For more information, see Republic of Armenia and the IMF

The following item is a Letter of Intent of the government of Armenia, which describes the policies that Armenia intends to implement in the context of its request for financial support from the IMF. The document, which is the property of Armenia, is being made available on the IMF website by agreement with the member as a service to users of the IMF website.

October 6, 1999

Mr. Michel Camdessus
Managing Director
International Monetary Fund
Washington, DC 20431

Dear Mr. Camdessus,

In our Letter of Intent (LOI) and Supplementary Memorandum of Economic and Financial Policies (MEFP) dated September 15, 1999, we reiterated our commitment to implement the macroeconomic policies and structural reforms supported by the third annual ESAF arrangement.

We are pleased to report to you at this time that all the prior actions for the Board meeting, and all but one of the structural benchmarks established for end-September 1999, have been observed. With regard to the structural benchmark on the social safety net, which calls for adopting a resolution on pension system reform and approving a three-year strategic plan for the health sector, the Cabinet is scheduled to take a final decision on October 7, 1999.

Despite the progress achieved in implementing the program measures, we have encountered difficulties in adhering to some policy commitments under the program. As you know, the second tranche of the SAC III loan ($23 million) was disbursed on September 21, 1999. This long-awaited disbursement came at a critical time. However, its conversion into drams, to assist in our effort to clear budgetary arrears, created monetary management problems and disrupted the smooth functioning of the foreign exchange market. In particular, in the last 9 days of September, reserve money exceeded the upper bound of the corridor by an average of 5 percent despite active reverse repurchase operations, and the nominal exchange rate of the dram appreciated 4 percent vis--vis the U.S. dollar. Our efforts to sterilize this inflow will continue; we expect to bring reserve money back to the path envisaged in the program during the first half of October.

The problems have also extended to the securities market. As reported by the staff, in all auctions conducted from August 17 through September 28, we accepted bids consistent with our announced borrowing requirements at the market clearing price, as called for in the program. However, during the auction conducted on September 30, 1999, the bids were very unevenly distributed. If we had accepted bids for the full amount of treasury bills announced, the unaccepted bidder would have been paid 15 percentage points more than the marginal interest rate of 50 percent. We understand this action contradicts our commitment in paragraph 17 of the MEFP. However, we believe that there was an unfair market practice and are conducting an investigation into the factors behind the wide dispersion of bids. In the meantime, we reiterate our commitment to accept all bids up to the total amount of bills offered at a market clearing price, thus allowing interest rates to be fully determined by market forces.

We have also experienced difficulties in eliminating all budgetary expenditure and pension benefit arrears by end-September, as envisaged in the program. The verification of overdue claims on the budget as of June 30, 1999 revealed that the outstanding stock of budgetary arrears was dram 13 billion, 20 percent higher than reported in the LOI and MEFP. As a result, by end-September, we have been able to issue expenditure authorizations consistent with clearing only 85 percent of the revised stock of budgetary arrears; we have cleared all core budgetary expenditure arrears, and 74 percent of noncore budgetary expenditure arrears. In addition, the budgetary execution of the State Fund for Social Insurance in the third quarter was consistent with reducing the stock of such arrears from dram 3 billion at end-June to a preliminarily estimated dram 1 2/3 billion at end-September. We intend to clear all remaining budgetary expenditure and pension benefit arrears by end-October, 1999. Attached is a revised table setting out our performance targets for the remainder of the program.

Sincerely yours,

Vazgen Sarkissian
Prime Minister
Republic of Armenia

Levon Barkhoudarian
Ministry of Finance
Tigran Sargsian
Central Bank of Armenia


Table 1. Armenia: Quantitative Benchmarks and Indicative Targets, 1998-19991
      December         March June  September2  December

 Maximum levels in millions of drams (end-period stocks)
Quantitative benchmarks
Net domestic banking system credit to
general government
  program   20,640   24,370   17,535 21,159 21,989
  actual   19,984   15,989 16,747 ... ...
Net domestic assets of CBA
  program   6,122   7,683 6,181 5,042 6,339
  actual   2,857   3,636 4,566 -2,306 ...
Domestic expenditure arrears3   2,176   1,825 13,460 2,072 0
 Maximum levels in millions of U.S. dollars (end-period stocks)
Net disbursements of short-term external  
  program   0   0 0 0 0
  actual   0   0 0 ... ...
Contracting and guaranteeing of new
nonconcessional medium- and long-term
external debt longer than one year
  program   0   0 0 0 0
  actual   0   0 0 ... ...
of which: debt of 1-5 years maturities
  program   0   0 0 0 0
  actual   0   0 0 ... ...
External arrears (continuous criterion)
  program   0   0 0 0 0
  actual   0   0 0 ... ...
 Minimum levels in millions of U.S. dollars (end-period stocks)
Net official international reserves
  program   99.5   95.0 79.4 93.6 97.0
  actual   108.5   89.2 83.2 115.3 ...
 Minimum levels in millions of drams
State budget tax revenue
  program   136,843   31,423 64,710 110,503 165,734
  actual   133,434   28,032 64,729 111,113 ...
 Maximum levels in millions of drams
State budget overall cash deficit (year to day)
  program   52,468   11,973 28,054 41,677 62,795
  actual   45,264   6,189 16,289 ... ...
Memorandum Item (Indicative Targets)
State budget expenditure   212,907   41,806 95,996 177,835 267,764
Dram broad money (end-period stock)
  program   53,770   54,308 48,289 51,792 57,163
  actual   57,539   45,819 49,666 ... ...
Reserve money (end-period stock)
  program   52,897   52,343 46,809 49,017 51,939
  actual   53,839   45,561 43,689 51,872 ...

Source: National Authorities
1Quantitative benchmarks and indicative targets as defined in Table 1, page 68 of EBS/99/181.
2Preliminary figures.
3For the remaining period of the program, this limit will be indicative and will not operate as a performance criterion.