## _cr0502

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### Executive Summary
- The Fund provided almost continuous financial assistance to Armenia beginning in 1994 under: Systemic Transformation Facility (late 1994), Stand-By Arrangement (1995–96), Enhanced Structural Adjustment Facility (ESAF, 1996–99), and Poverty Reduction and Growth Facility (PRGF, 2001–04).
- The report reviews Armenia’s performance under ESAF and PRGF (1996–04) and assesses lessons and directions for future Fund engagement.
- Major macro outcomes:
  - Real GDP growth among the highest in the region (CIS-7).
  - During 2001–03, real GDP increased at an average annual rate of 12 percent compared with program projections of 9 percent.
  - Inflation averaged 4.5 percent during 2001–03.
  - End-period inflation declined from 32 percent in 1995 to 2 percent in 1999.
  - External current account deficit remained high at 17 percent of GDP as of 1999.
  - Budget arrears equivalent to 4.5 percent of GDP as of end-June 2000.
  - Fiscal deficit on a commitment basis decreased from about 9 percent of GDP in 1996 to 1 percent in 2003.
  - Total expenditures were reduced by 4.8 percent of GDP from 1996 to 2003.
  - Tax revenues increased by 3.5 percent of GDP from 1996 to 2003; 3 percent of this resulted from the change of VAT taxation principle for CIS countries in 1997-98.
  - Social spending averaged 5 percent of GDP in both programs and was largely safeguarded.
- Program design and implementation:
  - ESAF focus: reduce external and fiscal vulnerabilities, decrease external debt ratios and budget arrears; structural measures on tax administration, energy sector quasi-fiscal deficits, banking regulation, and governance.
  - PRGF focus: enhance revenue performance, eliminate expenditure arrears, reduce reliance on external financing; more focused conditionality though number of quantitative performance criteria averaged 10 per staff report under both ESAF and PRGF.
  - Early program implementation uneven; performance improved since 2002 with all monetary performance criteria met since the third review.

### Balance of payments and reserves (substantial improvement)
- Current account deficit narrowed from 35½ percent of GDP in 1994 to about 7 percent of GDP in 2003.
- Improvement driven by:
  - an increase in domestic savings (resulting from fiscal consolidation),
  - strong export performance (agriculture, metals, diamonds),
  - foreign direct investment supporting exports,
  - transfers from Armenians living abroad.
- Official external reserves strengthened: gross reserves at US$502 million (4 months of imports) at end-2003.
- Debt management:
  - Between 1995 and 1999 Armenia financed reconstruction with concessional debt; World Bank and Fund lending contributed to rising debt ratios.
  - Post-1999: situation reversed due to successful growth and greater reliance on grant financing.
  - Latest debt sustainability analysis indicates medium-term external debt dynamics are sustainable.
  - Armenia has an excellent track record of servicing Fund obligations; share of Fund credit in total external debt is highest among PRGF countries.

### Financial intermediation, banking sector, and energy sector
- Financial intermediation:
  - Monetization (broad money/GDP) increased 1995–2000, unchanged subsequently, and remains below CIS-7 average.
  - Ratio of banks’ private sector loans to GDP broadly constant since 1995 and well below comparable countries.
  - Failure of eight banks during 2000–02 was a major factor behind weak intermediation.
  - CBA placed eight troubled banks under interim administration beginning late 2000; these accounted for a third of total deposits.
  - Remaining constraints: judicial enforcement of creditor rights, poor accounting by firms, weak corporate governance in banks.
- Banking sector reform measures:
  - SBA/ESAF/PRGF conditionality included revising prudential requirements, enforcing reserve requirements, strengthening accounting regulations, enacting a new bankruptcy law, and enhancing central bank supervisory authority.
  - FSAP (2000) noted systemic crisis unlikely to threaten economy due to small size, but sector weakness precluded delivery of growth-generating services.
- Energy and quasi-fiscal activities:
  - 1997 energy law separated Armenergo into generation, transmission, distribution and established the Energy Regulatory Commission (ERC).
  - Staff estimated quasi-fiscal deficit of the energy sector to be 4 percent in 1998.
  - Under PRGF, financial situation improved: electricity distribution companies privatized and primary fiscal deficit of energy sector largely eliminated.
  - Water and irrigation: primary deficits decreased as share of GDP due to higher tariffs, but water losses remain high.

### Governance, technical assistance, and collaboration with the World Bank
- Governance:
  - Improvements recorded by World Bank and Transparency International measures.
  - Reforms: simplified licensing, civil service reform, new criminal code, energy privatization, wider dissemination of laws.
  - Remaining gaps: tax and customs administration, judiciary.
  - Government approved an anti-corruption strategy at end-2003; participatory implementation remains the challenge.
- Fund technical assistance (TA):
  - Concentrated on fiscal, monetary, and banking areas.
  - FAD TA: tax policy, revenue administration, public expenditure management.
  - MFD TA: monetary and foreign exchange operations, banking supervision.
  - TA contributed to improvements in revenue-to-GDP stability, Treasury operations, monetary instruments, and supervisory frameworks.
- Fund–World Bank collaboration:
  - Close collaboration; Bank led on expenditure policy, private sector development, public sector reform, and environment under PRGF while Fund reinforced macro-critical conditionality.
  - Coordination was more effective when started early and responsibilities were clearly defined.

