Armenia’s employment strategy for 2019–23 (MoL) — December 2019.
  - Submit draft law on Higher Education and Science (Ministry of Education and Science) — December 2019.
  - Develop a comprehensive education reform strategy (Ministry of Education and Science) — June 2020.

*Source: Excerpt from the Republic of Armenia IMF program documents and Technical Memorandum of Understanding.*

### 11. Some project implementation units maintain accounts at the CBA. Grants received by these

### 1armea2019007 - 11. Some project implementation units maintain accounts at the CBA. Grants received by these

### Accounting treatment of grants, loans, and lending
- Grants received by project implementation units that maintain accounts at the CBA are recorded in the fiscal accounts as external grants on the revenue side and as foreign-financed expenditure on the expenditure side.
- Loans to finance investments that are intermediated through the banking system are recorded in the financial accounts as a financing item below the line and are thus excluded from net lending.
- Domestic budgetary lending is defined as the gross amount of new loans made to resident individuals, enterprises, or entities financed from the state budget or other general government resources. This includes, but is not limited to, loans financed from the Economic Stabilization Fund and lending under existing or prospective government programs (e.g., agricultural sector support and real estate development programs).
- Lending operations related to targeted projects financed with external loans and grants will be excluded from the calculation of the ceiling on budget domestic lending.
- The ceiling on domestic budgetary lending will be adjusted upward by the amount of undisbursed funds under domestic budgetary lending programs approved in the previous year.

### Special Privatization Account (SPA) and privatization proceeds
- Foreign currency proceeds from selling enterprises are credited to the SPA and their use is reflected in the state budget.
- The SPA is held at the CBA and the proceeds are invested abroad together with the CBA’s international reserves.
- These proceeds are included in the definition of the monetary accounts of the CBA as part of net foreign assets with a counter entry in other items net.
- Any withdrawal from the SPA will be accounted for as privatization proceeds used to finance the budget and will be recorded below the line.
- Domestic currency proceeds from selling enterprises to residents are deposited in a sub-account of the treasury single account and are also treated as a financing item and recorded below the line.
- Privatization proceeds received from non-residents in foreign currency and not held in the SPA are treated as a financing item (sale of financial assets) and recorded below the line.
- The floor on the program fiscal balance on a cash basis will be adjusted upwards by the amount of any funds received for privatization proceeds received from non-residents in foreign currency and not held in the SPA.

### Floor on average concessionality of newly contracted external debt
- The program sets an annual indicative floor of 30 percent on the average concessionality of new debt on a contraction basis with nonresidents with original maturities of one year or more as contracted and guaranteed by the public sector, but excludes the Eurobond issuance and any similar refinancing instruments.
- The concessionality floor is calculated on a calendar-year basis.
- The grant element is the difference between the present value (PV) of debt and its nominal value, expressed as a percentage of the nominal value of the debt.
- The PV of debt at the time of its contracting is calculated by discounting the future stream of payments of debt service due on this debt using a unified discount rate set at 5 percent.
- The public sector for program purposes comprises the general government (central plus local governments and covering the state budget and state debt), the central bank, and nonfinancial public enterprises (enterprises and agencies in which the government holds a controlling stake—typically owns more than 50 percent of the shares, but which are not consolidated in the budget).
- For program purposes, a guarantee of a debt arises from any explicit legal obligation of the public sector to service a debt in the event of nonpayment by the debtor, or from any implicit legal or contractual obligation of the public sector to finance partially or in full any shortfall incurred by the debtor.

### Ceiling on government guaranteed external debt
- A cumulative ceiling (IT) of $100 million for the program period applies to new government guarantees of the total of concessional and non-concessional external financing, excluding the Eurobond and any similar refinancing instruments.
- The issuance of debt guarantees will be measured at the exchange rates listed in Table 1.
- The limit covers debt guarantees issued by the general government to entities outside the general government (excluding the CBA).
- Guarantee issuance will be monitored on a monthly basis and the Ministry of Finance will provide data within 21 days from the end of the month.

### Floor on social spending
- The program sets a floor on social spending of the government.
- For the purposes of the program, social spending of the government comprises the family benefit program and maternity benefits, one-time childbirth benefits, and childcare benefits for children less than two years of age in the budget.

