Press Release: IMF Approves Second Annual Loan for Armenia Under ESAF

June 24, 1997

The International Monetary Fund (IMF) approved the second annual loan under the Enhanced Structural Adjustment Facility (ESAF),1 in an amount equivalent to SDR 33.75 million (about US$47 million), to support Armenia’s economic program in 1997. The loan is available in two equal semiannual installments, the first of which can be drawn on June 30, 1997.


Performance under the first year of the ESAF-supported program was uneven. Led by expansion in the services and construction sectors, real GDP grew by 5.8 percent in 1996, inflation declined sharply to under 6 percent during the year, and the current account position improved noticeably. At the same time however, fiscal and monetary policies were considerably relaxed in the run up to the presidential elections in September. As a result of shortfalls in total revenues and grants and higher-than-expected expenditures, the overall cash fiscal deficit, amounted to 9.3 percent of GDP.

The 1997 Program

The key macroeconomic objectives of the 1997 program are: (a) to achieve a real GDP growth rate of about 6 percent; (b) bring down the inflation rate during the year to under 10 percent; and (c) increase gross reserves to the equivalent of 2.8 months of imports. To achieve these objectives, fiscal policy will aim at reducing the overall deficit to under 7 percent of GDP from 9.3 percent in 1996, by increasing revenue through further improvements in tax administration, full implementation of the tax arrears payment scheme, the establishment of an operational legal framework to enforce revenue collections, and adopting a series of revenue measures that aim at rationalizing and simplifying the structure of several important taxes. To improve expenditure management, the Treasury Account at the Central Bank will be used to conduct most government transactions, and the Central Treasury and Field Treasuries will become fully operational by the end of the year. The authorities will also further reduce current expenditure to 18.5 percent of GDP from 19.6 percent in 1996, through elimination of open-ended price subsidies to privileged groups, cuts in defense expenditures, and a reduction in interest payments. Monetary policy will be consistent with achieving the program’s inflation targets.

Structural Reforms

Building on the substantial advances in systemic reforms since 1994, the authorities are committed to accelerating the implementation of structural reforms. In addition to the reforms under way in the banking sector and tax administration, the 1997 program follows a three-pronged approach: (i) continued privatization to lay the basis for sustained growth; (ii) improvement of financial discipline through enterprise restructuring; and (iii) reforms in the energy, health and education sectors.

Addressing Social Needs

The authorities will take several measures during the program period to improve the targeting of social safety net benefits to alleviate poverty and improve income distribution. In particular, a plan to reduce pension benefits for working pensioners and increase those for nonworking pensioners is under consideration.

The Challenge Ahead

Although good macroeconomic performance in 1997 is within reach, the fiscal situation remains fragile and external sustainability could become an issue over the medium term. The authorities will therefore need to consolidate the fiscal gains achieved so far, restore confidence in the dram, and accumulate a reasonable cushion of reserves to weather external shocks.

Armenia joined the IMF on May 28, 1992, and its quota2 is SDR 67.5 million (about US$94 million). Its outstanding use of IMF financing currently totals SDR 81 million (about US$113 million).

Armenia: Selected Economic Indicators

1995 1996 1997* 1998** 1999**

(Percent change)
Real GDP 6.9 5.8 5.8 6.0 6.0
Consumer prices
(end of period)
31.9 5.7 9.5 8.0 6.2

(Percent of GDP)
Overall fiscal balance, cash basis
-11.1 -9.3 -6.7 -5.6 -4.0
External current account balance,
excluding official transfers (deficit-)
-37.6 -26.6 -24.0 -23.2 -21.1

(Months of imports)
Gross official reserves 1.6 2.2 2.8 3.1 3.1

Sources: Armenian authorities, and IMF staff estimates and projections.
** Projections.

1The 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 a year and are repayable over 10 years, with 5 1/2-year grace period.

2A 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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