### Assessment, risks, and policy recommendations
- Assessment:
  - Quantitative projections under ESAF and PRGF generally accurate for inflation, fiscal balance, and reserve money; real GDP growth projections under PRGF often conservative.
  - Revenue collection improvements often too optimistic due to persistent tax and customs administration weaknesses and insufficient political will.
  - Since mid-2002 performance improved significantly, suggesting improved ownership.
- Major risk:
  - Loss of political commitment and ownership is the major risk for any future Fund-supported program.
  - Fund should remain ready to disengage if implementation falters; a hiatus (but not disengagement) between arrangements may be needed to ensure ownership.
- Recommendations for future Fund involvement:
  - Continued Fund engagement would be beneficial but a successor arrangement should involve reduced access.
  - Before further Fund financing, authorities should demonstrate intensified commitment to remaining reforms in taxation, banking, and governance.
  - Fund-supported program roles: facilitate internal consensus, capacity building, provide confidence to donors and investors, and catalyze donor support.
  - Consider reducing access—to 10 percent of quota—since financing gaps likely lower in medium term.
- Priority concentration areas for future programs:
  1. Improving tax and customs administration: enhance transparency, efficiency, equity; implement risk-based customs controls; focus near term on administration quality while pursuing medium-term tax reform.
  2. Banking sector reforms: increase public confidence, complete structural reforms, provide substantial and prolonged TA with World Bank and donor collaboration.
  3. Governance and private sector development: emphasize governance improvements and close Fund–World Bank cooperation.

### Program compliance, targets, and key statistics (selected figures)
- Regional performance (CIS-7):
  - Average real GDP growth, 1995–99: Armenia 5.3; Azerbaijan 2.5; Georgia 5.9; Kyrgyz Republic 3.5; Moldova -3.1; Tajikistan -1.2; Uzbekistan 1.7.
  - Average real GDP growth, 2001–03: Armenia 12.1; Azerbaijan 10.6; Georgia 6.3; Kyrgyz Republic 4.0; Moldova 6.7; Tajikistan 9.8; Uzbekistan 2.9.
  - Annual average inflation, 1995–99: Armenia 43.8; Azerbaijan 85.2; Georgia 46.3; Kyrgyz Republic 29.0; Moldova 22.5; Tajikistan 237.9; Uzbekistan 98.2.
  - Annual average inflation, 2001–03: Armenia 3.0; Azerbaijan 2.2; Georgia 5.0; Kyrgyz Republic 4.0; Moldova 8.9; Tajikistan 22.4; Uzbekistan 35.5.
- ESAF original targets vs outcomes, selected (1996–99):
  - Real GDP growth (annual percent change): 1996 Program 6.5; Outcome 5.8. 1997 Program 3.3; Outcome 3.1. 1998 Program 5.5; Outcome 7.3. 1999 Program 3.5; Outcome 3.3.
  - Inflation (end-period): 1996 Program 18.0; Outcome 5.8. 1997 Program 21.0; Outcome 21.9. 1998 Program 3.8; Outcome -1.3. 1999 Program 8.0; Outcome 2.0.
  - Fiscal balance (cash basis, percent of GDP): 1996 Program -9.3; Outcome -9.3. 1997 Program -6.7; Outcome -4.7. 1998 Program -5.6; Outcome -4.7. 1999 Program -6.1; Outcome -5.3.
  - Net international reserves (millions of US$): 1996 Program 16.0; Outcome 46.7. 1997 Program 86; Outcome 106. 1998 Program 99.5; Outcome 108.5. 1999 Program 97.0; Outcome 113.2.
  - Gross international reserves (millions of US$): 1996 Program 133; Outcome 168. 1997 Program 219; Outcome 243. 1998 Program 291; Outcome 298. 1999 Program 309; Outcome 305.
  - Nominal GDP (billions of drams): 1996 Outcome 660; 1997 Outcome 804; 1998 Outcome 959; 1999 Outcome 988.
- PRGF original targets vs outcomes, selected (2001–04):
  - Real GDP growth (annual percent change): 2001 Program 6.5; Outcome 9.6. 2002 Program 7.5; Outcome 13.2. 2003 Program 12.0; Outcome 13.9. 2004 Program 7.0; Outcome ...
  - Inflation (end-period): 2001 Program 3.5; Outcome 3.0. 2002 Program 3.0; Outcome 2.0. 2003 Program 4.0; Outcome 8.6. 2004 Program 3.0; Outcome ...
  - Fiscal balance (cash basis, percent of GDP): 2001 Program -5.5; Outcome -4.0. 2002 Program -3.3; Outcome -2.6. 2003 Program -2.0; Outcome -1.5. 2004 Program -1.9; Outcome ...
  - Tax revenues (percent of GDP): 2001 Program 15.1; Outcome 14.3. 2002 Program 15.0; Outcome 14.6. 2003 Program 14.3; Outcome 14.0. 2004 Program 14.6; Outcome ...
  - Total expenditures (percent of GDP): 2001 Program 21.2; Outcome 20.9. 2002 Program 21.5; Outcome 19.3. 2003 Program 20.6; Outcome 18.9. 2004 Program 17.7; Outcome ...
  - Net domestic assets (Billions of drams): 2001 Program -6.0; Outcome -4.5. 2002 Program 1.8; Outcome -12.4. 2003 Program -26.3; Outcome -39.2. 2004 Program -24.2; Outcome ...
  - Net credit to government from banking system (Billions of drams): 2001 Program 12.1; Outcome 9.5. 2002 Program 6.6; Outcome 0.0. 2003 Program -1.2; Outcome -14.6. 2004 Program -12.8; Outcome ...
  - Reserve money (indicative band / outcome): 2001 Program 72–75; Outcome 80.4. 2002 Program 87–90; Outcome 111.3. 2003 Program 118–123; Outcome 118.6. 2004 Program 121–126; Outcome ...
  - Net international reserves (millions of US$): 2001 Program 145; Outcome 155. 2002 Program 165; Outcome 231. 2003 Program 264.9; Outcome 282.5. 2004 Program 281.3; Outcome ...
  - Current account balance (percent of GDP): 2001 Program -14.1; Outcome -9.5. 2002 Program -8.7; Outcome -6.2. 2003 Program -7.7; Outcome -6.8. 2004 Program -5.9; Outcome ...
  - Gross international reserves (millions of US$): 2001 Program 336; Outcome 329. 2002 Program 364; Outcome 430. 2003 Program 470; Outcome 502. 2004 Program 492; Outcome ...
  - Nominal GDP (billions of drams): 2001 Outcome 1,176. 2002 Outcome 1,362. 2003 Outcome 1,618. 2004 Outcome 1,784.
- Program compliance:
  - Conditionality under PRGF was more focused but number of quantitative performance criteria averaged 10 per staff report under both ESAF and PRGF.
  - PRGF initial performance weak; first review delayed and combined with second review in September 2002 after 10 waivers were requested to complete the first two reviews.
  - Since 2002 program performance improved; on the structural side only one prior action for each of the third, fourth and fifth reviews; since the third review all monetary performance criteria were met.