### Adjusters to quantitative performance criteria and indicative targets
- Changes in reserve requirements: The ceiling on the NDA of the CBA will be adjusted downward (upward) by the amount of banks’ reserves freed (seized) by any reduction (increase) of the reserve requirement ratio on both domestic currency and foreign currency liabilities relative to the baseline assumption as per the formula: ΔNDA = ΔrB, where B denotes the level of liabilities subject to reserve requirements in the initial definition and Δr is the change in the reserve requirement ratio.
- KfW, Asian Development Bank, and World Bank loan disbursements: the ceiling on the NDA of the CBA will be adjusted upward (downward) by the full amount of any excess (shortfall) of disbursements from the KfW, Asian Development Bank, and World Bank loans directed at SME financing compared to programmed amounts (Table 2). The floor on NIR will be adjusted upward (downward) by the cumulative amount of any excess (shortfall) of these disbursements compared to program amounts.
- Budget support grants to the public sector are defined as grants received by the general government for direct budget support from external donors and not related to project financing.
- Project support grants are defined as grants received by the general government for public sector projects.
- Budget support loans to the public sector are defined as disbursements of commercial loans (e.g., Eurobonds), loans from bilateral and multilateral donors for budget support, and Fund purchases credited directly to the government accounts at the CBA.
- Project financing to the public sector is defined as disbursements of loans from bilateral and multilateral donors for public sector projects.
- The floor on NIR will be adjusted upward (downward) by the cumulative amount of any excess (shortfall) of budget support loans, budget support grants or project financing grants compared to program amounts (excluding Fund purchases by the government) (Table 3).
- The floor on NIR will be adjusted downward for any external public debt amortization amounts in excess of program amounts.
- The floor on the program fiscal balance on a cash basis will be adjusted upward (downward) by the cumulative total amount of the budget support grants received in excess (to account for a shortfall) of the program amounts (Table 3), subject to a cap of $100 million per year in either direction.
- The floor on the program fiscal balance on a cash basis will also be adjusted downward (upward) by the cumulative total amount of the project financing loans received in excess (to account for a shortfall) of the program amounts (Table 3), subject to a cap of $100 million in either direction.
- The ceiling on NDA will be adjusted downward (upward) by the cumulative amount of any excess (shortfall) of budget support loans, budget support grants or project financing grants compared to program amounts (Table 3).

