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IMF Executive Board Concludes 2019 Article IV Consultation with the Republic of Armenia

May 31, 2019

On May 17, 2019, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation [1] with the Republic of Armenia.

Armenia’s economy continues to perform well. Activity expanded by 5.2 percent in 2018, aided by a pickup in private investment and continued recovery in remittances, and annual consumer price index (CPI) inflation fell to 1.9 percent in March. The current account deficit widened to 9.1 percent of GDP in 2018, primarily owing to stronger capital goods imports, weaker primary income, and some measurement issues. Fiscal consolidation is on track, supported by strong tax administration efforts, with public debt as a share of GDP declining in 2018. Monetary and financial conditions remain stable with limited pressure on the exchange rate. The banking sector is well-capitalized, and credit growth has been supporting economic activity. On the structural front, the fiscal rule was redesigned and improved in December 2017. A full-fledged pension reform came into effect in July 2018. A draft public-private partnership law has been prepared in consultation with international development partners, including the IMF. The new government has pledged to speed up reform, in particular to decisively combat corruption and improve governance, with a view to promoting inclusive and sustainable growth.

Looking ahead, growth is expected to moderate to a more sustainable level of 4.6 percent in 2019 and stabilize at 4.5 percent over the medium term. The authorities are aiming for higher medium-term growth supported by reform. CPI inflation is projected to converge to the Central Bank of Armenia’s (CBA’s) medium-term target of 4 percent over the next two years. The current account deficit is expected to improve to 7.3 percent of GDP in 2019, as transitory factors begin to fade, and gradually fall to a more sustainable level of around 6 percent of GDP, as exports continue to grow and imports moderate somewhat.

Downside risks to growth are mostly external. They include increased global trade tensions and turbulence in global financial markets, both of which could lower trading partners’ growth, remittances, and commodity prices. On the upside, faster progress on the reform agenda could boost potential growth.

Executive Board Assessment [2]

Executive Directors agreed with the thrust of the staff appraisal. They commended the authorities’ efforts in recent years to maintain macroeconomic stability and strengthen policy frameworks. Directors noted that Armenia remains vulnerable to external shocks and faces structural challenges in its transition toward a dynamic, private‑sector led emerging market economy. In this context, they welcomed the new government’s reform agenda, particularly anti‑corruption efforts to improve governance and the business environment, to foster sustainable and inclusive growth. Directors emphasized that ownership and resolute implementation are key to the success of the reforms.

Directors supported the authorities’ fiscal consolidation plans, guided by the fiscal rule, aiming to bring central government debt to below 50 percent of GDP in the medium term, while leaving adequate fiscal space for critical spending. They noted that the authorities’ tax reform, including the simplification of the personal income tax system, is aimed at improving compliance and supporting economic activity. However, they cautioned that careful monitoring is needed to avoid a fall in revenues and a worsening of income distribution. Directors also underscored the need for accompanying sustainable compensating measures and strong tax administration efforts. Strengthening revenue mobilization would help preserve debt sustainability while also creating needed space for growth‑enhancing infrastructure and social spending. In this regard, further efforts to improve public investment management were encouraged.

Directors considered that the current monetary policy stance remains appropriate and that policy should remain focused on bringing inflation back to its medium‑term target. At the same time, they underscored the importance of continued exchange rate flexibility in responding to external shocks, maintaining foreign exchange reserves at an adequate level, and protecting competitiveness. Foreign exchange market interventions should be limited to preventing disorderly market fluctuations.

Directors encouraged further strengthening of the monetary and financial sector policy frameworks. To increase the effectiveness of inflation targeting and monetary transmission mechanism, they noted the need to develop a well‑functioning interbank market, enhance communication, and promote de‑dollarization. In supporting a more resilient financial sector and strengthening the macroprudential framework, Directors welcomed the authorities’ commitment to bolstering banks’ foreign exchange liquidity buffers, and encouraged measures to develop capital markets further and increase access to finance.

Directors noted the importance of advancing structural reforms to foster sustainable and inclusive growth through measures that promote private sector development, attract more FDI, and increase diversification. They welcomed the government’s strong commitment through its five‑year program to strengthen governance, enhance competition, and improve the business climate. Measures to enhance human capital and foster female labor market participation were also encouraged.

It is expected that the next Article IV consultation with the Republic of Armenia will be held in accordance with the Executive Board decision on consultation cycles for members with Fund arrangements.