*Source: Executive Summary and sections of IMF staff report (Armenia) reviewing 1996–2004 Fund-supported programs.*

### Executive Summary ......................................................................................................

### Executive Summary

### Introduction
- The Fund has provided almost continuous financial assistance to Armenia beginning in 1994, including support under the Systemic Transformation Facility (late 1994), a Stand-By Arrangement (1995–96), an Enhanced Structural Adjustment Facility (ESAF, 1996–99), and a Poverty Reduction and Growth Facility (PRGF, 2001–04).
- This report reviews Armenia’s performance under the two most recent Fund-supported programs, covering 1996–04, and assesses lessons and directions for future Fund engagement.

### Major findings on macroeconomic performance
- Armenia’s macroeconomic performance has been stronger than most countries in the region (CIS-7: Azerbaijan, Georgia, Kyrgyz Republic, Moldova, Tajikistan, Uzbekistan); average real GDP growth among the highest and inflation among the lowest (Tables 1 and 2).
- Growth has been broad based, financed by grants, concessional lending, and private investment (transfers from Armenians living abroad and foreign direct investment).
- During 2001–03, real GDP increased at an average annual rate of 12 percent compared with program projections of 9 percent.
- Inflation averaged 4.5 percent during 2001–03.
- End-period inflation declined from 32 percent in 1995 to 2 percent in 1999.
- The external current account deficit remained high (17 percent of GDP) as of 1999.
- Budget arrears were equivalent to 4.5 percent of GDP as of end-June 2000.
- The fiscal deficit on a commitment basis decreased from about 9 percent of GDP in 1996 to 1 percent in 2003.
- Total expenditures were reduced by 4.8 percent of GDP from 1996 to 2003.
- Tax revenues increased by 3.5 percent of GDP from 1996 to 2003; most of the improvement in revenues (3 percent) resulted from a change in the principle of taxation of the VAT from origin to destination for CIS countries in 1997-98.
- Taxes on profits and income as a share of GDP declined during 2001–03.
- About 5,000 out of 6,500 budgetary institutions have been converted into non-commercial organizations and removed from treasury coverage.

### Program objectives, conditionality, and implementation
- ESAF objectives: reduce external and fiscal vulnerabilities, decrease external debt ratios and budget arrears; structural measures on tax administration, energy sector quasi-fiscal deficits, banking regulation, and governance.
- PRGF objectives: enhance revenue performance, eliminate expenditure arrears, reduce reliance on external financing; structural reforms similar to ESAF with emphasis on tax administration, energy and water sector quasi-fiscal deficits, banking regulation, and governance.
- Conditionality under PRGF was more focused; measures on privatization, civil service reform, and the social safety net were dropped from PRGF through streamlining and greater cooperation with the World Bank, but the overall number of conditions was not reduced (the number of quantitative performance criteria averaged 10 in each of the staff reports under both ESAF and PRGF).
- Program implementation quality was uneven early in Fund engagement but improved in recent years. Delays in key structural reforms (banking, tax and customs administration, energy) occurred, reflecting capacity constraints and at times insufficient ownership—particularly during political instability in 1999–01.
- During the ESAF period several performance criteria were missed and some benchmarks were implemented “only partially or with considerable delay,” yet the final review was completed (September 1999).
- PRGF initial performance was weak; completion of the first review was delayed and combined with the second review in September 2002, 16 months after program approval. To complete the first two reviews the authorities requested 10 waivers (nine for missed quantitative performance criteria and one for an unmet structural performance criterion).
- Since 2002 program performance improved; on the structural side there has been only one prior action for each of the third, fourth and fifth reviews. Since the third review all monetary performance criteria were met.