### Data reporting requirements: summary of key frequencies and timing
- CBA balance sheet: Summary daily — timing: The following working day.
- CBA balance sheet: Summary at program exchange rates; and by chart of accounts at actual official exchange rates — Monthly — Within seven days of the end of each month.
- Monetary survey: Summary banking system balance sheet for the central bank at both program exchange rates and by chart of accounts at actual official exchange rates; the consolidated balance sheet of commercial banks by chart of accounts at actual official exchange rates — Monthly — Within 25 days of the end of each month.
- International reserves: By chart of accounts; at (i) program exchange rates; and (ii) at actual official exchange rates — Daily — The following working day.
- Foreign exchange market: Official exchange rates (buying and selling); daily trade volume, and weighted average exchange rate of the interbank, intrabank and Nasdaq-OMX — Daily — Within 1 day.
- Foreign exchange market (CBA operations): CBA foreign exchange operations, (exchange rate, volume) — Daily — Within 1 day.
- Foreign exchange market: Exchange rate (buying and selling) — Daily — Within 1 day.
- Interest rates: Refinance rate — At least monthly — Within 1 days of the CBA Board decision.
- Interbank money market: Daily interbank repo volume and interest rate and number of trades — Daily — Within 1 day.
- CBA operations: Repo (reverse repo) operations, open market operations, Lombard credits, deposit facility, and foreign exchange swaps (volumes, maturity, yields, exchange rates) — Daily — Within 1 day.
- Bank liquidity: Reserves and excess reserves, by currency — Monthly — Within 15 days of the end of each reference period.
- Interest rates and flows of the funds attracted and allocated by commercial banks: By currency and maturity — Weekly — Last working day of the week.
- T-bill and coupon bond financing, CBA securities: Auction data: date, original and remaining maturities, issuance volume, allocation, average yield and coupon yield (if available) — Weekly — Last working day of the week.
- Banking data: Sectoral distribution of loans and deposits; dollarization of loans and deposits; loan maturities; interbank rate, by volume and maturity; T-bill rate, bond yield; deposit and lending rates, by maturity; monthly weighted average interest rate on government bonds — Monthly — Within 25 days of the end of each month.
- Banking indicators: Capital adequacy; asset composition and quality; profitability; liquidity; open FX positions; and compliance with prudential norms — Monthly — Within 30 days of the end of each month.
- Banking sector stress tests: Results of stress tests on exchange rate, liquidity, and credit risk — Monthly — Within 30 days of the end of each month.
- On-lending via commercial banks: On lending via the CBA and government (from, KfW, WB, ADB, etc.) by type of on-lending projects (including loan disbursements and repayments) — Monthly — Within 10 days of the end of each month.
- CPI: Index of core inflation — Monthly — Within 21 days of the end of each month.
- Transfers: Non-commercial transfers of individuals — Monthly — Within 31 of the end of each month.
- Other monetary data: IFS format — Monthly — Within 45 days of the end of each month.
- Balance of payments: Detailed balance of payments data — Quarterly — Within 92 days of the end of each quarter.
- T-bill and coupon bond financing: By holders, i.e., CBA, resident banks, resident nonbanks, and nonresidents — Monthly — Within 7 days of each month.
- External debt: Disbursements and stock of outstanding short-term and contracting or guaranteeing and outstanding stock of medium-and long-term external debt of the government, the CBA, and state-owned companies (by company); any stock of arrears on external debt service and outstanding stock of government guarantees and external arrears — Monthly — Within 21 days of the end of each month. For project implementation units, within 21 days of the end of each month (preliminary data) and within 45 days of the end of each month (final data).
- Ministry of Finance — Revenue collection: Total revenue collected separately by the tax administration and customs administration, including revenue by individual tax, and social contributions — Monthly — Within 7 days of the end of each month.
- Ministry of Finance — Domestic expenditure arrears: All unpaid claims outstanding at the end of the month which includes wages, social contributions (including for pensions), family allowances, and amortization and domestic interest payments — Monthly — Within 45 days of the end of each month for government arrears.
- Ministry of Finance — Privatization receipts: Balance on the SPA; gross inflows into and outflows from the SPA during the month, specifying the nature of each transaction — Monthly — Within 7 days of the end of each month.
- Ministry of Finance — Treasury single account (TSA): Detailed breakdown of central treasury account ... flows during the month and end of month stocks — Monthly — Within 7 days of the end of each month.
- Ministry of Finance — Consolidated central government State budget — Monthly — Within 30 days of the end of each month.
- Consolidated general government (central and local governments, and NCEs) — Quarterly — Within 60 days of the end of each quarter; Annual — Within 180 days of the end of each year.
- Budget execution: All cash receipts, cash expenditures, including domestic and external debt-service payments, external and domestic borrowing and lending operations, and inflow of grants to the central government; expenditure data consistent with the GFSM2001 methodology — Monthly — Within one month following the end of each quarter.
- National Statistical Service — Detailed export and import data — Monthly — Within 28 days of the end of each month; Quarterly — Within 45 days of the end of each quarter.
- National Statistical Service — CPI by category — Monthly — Within 5 days of the end of each month.
- State Revenue Committee — Tax arrears by type of tax — Monthly — Within 30 days of the end of each quarter (monthly data provided on a quarterly basis). For the 30 largest debtors and for all major companies in the energy, water, and irrigation sectors — Quarterly — Within 30 days of the end of each quarter.
- State Revenue Committee — Tax credits: Detailed data, by type of tax, of outstanding tax credits for all types of tax revenues, in both net and gross terms — Monthly — Within 45 days of the end of each month (monthly data provided on a quarterly basis).
- State Revenue Committee — Tax Revenues: Tax Revenue by type of tax — Monthly — Within 45 days of the end of each quarter (monthly data provided on a quarterly basis).
- State Revenue Committee — VAT and turnover tax: Number of registered taxpayers — Monthly — Within 45 days of the end of each month (monthly data provided on a quarterly basis).
- State Revenue Committee — VAT refund claims in arrears: Detailed data on VAT refunds in arrears ... after the 90-day statutory processing period. Number of refund applications processed per month — Monthly — Within 45 days of the end of each month (monthly data provided on a quarterly basis).
- State Revenue Committee — Large taxpayers: Data on the number of taxpayers and amount of taxes managed by the large tax inspectorate — Monthly — Within 45days after the end of each month.
- State Revenue Committee — Import data (quarterly): 1. Total value of recorded imports, breaking out raw diamond imports; 2. Total value of non-duty-free recorded imports; 3. Number of total transactions involving recorded imports; 4. Number of total transactions involving non-duty-free recorded imports; 5. Value of recorded imports where customs value was assessed using transaction prices, breaking out raw diamond imports; 6. Value of non-duty-free recorded imports where customs value was assessed using transaction prices; 7. Number of transactions involving recorded imports where customs value was assessed using transaction prices — Quarterly — Within 30 days of the end of each quarter.

