Press Release: IMF Approves Three-Year Loan for the Republic of Armenia Under the ESAF

February 14, 1996

The International Monetary Fund (IMF) today approved a three-year loan for the Republic of Armenia in an amount equivalent to SDR 101.25 million (about $148 million) under the enhanced structural adjustment facility (ESAF)1 to support the Government's medium-term economic and reform program during the period 1996-98. The first annual ESAF loan, in an amount equivalent to SDR 33.75 million (about $49 million), will be disbursed in two equal semiannual installments; the first, in an amount equivalent to SDR 16.875 million (about $25 million), will be available at the end of February; the second will become available in September 1996 after review of program implementation by the IMF's Executive Board.


The ESAF-supported program builds upon the achievements of Armenia's previous programs of economic reform: the first supported by a drawing under the Systemic Transformation Facility (STF) in December 1994, and the second supported by a stand-by arrangement and a second STF drawing, approved by the Fund in June 1995. Under these programs, the Armenian authorities achieved remarkable exchange rate stability during 1995; kept inflation low; implemented fiscal measures to maintain the general government deficit within the limits set by the revised program for end-1995; and accelerated substantially the pace of privatization. In 1995, the economy is estimated to have grown by 5 percent, primarily thanks to increased industrial activity and a steady improvement in agriculture output. Having achieved a fair degree of economic stability, the Armenian authorities have designed a medium-term program to address critical structural distortions that still pervade the economy.

Medium-Term Strategy and the 1996-98 Program

The objectives of the ESAF-supported program are to maintain macroeconomic stability and to nurture growth by building an environment conducive to the development of the private sector while dealing decisively with structural distortions to improve the supply response of the Armenian economy. The main macroeconomic objectives of the program are to raise the economic growth rate from 5 percent in 1995 to 7 percent in 1998, reduce the rate of annual inflation from 32 percent in 1995 to 8.0 percent by end-1998, and narrow the current account deficit from 26.4 percent of GDP in 1995 to 12.5 percent of GDP in 1998 while raising gross international reserves from the equivalent of 1.5 months of imports in 1995 to 3.5 months in 1998. In support of these objectives, fiscal policy will aim at a fundamental restructuring of the budget, coupled with a continuous reduction in the deficit from 10.9 percent of GDP in 1995 to 3.8 percent of GDP in 1998; monetary policy will be consistent with the envisaged reduction of inflation; and structural reforms will aim at establishing the necessary incentives for state enterprises to produce goods based on commercial principles.

In this medium-term framework, the program for 1996, supported by the first annual ESAF loan, aims at a real GDP growth rate of 6.5 percent; a reduction in the rate of inflation to 19 percent, and a lowering of the current account deficit to 17 percent of GDP. To these ends, fiscal policy is designed to reduce the budget deficit to 7.6 percent of GDP in 1996 through improved tax administration, including the reduction of the stock of tax arrears, and tight expenditure management and control. Monetary policy will focus on containing inflationary pressures while exchange rate policy will seek a relatively stable nominal exchange rate for the dram.

Structural Reforms

A series of structural reforms constitute the linchpin of the economic program. Foremost among them will be a fundamental reform of the energy sector and a corresponding restructuring of several enterprises, with electricity tariffs being raised in stages to reach full cost recovery. The program will also impose hard-budget constraints on enterprises through decentralization, privatization, and implementation of the bankruptcy and collateral laws upon their approval by the Parliament in 1996. The Central Bank will impose financial discipline on the banking sector by implementing a law on bank insolvency. Also, the 1996 privatization program envisages completion of small-scale privatization and substantial progress in privatizing medium- and large-scale enterprises through public subscriptions payable in cash or vouchers. Other significant structural reforms envisaged in the program will include progress toward a functioning electronic payments system--which is critical to the development of the secondary market for government securities and to the development of indirect instruments of monetary policy--and establishing a debt-management unit to monitor the contracting and guaranteeing of external debt obligations by the Government, the Central Bank, and state enterprises.

Addressing Social Problems

To cope with the social pressures involved in the transition process, the reorientation of social expenditures toward the most vulnerable remains a high-priority task. Although some measures have been taken in this area, much remains to be done. The program lays emphasis on improving the targeting of the social safety net and intensifying efforts in rationalizing social expenditures. Reforms of the education and health care system are expected both to improve the quality and increase the efficiency of budgetary support in these areas.

The Challenge Ahead

In addition to exercising fiscal restraint and vigilance over banking system developments to prevent a domestic crisis that could jeopardize the program, Armenia will need concessional external financing in the foreseeable future to meet the country's rehabilitation needs.

The Republic of Armenia joined the IMF on May 28, 1992; its quota2 is SDR 67.5 million (about $99 million). Armenia's outstanding use of IMF credit currently totals SDR 47 million (about $69 million).

Republic of Armenia: Selected Economic Indicators

  1994 1995 1996* 1997* 1998*

(percent change)
Real economic growth 5.4 5.0 6.5 7.0 7.0
    (end of period)
1,884.5 31.9 18.9 9.5 8.0
(percent of GDP)
External current account balance,
    excluding official transfers
    (deficit –)
–35.5 –26.4 –17.3 –15.4 –12.2
Goverment balance,
    (excluding grants; on a cash basis)
    (deficit –)
–10.1 –10.9 –7.6 –4.4 –3.8

Sources: Armenian authorities and IMF staff estimates

1. The ESAF is a concessional IMF facility for assisting eligible members that are undertaking economic reform programs to strengthen their balance of payments and improve their growth prospects. ESAF loans carry an interest rate of 0.5 percent and are repayable over 10 years, with a 5 1/2-year grace period.  

2. A member's quota in the IMF determines, in particular, the amount of its subscription, its voting weight, its access to IMF financing, and its share in the allocation of SDRs.


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