### Fiscal policy and public expenditure management
- Significant fiscal consolidation achieved overall under Fund programs, driven largely by expenditure compression.
- Expenditure arrears and weak expenditure management were problems during ESAF; treasury operations improved with the introduction of a commitment control system and improved cash management procedures, contributing to the near elimination of domestic expenditure arrears in 2003 (some payment arrears remain pending verification of claims).
- Social spending averaged 5 percent of GDP in both programs and was largely safeguarded.
- Limited success in increasing tax revenues reflects weaknesses in tax and customs administration: accumulating tax arrears, extensive netting out operations, one-off schemes to reduce tax arrears, weak collection enforcement powers, inadequate audit processes, lack of self-assessment, and governance problems.
- Tax revenue data for 1999 are distorted by large netting out operations making the apparent increase artificial.

### Monetary and exchange rate policy
- Declining inflation reflects improved monetary policy and limits on bank financing of the fiscal deficit.
- Monetary program implementation during ESAF was mixed with frequent breaches of indicative broad money targets in 1998–99; performance improved significantly under PRGF with enhanced CBA implementation, adoption of better indirect instruments, improvements in the treasury bill market, and use of open market operations.
- Since the third review all monetary performance criteria were met, including on net domestic assets of the central bank, net credit to government, and net international reserves.
- Armenia has formally maintained a flexible exchange rate system, though data suggest some exchange rate management. A real depreciation of the dram and strong export growth indicate maintained competitiveness; during the first half of 2004 the dram appreciated slightly in nominal and real effective terms.

### Structural reform, capacity, and ownership
- Key reforms in banking, tax and customs administration, and the energy sectors experienced delays, reflecting capacity constraints and insufficient ownership.
- Capacity constraints and insufficient political will contributed to erratic implementation and the need for waivers and prior actions.
- Capacity improvements in tax and customs agencies fell short of expectations; separation of those agencies from the Ministry of Finance occurred against staff advice and worsened capacity problems.
- An assessment of the authorities’ ownership, priorities, and capacity should be a key ingredient in the formulation of any future assistance program.

### External position and financing
- Foreign financing has been provided by grants, concessional lending, and private investment (transfers from Armenians living abroad and foreign direct investment).
- The external current account deficit declined but remained high (17 percent of GDP) as of 1999.
- Continued Fund engagement could provide confidence to donors and investors, facilitate internal consensus, and support capacity building while helping preserve macroeconomic stability and foster growth and poverty reduction.

### Collaboration with the World Bank
- Fund–World Bank collaboration has been good; the Bank played a valuable role in facilitating streamlining of conditionality under the PRGF.
- Continued collaboration would enhance efforts to intensify ownership and sharpen program design.

### Assessment and policy recommendations
- Continued Fund engagement would be beneficial but a successor arrangement should involve reduced access.
- Before further financial support is made available from the Fund, the authorities need to demonstrate intensified commitment to remaining reforms in taxation, banking, and governance.
- A Fund-supported program could play a valuable role in facilitating internal consensus on appropriate policies, capacity building, and providing confidence to donors and investors.

*Source: Executive Summary, IMF staff report (Armenia), 1996–2004 program review.*

### 13.      There has been substantial improvement in the balance of payments.

### There has been substantial improvement in the balance of payments

### Balance of payments and reserves
- Current account deficit narrowed from 35½ percent of GDP in 1994 to about 7 percent of GDP in 2003.
- Improvement driven by:
  - an increase in domestic savings (resulting from fiscal consolidation),
  - strong export performance, including agriculture, metals, and diamonds,
  - foreign direct investment supporting exports,
  - transfers from Armenians living abroad.
- Official external reserves strengthened substantially, with gross reserves at US$502 million (4 months of imports) at end-2003.

### Debt management
- Between 1995 and 1999, grants were not readily available and Armenia financed most reconstruction with concessional debt; World Bank and Fund lending contributed to rising debt ratios.
- Situation reversed after 1999 due to successful growth performance and greater reliance on grant financing.
- Some problems arose during the ESAF in connection with external borrowing to support the energy sector but were resolved within the program framework.
- Latest debt sustainability analysis indicates Armenia’s medium-term external debt dynamics are sustainable.
- Armenia has an excellent track record of servicing its financial obligations to the Fund; its share of Fund credit in total external debt is the highest among PRGF countries.
- Overall, debt management issues appear to have been well handled under Fund-supported programs.