*Source: 1armea2019007 - 11. Some project implementation units maintain accounts at the CBA. Grants received by these*

### 8. Number of transactions involving

### 8. Number of transactions involving non duty-free recorded imports where customs value was assessed using transaction prices

### Administrative indicators and reporting timelines
- Automated VAT refunds
  - Indicator: Number of refunds that were processed automatically (share of total refunds); total value of automated and automatic refunds and offsets; average waiting time (days) to receive refund
  - Frequency: Monthly
  - Reporting deadline: Within 45 days of the end of each month (monthly data provided on a quarterly basis)
- Risk-based selection approach
  - Indicator: Percentage of selected companies chosen on the basis of risk-based approach, identified revenue from risk-based audits
  - Frequency: Monthly
  - Reporting deadline: Within 45 days of the end of each month (monthly data provided on a quarterly basis)
- Pension system
  - Indicator: Number of participants in the pension second pillar, social payments and funded contributions
  - Frequency: Monthly
  - Reporting deadline: Within two months of the end of each quarter (monthly data provided on a quarterly basis)

### Macroeconomic developments and outlook — key findings and projections
- 2019 near-term performance
  - GDP growth: 7.1 percent in the first half of 2019; 7.9 percent in 2019 Q3
  - Inflation: 1.0 percent in November 2019; 0.5 percent at end-September 2019
  - CBA policy rate: cut by 25 basis points to 5.5 percent in September; left unchanged at 5.5 percent on December 6, 2019
  - Credit growth: 16.5 percent in end-October
  - Nonperforming loans (NPLs): 5.2 percent
  - Fiscal deficit: expected to be around 1.5 percent of GDP (below the 2019 budget target of 2.2 percent of GDP)
  - Central government debt: expected to fall to around 50 percent in 2019
  - Eurobond issuance: $500 million 10-year Eurobond placed in September (oversubscribed)
  - Current account: deficit narrowing; external position strengthening in 2019
- Sovereign ratings in 2019
  - Moody's: upgraded to 'Ba3' from 'B1' with a stable outlook (August)
  - Fitch: upgraded to 'BB-' from 'B+' with a stable outlook (November)
- Growth outlook
  - 2019: expected at somewhat above 6.5 percent
  - 2020 (authorities' conservative assumption under the IMF program): around 4.5–5.0 percent
  - Medium-term (authorities' target with reforms): 5.0-5.5 percent
- Inflation and external norms
  - Inflation target: 4.0 percent
  - Current account deficit norm: 6.0 percent of GDP

