IMF Staff Completes Second Review under the Stand-By Arrangement and the 2023 Article IV Consultation with Armenia
IMF News, November 7, 2023
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- Published: November 7, 2023
Mission, scope, and IMF agreement
- IMF team led by Iva Petrova visited Yerevan during September 13-25 for the 2023 Article IV consultation and the second review under the Stand-By Arrangement (SBA).
- Staff-level agreement reached on the second review of the SBA; subject to approval by the IMF’s Executive Board, scheduled to consider the review in mid-December.
- Board approval would enable access of about US$24.3 million (SDR 18.4 million), bringing the total access to about US$72.9 million (SDR 55.2 million).
- The SBA is being treated by the Armenian authorities as precautionary and aims to ensure policy continuity and support the government reform agenda.
Recent performance and near-term outlook
- Armenia’s economy grew by 10.5 percent in the first half of 2023, supported by robust private consumption and services trade.
- Staff projections:
- GDP growth expected to reach 7 percent in 2023.
- GDP growth expected to decelerate to 5 percent in 2024.
- Risks and scenario notes:
- Upside: growth could surprise on the upside in the event of a renewed bout of income and capital flows and strong implementation of reforms.
- Downside risks: elevated, including from geopolitical tensions, tight global financial conditions, slowdown in external demand, and abrupt reversal of capital flows.
Inflation, monetary policy, and exchange rate
- Inflation has remained subdued, helped by proactive monetary policy, exchange rate appreciation, and falling food and transportation prices.
- Service price inflation has been stickier.
- The Central Bank of Armenia (CBA) has started gradual normalization of monetary policy and should continue a data-dependent approach to ensure inflation expectations remain anchored.
- The flexible exchange rate should remain a key shock absorber.
- The CBA continues efforts to strengthen prudential and supervisory frameworks to help stem financial sector risks, including from rising housing prices.
Fiscal stance and public debt
- The overall fiscal balance recorded a surplus of 0.7 percent of GDP through September 2023.
- Central government debt remains sustainable.
- The draft 2024 budget:
- Appropriately accommodates refugee support while ensuring macroeconomic stability.
- Fiscal deficit is expected to support priority social and capital expenditures, with efforts continuing to improve revenue mobilization.
- It should help keep the economy from overheating and maintain a moderate debt level.
Financial sector and banking system
- The banking system has strong capital and liquidity buffers.
- Banking sector profitability continues to remain high.
- Ongoing CBA measures aim to strengthen prudential and supervisory frameworks.
Refugee response and social integration
- The authorities have responded proactively to the needs of the more than 100,000 ethnic Armenian refugees from Nagorno Karabakh.
- Immediate measures include cash support to address essential needs, temporary shelters, and financial aid to cover accommodation and utility expenses.
- Ongoing comprehensive assessment of medium-to-long term needs (housing, education, employment, social protection) would assist in their integration in Armenia.
Structural reforms and policy priorities
- Policy priorities: preserve macroeconomic stability, strengthen economic resilience, and continue structural reforms in:
- Product and labor markets.
- Revenue mobilization and public investment management.
- Improving the business environment to boost productivity and foster more inclusive growth.
- Specific reform recommendations and actions:
- Maintain the strong policy and reform momentum; build fiscal buffers and further strengthen medium term sustainability.
- Keep inflation expectations anchored and safeguard financial stability.
- Complete governance reforms.
- Boost productivity to deliver sustained and inclusive growth in line with the knowledge-based, export-oriented, and investment-driven growth strategy envisaged in the 2021-26 Government Reform Program.
- Develop and implement concrete and fully costed employment and export strategies.
- Upgrade the insolvency framework and prioritize governance reforms to support investment and improve the business environment.
- Implement the public investment management action plan to improve the implementation and quality of capital expenditures.
- Create fiscal space through revenue enhancing tax policies—including via rationalization of tax expenditures—and ongoing tax administration reforms.
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