### Financial intermediation and banking sector
- Monetization (ratio of broad money to GDP) increased between 1995 and 2000 but was unchanged subsequently and remains below the average for CIS-7 countries.
- Ratio of banks’ private sector loans to GDP has been broadly constant since 1995 and is well below the average for comparable countries.
- A major factor behind weak financial intermediation was the failure of eight banks during 2000–02.
- Banks decreased exposure to the private sector as a share of total assets; economic growth was primarily financed from retained earnings, foreign direct investment, and transfers from abroad.
- Fund-supported programs recognized banking problems; SBA conditionality included revising prudential requirements, enforcing reserve requirements, and strengthening accounting regulations.
- ESAF included at least 10 structural benchmarks to improve supervision, legal framework, and operation of commercial banks; implementation occurred but effectiveness is unclear.
- FSAP (2000) noted a systemic banking crisis would not threaten the economy because of small size, but sector weakness would exacerbate shocks and precluded delivery of growth-generating financial services.
- PRGF introduced structural measures overlapping FSAP recommendations, including enacting a new bankruptcy law and enhancing the central bank’s supervisory authority.
- Beginning late 2000 and during most of 2001, the CBA placed eight troubled banks (accounting for a third of total deposits) under interim administration because of insider abuse.
- Structural benchmarks for subsequent reviews focused on resolving these “intervened banks” to restore confidence.
- Additional measures supported legislative changes on registration of collateral and shareholder rights.
- Remaining problems: functioning of the judicial system (to enforce creditor rights), poor accounting by firms, weak corporate governance in banks.
- These factors, together with banking failures and late introduction of creditor-rights reforms, explain sluggish remonetization and financial intermediation.

### Energy and quasi-fiscal activities
- During ESAF, measures for energy-sector privatization were implemented: the 1997 energy law separated Armenergo into generation, transmission, and distribution, and established the Energy Regulatory Commission (ERC).
- Despite institutional changes, financial condition of the energy sector during ESAF was largely unchanged due to difficulty imposing hard budget constraints on enterprises.
- A breach occurred in 1997 of a continuous performance criterion prohibiting non-concessional borrowing to finance energy enterprises.
- Staff estimated the quasi-fiscal deficit of the energy sector to be 4 percent in 1998 (data for 1997 not available).
- Under PRGF, financial situation of the energy sector improved substantially: electricity distribution companies were privatized and the primary fiscal deficit of the energy sector was largely eliminated.
- Less progress in water and irrigation sectors: overall and primary deficits decreased as a share of GDP because of higher tariffs, but water losses remain high.

### Governance
- Governance improved according to several measures (e.g., World Bank and Transparency International).
- Contributing reforms: simplification of licensing procedures, civil service reform, adoption of a new criminal code, privatization in the energy sector, wider dissemination of laws and regulations.
- Fund-supported programs addressed governance via legislative changes in Fund competency areas: elimination of distortionary taxes, greater budget transparency, and introducing Basel standards for bank supervision.
- Significant remaining gaps: tax and customs administration and the judiciary.
- Government approved an anti-corruption strategy at end-2003; implementation in a fully participatory process remains the challenge.

### Collaboration with the World Bank
- Bank-Fund collaboration was close; some overlap of conditionality under ESAF (privatization, civil service reform, social protection).
- Coordination and division of responsibilities improved under PRGF: Bank led key structural reform areas (expenditure policy, private sector development, public sector reform, environment); Fund reinforced Bank conditionality where macro implications existed.
- Cooperation was more effective when started early in program design and responsibilities were clearly defined.
- Continued close coordination needed to reconcile decentralization of public sector management with transparency and financial accountability in decentralized agencies.
- World Bank reports (Country Assistance Strategy, June 2004; Country Assistance Evaluation) identified improved business environment, reduced quasi-fiscal deficits in the energy sector, and improved governance as key Bank results.

### Assessment and lessons (Fund engagement and program effectiveness)
- Quantitative projections under ESAF and PRGF were generally accurate; projections for inflation, overall fiscal balance, and reserve money were broadly correct.
- Projections for real GDP growth under PRGF often proved conservative.
- Expected improvements in revenue collection (as a share of GDP) were often too optimistic; persistent weaknesses in tax and customs administration reflect insufficient political will.
- Program design and conditionality were appropriate and focused on fiscal and banking priorities; PRGF was more narrowly focused than ESAF though number of structural conditions remained high.
- Since mid-2002, there was an average of eight structural measures for each review; many structural conditions were very detailed.
- Frequent use of prior actions was common, though it diminished under recent reviews; beginning mid-2002 performance improved significantly suggesting improved ownership.
- Fund engagement was part of a broader CIS stabilization initiative; Armenia’s macro performance (growth and inflation), large reform agenda, and widespread poverty fostered presumption of continued Fund engagement.
- Mixed implementation in some periods, often during political uncertainty, suggests scope for strengthening ownership; weak performance was sometimes met with more structural measures rather than addressing ownership issues.
- Most broad macroeconomic objectives were met: restoration of growth and reduction of inflation achieved quickly; current account deficit reduction progressed more slowly but was financed largely by concessional borrowing, FDI, and private transfers.
- Some non-concessional borrowing occurred in energy sector reform delays but was addressed; debt sustainability does not appear to be a problem.
- Fiscal performance satisfactory, but tax administration improvements modest; Fund technical assistance complemented program priorities though capacity remains concentrated in a few agencies and individuals.

### Fund technical assistance
- TA concentrated on fiscal, monetary, and banking areas.
  - Fiscal TA: tax policy, revenue administration, public expenditure management.
  - MFD TA: monetary and foreign exchange operations, banking supervision.
  - Additional TA supported banking-sector structural reforms under ESAF/PRGF.
- FAD recommendations on revenue and public expenditure management helped keep revenue-to-GDP ratio stable and improve Treasury operations.
- MFD TA contributed to improvements in meeting monetary and financial targets, supervisory and regulatory framework, and use of monetary policy instruments.