### Fiscal policy and reforms — actions and targets
- 2020 budget and debt objectives
  - 2020 state budget adopted on December 6 targeting a fiscal deficit of 2.3 percent of GDP
  - Objective: bring public debt below 50 percent of GDP by 2023
- Revenue and tax policy
  - June 2019: Parliament adopted the growth-friendly tax reform package effective January 2020, including:
    - Flattening of the personal income tax (PIT) structure
    - Reducing PIT and corporate income tax (CIT) rates
    - Simplifying special tax regimes
    - Compensation measures: new taxes on tobacco and gambling; indexing excise tax rates to inflation; removing selected tax exemptions; increasing gambling and financial sector license fees
  - Tax administration: comprehensive tax administration strategy for 2020–2024 approved on December 12, 2019
  - Tax reform strategy: finalizing 2019-2023 strategy; plan to introduce an individual tax return system by end-2021
- Property taxation
  - November 2019: Parliament approved the law on Establishing Market Evaluation Procedure for Real Estate Taxation
  - Target: start tax collections under new regime in 2021; mitigate impact on low-income population and enhance electronic tax management
- Public investment and PPPs
  - June 2019: Parliament adopted the PPP law
  - Ongoing: drafting secondary legislation and creating a database for all PPPs; improve implementation of foreign-financed capital spending projects and develop a sound public investment management (PIM) process

### Monetary policy and financial stability — measures and timetable
- Monetary policy framework
  - CBA objective: balance price stability (4.0 percent target) and financial stability; two-way exchange rate flexibility under the IT framework; enhance international reserves buffers
- Prudential and liquidity measures
  - FX reserve requirement reform: time-bound action plan and communication strategy prepared; conversion of 6 percent of FX reserve requirements completed; remaining re-denomination expected to be completed by mid-2024
  - Regulatory measures introduced or planned:
    - Recovery plans for banks
    - Capital conservation and countercyclical capital buffers
    - Surcharge for domestic systemically-important banks
    - Draft regulations on introducing LCR and NSFR for all currencies expected to come in force by March 2020
    - Work towards adopting a stressed LTV ratio
- Capital market development
  - Draft capital market development program prepared and shared with staff; authorities request postponement of the associated structural benchmark to March 2020 to allow more review time

### Structural reforms — governance, labor, human capital, and anti-corruption
- Governance and anti-corruption
  - June 2019: law adopted to establish a registry of beneficial ownership information, prioritizing the extractive sector
  - Comprehensive anti-corruption strategy for 2019–23 approved by the government on October 3, 2019
  - Draft law on a single autonomous anti-corruption entity to be submitted to the National Assembly with slight delay (expected by end-December 2019)
  - Appointment: all five members of the CPC were appointed in November 2019
  - Composite WB governance indicator: improved to 46% ranking in 2018 from 42.2% in 2017
- Human capital and social policies
  - Gender strategy for 2019–23 adopted
  - Employment strategy expected to be finalized and approved by end-2019
  - Education reforms: draft law on Higher Education and Science prepared, expected to be submitted to the NA by end-2019
  - Social protection: work underway to strengthen social and family benefit schemes and to develop a concept note for universal health coverage financing
- Business environment and SMEs
  - Investment Support Office to be created within the Ministry of Economy
  - Efficiency review of existing SME support programs and development of framework for SME financial reporting and auditing underway
  - Action plan being prepared to address core issues identified in the 2019 WB Doing Business Report

### Program performance, requests, and conclusion
- Program status
  - All end-June 2019 quantitative performance criteria (QPCs) and structural benchmarks (SBs) were met; most indicative targets (ITs) observed except the IT on social spending missed by a very small margin
  - Authorities request completion of the first review of the SBA and intend to treat the arrangement as precautionary
  - Requests to reset timing of SBs:
    - Capital market development program: reset to December 2019 (requested)
    - Single autonomous anti-corruption entity SB: reset to March 2020 (requested)
  - Request to adjust end-December IT on social spending due to lower-than-expected demand and improved social targeting
- Overall assessment
  - Armenia’s economic program off to a good start with strong macroeconomic performance, stable monetary and financial conditions, and notable progress on multiple reform fronts
  - Authorities reiterate commitment to program policies, quantitative targets, and structural benchmarks and stand ready to consult with the IMF on revisions

*Statement by Mr. Doornbosch, Executive Director and Ms. Harutyunyan, Advisor on the Republic of Armenia, December 20, 2019*

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_Source: https://www.imf.org/-/media/files/publications/cr/2019/1armea2019007.pdf_