Table 1. Armenia: Selected Economic and Financial Indicators, 2016–23

2016

2017

2018

2019

2020

2021

2022

2023

Act.

Act.

Act.

Projections

National income and prices:

Real GDP (percent change)

0.2

7.5

5.2

4.6

4.5

4.5

4.5

4.5

Final consumption expenditure, Contrib. to Growth

-0.9

7.4

2.7

3.3

3.4

2.7

3.5

2.1

Gross fixed capital formation, Contrib. to Growth

-2.4

1.5

0.8

6.8

4.6

5.0

4.2

3.1

Changes in inventories, Contrib. to Growth

0.7

1.1

4.0

-4.6

0.0

0.0

0.0

0.0

Net exports of goods and services, Contrib. to Growth

3.1

-1.2

-1.8

-1.2

-3.4

-3.1

-3.2

-0.6

Gross domestic product (in billions of drams)

5,067

5,569

6,003

6,549

7,102

7,745

8,437

9,169

Gross domestic product per capita (in U.S. dollars)

3,524

3,872

4,186

4,533

4,764

5,068

5,386

5,710

CPI (period average; percent change)

-1.4

1.0

2.5

2.1

3.0

3.7

4.0

4.1

CPI (end of period; percent change)

-1.1

2.6

1.8

2.5

3.3

3.8

4.1

4.3

GDP deflator (percent change)

0.3

2.2

2.5

4.3

3.8

4.4

4.2

4.0

Unemployment rate (in percent)

20.2

18.6

18.1

17.9

17.7

17.8

17.7

17.6

Investment and saving (in percent of GDP)

Investment

18.0

19.0

22.4

23.6

24.1

24.4

24.9

25.6

National savings

15.8

16.6

13.3

16.3

16.8

17.5

18.4

19.4

Money and credit (end of period)

Reserve money (percent change)

13.1

-1.0

17.8

9.0

9.5

8.5

8.5

8.5

Broad money (percent change)

17.5

18.5

7.4

7.0

9.5

8.5

8.5

8.5

Private sector credit growth (percent change)

6.0

16.5

17.2

16.0

15.5

13.0

12.5

11.0

Central government operations (in percent of GDP)

Revenue and grants

21.4

21.2

21.7

22.6

22.8

22.8

22.9

23.2

Of which : tax revenue

20.1

20.2

20.6

21.0

21.3

21.5

21.7

21.9

Expenditure

27.0

26.0

23.5

25.2

24.9

24.7

24.7

25.0

Overall balance on a cash basis

-5.6

-4.8

-1.8

-2.5

-2.1

-1.9

-1.8

-1.8

Public and publicly-guaranteed (PPG) debt

56.7

58.9

55.8

54.6

53.7

52.3

51.1

50.1

Central Government's PPG debt (in percent)

52.0

53.7

51.4

51.0

50.8

50.2

49.5

49.0

Share of foreign currency debt (in percent)

80.9

81.1

77.5

77.6

76.5

75.4

73.9

74.3

External sector

Exports of goods and services (in millions of U.S. dollars)

3,500

4,307

4,669

5,074

5,361

5,744

6,137

6,625

Imports of goods and services (in millions of U.S. dollars)

-4,516

-5,710

-6,583

-7,132

-7,467

-7,892

-8,371

-8,875

Exports of goods and services (percent change)

11.6

23.0

8.4

8.7

5.7

7.2

6.8

7.9

Imports of goods and services (percent change)

2.2

26.4

15.3

8.3

4.7

5.7

6.1

6.0

Current account balance (in percent of GDP)

-2.3

-2.4

-9.1

-7.3

-7.3

-6.9

-6.5

-6.2

FDI (net, in millions of U.S. dollars)

272

228

266

296

318

346

376

407

Gross international reserves (in millions of U.S. dollars)

2,204

2,314

2,249

2,284

2,373

2,418

2,468

2,633

Import cover 1/

4.6

4.2

3.8

3.7

3.8

3.5

3.3

3.4

End-of-period exchange rate (dram per U.S. dollar)

484

484

484

Average exchange rate (dram per U.S. dollar)

480

483

483

Sources: Armenian authorities; and Fund staff estimates and projections.

1/ Gross international reserves in months of next year's imports of goods and services, including the SDR holdings.




[1] Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.

[2] At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm.

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