### Additional implementation observations
- Progress in expenditure management advanced over time; revenue collection remained difficult.
- Compliance with budget and tax structural measures was generally satisfactory, suggesting design or commitment issues rather than implementation capacity alone.
- Structural reform in the banking sector was slow: weak compliance under ESAF, better under PRGF, but delayed measures, banking failures 2000–02, and weak creditor/property rights mean improvements in intermediation and confidence are only beginning to materialize.
- CBA intervention to administer eight weak banks removed unsound institutions, but prolonged administration by authorities delayed recovery of public confidence.
- Energy-sector reform pattern indicates initial ownership constraints that improved; quasi-fiscal activities as measured by the primary deficit have been reduced more recently, reflecting both complexity of reforms and variable political commitment.

*Source: _cr0502 - 13.      There has been substantial improvement in the balance of payments.*

### 31.      Armenia has consistently displayed strong growth and low levels of inflation. As

### Armenia has consistently displayed strong growth and low levels of inflation. As

### Performance overview and context
- Armenia displayed strong growth and low levels of inflation under Fund-supported programs.
- Performance with respect to key quantitative measures was generally satisfactory under the two arrangements, suggesting Fund-supported programs contributed to macroeconomic stability.
- Strong economic performance was driven by:
  - recovery from the break-up of the FSU,
  - steadily improving macroeconomic policy,
  - large capital inflows consisting mainly of concessional assistance, FDI, and private transfers.
- The Fund’s role was to support and guide the stabilization process; implementation of most quantitative measures was broadly satisfactory.
- Structural reform implementation improved significantly in recent years, but near-term sustainability of growth depends critically on completing the structural reform agenda.

### Lessons from Fund involvement
- On balance, the Fund’s involvement in Armenia has been beneficial.
- Structural reform proved more difficult than expected due to capacity constraints and insufficient political support, contributing to uneven implementation and the need for waivers, prior actions, and various benchmarks.
- Future Fund support should:
  - be targeted to areas that are macro-critical and accompanied by a demonstration of strong commitment to pending reforms,
  - include a realistic assessment of the authorities’ ownership, priorities and capacity in program design.
- Weak ownership consequences were evident during political uncertainty in 1999–2001; delays in preparing a successor arrangement and concluding the first two reviews indicate the Fund disengaged appropriately when implementation and commitment were weak.
- Modest progress in strengthening tax collections and improving confidence in the banking sector highlights the need for enhanced ownership; a more stringent structural reform agenda will not substitute for commitment and capacity building.
- Clear reform objectives and an articulated implementation path in tax and banking would enhance ownership and implementation performance.

### Considerations for future Fund involvement
- Continued Fund engagement and financial assistance would be beneficial given:
  - the importance of macroeconomic stability for effective poverty reduction,
  - the unfinished reform agenda.
- Required policies and actions include:
  - maintain economic stability,
  - address weaknesses in tax and customs administration,
  - complete banking system reforms.
- Debt ratios should remain low; further official financing and grants should be the main vehicle for financing the balance of payments gap.
- Armenia’s institutions and implementation capacity have improved but remain fragile and concentrated in a few small groups within the government.
- The Fund could play a pivotal role by:
  - helping authorities formulate a policy framework to address remaining reforms,
  - providing a catalytic role in securing financial and technical support from donors and other development partners,
  - facilitating access over time to more diversified sources of financing, including on nonconcessional terms.
- Authorities value the signaling role of a Fund-supported program to garner donor support and strengthen their stance against vested interests.
- Consideration should be given to reducing access—to 10 percent of quota—as financing gaps are likely to be lower in the medium term.

### Priority areas for a Fund-supported program
- Three priority concentration areas:
  1. Improving tax and customs administration:
     - Emphasis on enhancing transparency, efficiency and equity of the tax system to improve the business environment and raise higher revenues.
     - Improve customs administration to remove discretion from customs officials, increase transparency, and effectively implement risk-based control systems.
     - Given pressing social needs, broader medium-term tax reforms are essential to create an equitable and efficient tax system and increase revenues; near term focus should be on improving the quality of tax and customs administration.
  2. Banking sector reforms:
     - The past decade’s impressive growth occurred without the banking sector playing a significant role.
     - External financing was essential but is unlikely to substitute for domestic financing in the medium and long-term.
     - Increasing public confidence in banks should remain a central objective; substantial and prolonged TA requirements will necessitate close collaboration with the World Bank and other donors.
  3. Governance and private sector development:
     - Strong private sector growth underpinned the post-Soviet recovery.
     - Recent governance improvements and foreign transfers facilitated private sector expansion, but there is substantial scope for further improvement in governance.
     - Governance should be an area of emphasis and close cooperation between the Fund and the World Bank.

### Ownership, sequencing, and instruments
- Intensified ownership in remaining reform areas is essential for future Fund support.
- Vehicles for demonstrating intensified ownership could include authorities articulating an ambitious strategy for remaining structural reforms in the tax and banking areas and implementing key portions early to demonstrate ownership.
- The Fund’s priorities complement those of the World Bank; continued strong collaboration is envisioned.
- The Fund should take the lead in tax and selected banking reforms and integrate strong TA support from the Bank.

### Exit, graduation, and access strategy
- An exit from PRGF support is envisaged as the country’s income level will soon exceed IDA thresholds and the financing gap is likely to shrink further.
- Graduation steps include:
  - a reduced level of access in a potential new PRGF (one suggested reduction is to 10 percent of quota),
  - if Armenia carries out the remaining macro-critical reforms during the next three years, a subsequent Fund arrangement may not be necessary.

*Source: IMF staff assessment.*

### 38.      The major risk facing any future Fund-supported program is the loss of political

### _cr0502 - 38.      The major risk facing any future Fund-supported program is the loss of political

### Major risk and Fund response
- The major risk facing any future Fund-supported program is the loss of political commitment and ownership.
- Evidence: Armenia’s performance deteriorated during the latter period under the ESAF and the early part of the PRGF arrangement.
- Fund guidance:
  - The Fund should remain ready to disengage if implementation of the reform agenda falters.
  - A hiatus, but not disengagement, between the present arrangement and a future program of assistance may be needed to ensure that there is enough ownership to carry on with the remaining reforms.

### Regional growth (Table 1: Economic Growth in CIS-7 Countries, 1995–2003)
- Average real GDP growth, 1995–99:
  - Armenia: 5.3
  - Azerbaijan: 2.5
  - Georgia: 5.9
  - Kyrgyz Republic: 3.5
  - Moldova: -3.1
  - Tajikistan: -1.2
  - Uzbekistan: 1.7
- Standard deviation, 1995–99:
  - Armenia: 1.9
  - Azerbaijan: 8.6
  - Georgia: 4.2
  - Kyrgyz Republic: 5.8
  - Moldova: 3.4
  - Tajikistan: 7.3
  - Uzbekistan: 1.6
- Average real GDP growth, 2001–03:
  - Armenia: 12.1
  - Azerbaijan: 10.6
  - Georgia: 6.3
  - Kyrgyz Republic: 4.0
  - Moldova: 6.7
  - Tajikistan: 9.8
  - Uzbekistan: 2.9
- Standard deviation, 2001–03:
  - Armenia: 2.3
  - Azerbaijan: 0.7
  - Georgia: 2.0
  - Kyrgyz Republic: 3.5
  - Moldova: 0.9
  - Tajikistan: 0.6
  - Uzbekistan: 1.3

### Inflation patterns (Table 2: Inflation in CIS-7 Countries, 1995–2003)
- Annual average, 1995–99:
  - Armenia: 43.8
  - Azerbaijan: 85.2
  - Georgia: 46.3
  - Kyrgyz Republic: 29.0
  - Moldova: 22.5
  - Tajikistan: 237.9
  - Uzbekistan: 98.2
- Standard deviation, 1995–99:
  - Armenia: 74.6
  - Azerbaijan: 182.9
  - Georgia: 66.5
  - Kyrgyz Republic: 12.7
  - Moldova: 13.0
  - Tajikistan: 263.4
  - Uzbekistan: 117.1
- Annual average, 2001–03:
  - Armenia: 3.0
  - Azerbaijan: 2.2
  - Georgia: 5.0
  - Kyrgyz Republic: 4.0
  - Moldova: 8.9
  - Tajikistan: 22.4
  - Uzbekistan: 35.5
- Standard deviation, 2001–03:
  - Armenia: 1.9
  - Azerbaijan: 0.6
  - Georgia: 0.5
  - Kyrgyz Republic: 2.6
  - Moldova: 3.3
  - Tajikistan: 14.2
  - Uzbekistan: 18.0

### Program compliance and implementation (Tables 3–5)
- Overview: Tables document compliance under SBA (1995–96), ESAF (1996–99), and PRGF (2001–04), covering:
  - Prior Actions
  - Quantitative Performance Criteria
  - Structural Performance Criteria
  - Structural Benchmarks
- Summary qualitative finding:
  - Compliance varied across arrangements and reviews with a mix of Met, Not Met, Waivers, and instances where reporting was incomplete (e.g., footnotes noting assumed met or reporting gaps).

### Armenia: ESAF original program targets and outcomes, 1996–99 (Table 6)
- Real GDP growth (annual percent change):
  - 1996 Program: 6.5; Outcome: 5.8
  - 1997 Program: 3.3; Outcome: 3.1
  - 1998 Program: 5.5; Outcome: 7.3
  - 1999 Program: 3.5; Outcome: 3.3
- Inflation (end-period):
  - 1996 Program: 18.0; Outcome: 5.8
  - 1997 Program: 21.0; Outcome: 21.9
  - 1998 Program: 3.8; Outcome: -1.3
  - 1999 Program: 8.0; Outcome: 2.0
- Fiscal balance (cash basis, percent of GDP):
  - 1996 Program: -9.3; Outcome: -9.3
  - 1997 Program: -6.7; Outcome: -4.7
  - 1998 Program: -5.6; Outcome: -4.7
  - 1999 Program: -6.1; Outcome: -5.3
- Tax revenues (percent of GDP):
  - 1996 Program: 11.4; Outcome: 10.5
  - 1997 Program: 12.4; Outcome: 13.4
  - 1998 Program: 15.3; Outcome: 13.6
  - 1999 Program: 16.6; Outcome: 16.1
- Monetary (Billions of drams):
  - Net domestic assets:
    - 1996 Program: 27.1; Outcome: 21.5
    - 1997 Program: 6.4; Outcome: 3.1
    - 1998 Program: 6.1; Outcome: 4.0
    - 1999 Program: 6.3; Outcome: 1.2
  - Net credit to government from banking system:
    - 1996 Program: 22.9; Outcome: 23.3
    - 1997 Program: 15.5; Outcome: 16.0
    - 1998 Program: 20.6; Outcome: 20.0
    - 1999 Program: 22.0; Outcome: 15.4
  - Reserve money:
    - 1996 Program: 33.5; Outcome: 41.3
    - 1997 Program: 46.6; Outcome: 50.6
    - 1998 Program: 52.9; Outcome: 53.8
    - 1999 Program: 51.9; Outcome: 53.9
  - Net international reserves (millions of US$):
    - 1996 Program: 16.0; Outcome: 46.7
    - 1997 Program: 86; Outcome: 106
    - 1998 Program: 99.5; Outcome: 108.5
    - 1999 Program: 97.0; Outcome: 113.2
- External (percent of GDP unless otherwise indicated):
  - Current account balance:
    - 1996 Program: -29.5; Outcome: -18.2
    - 1997 Program: -27.1; Outcome: -18.7
    - 1998 Program: -23.7; Outcome: -21.3
    - 1999 Program: -24.7; Outcome: -16.7
  - Gross international reserves (millions of US$):
    - 1996 Program: 133; Outcome: 168
    - 1997 Program: 219; Outcome: 243
    - 1998 Program: 291; Outcome: 298
    - 1999 Program: 309; Outcome: 305
- Memorandum:
  - Nominal GDP (billions of drams):
    - 1996 Outcome: 660
    - 1997 Outcome: 804
    - 1998 Outcome: 959
    - 1999 Outcome: 988

### Armenia: PRGF original program targets and outcomes, 2001–04 (Table 7)
- Real GDP growth (annual percent change):
  - 2001 Program: 6.5; Outcome: 9.6
  - 2002 Program: 7.5; Outcome: 13.2
  - 2003 Program: 12.0; Outcome: 13.9
  - 2004 Program: 7.0; Outcome: ...
- Inflation (end-period):
  - 2001 Program: 3.5; Outcome: 3.0
  - 2002 Program: 3.0; Outcome: 2.0
  - 2003 Program: 4.0; Outcome: 8.6
  - 2004 Program: 3.0; Outcome: ...
- Fiscal balance (cash basis, percent of GDP):
  - 2001 Program: -5.5; Outcome: -4.0
  - 2002 Program: -3.3; Outcome: -2.6
  - 2003 Program: -2.0; Outcome: -1.5
  - 2004 Program: -1.9; Outcome: ...
- Tax revenues (percent of GDP):
  - 2001 Program: 15.1; Outcome: 14.3
  - 2002 Program: 15.0; Outcome: 14.6
  - 2003 Program: 14.3; Outcome: 14.0
  - 2004 Program: 14.6; Outcome: ...
- Total expenditures (percent of GDP):
  - 2001 Program: 21.2; Outcome: 20.9
  - 2002 Program: 21.5; Outcome: 19.3
  - 2003 Program: 20.6; Outcome: 18.9
  - 2004 Program: 17.7; Outcome: ...
- Tax arrears:
  - 2001 Outcome: 5.2
  - 2002 Outcome: 4.9
  - 2003 Outcome: 5.3
- Monetary (Billions of drams unless otherwise indicated):
  - Net domestic assets 1/:
    - 2001 Program: -6.0; Outcome: -4.5
    - 2002 Program: 1.8; Outcome: -12.4
    - 2003 Program: -26.3; Outcome: -39.2
    - 2004 Program: -24.2; Outcome: ...
  - Net credit to government from banking system:
    - 2001 Program: 12.1; Outcome: 9.5
    - 2002 Program: 6.6; Outcome: 0.0
    - 2003 Program: -1.2; Outcome: -14.6
    - 2004 Program: -12.8; Outcome: ...
  - Reserve money (indicative band / outcome):
    - 2001 Program: 72–75; Outcome: 80.4
    - 2002 Program: 87–90; Outcome: 111.3
    - 2003 Program: 118–123; Outcome: 118.6
    - 2004 Program: 121–126; Outcome: ...
  - Net international reserves (millions of US$) 1/:
    - 2001 Program: 145; Outcome: 155
    - 2002 Program: 165; Outcome: 231
    - 2003 Program: 264.9; Outcome: 282.5
    - 2004 Program: 281.3; Outcome: ...
- External (percent of GDP unless otherwise indicated):
  - Current account balance:
    - 2001 Program: -14.1; Outcome: -9.5
    - 2002 Program: -8.7; Outcome: -6.2
    - 2003 Program: -7.7; Outcome: -6.8
    - 2004 Program: -5.9; Outcome: ...
  - Gross international reserves (millions of US$):
    - 2001 Program: 336; Outcome: 329
    - 2002 Program: 364; Outcome: 430
    - 2003 Program: 470; Outcome: 502
    - 2004 Program: 492; Outcome: ...
- Memorandum:
  - Nominal GDP (billions of drams):
    - 2001 Outcome: 1,176
    - 2002 Outcome: 1,362
    - 2003 Outcome: 1,618
    - 2004 Outcome: 1,784
- Footnote:
  - 1/ At program exchange rates defined in the respective TMU.

*Source: IMF staff report content unit _cr0502 - 38.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2005/_cr0502.pdf_