Mission Concluding Statement 

An IMF staff team visited Yerevan during September 24-October 6 to continue discussions with the Armenian authorities on the fourth review of the program supported by the Poverty Reduction and Growth Facility (PRGF). The mission reached preliminary understandings on a new annual program through June 2004. The agreement could be formalized during the next few weeks and the Fund's Executive Board could consider the review in November. This would allow Armenia to draw the fifth tranche under the PRGF arrangement equivalent to about US$13 million.

The Armenian economy continued its strong performance in 2003, with real GDP growth of nearly 15 percent through August. The 12-month rate of inflation rose from 2 percent at end-2002 to 7.6 percent in September 2003 mainly reflecting an increase in the price of bread during the summer. Fiscal policy remained broadly on track in the first half of 2003 and the main monetary and fiscal quantitative targets under the program have been observed. At the same time, the balance of payments remained strong in view of foreign grants and foreign investment, leading to a further accumulation of international reserves.

The discussions on the government's program for the remainder of 2003 and 2004 focused on the need for the fiscal stance to be consistent with the recently approved Poverty Reduction Strategy Paper (PRSP). The program will be underpinned by further structural reforms and a cautious monetary policy in light of the recent pick up in inflation. Tax revenues are projected to increase rapidly next year on account of improved tax administration and tax policy reforms. The expenditure profile would be in line with the priorities set forth in the PRSP, implying an appropriate increase in current outlays to finance higher spending on health, education, and social security, while safeguarding sufficient domestically financed capital expenditures to sustain growth over the medium term. The fiscal deficit in 2004 is targeted at 2.5 percent of GDP.

The structural reform agenda includes measures to: (i) shore up tax collections through the introduction of a minimum profit tax; (ii) enhance the efficiency of the VAT system by reducing the value of exempted imports at the border, regulating the use of cash registers, and piloting a VAT deferral system for high-value imports of capital goods; (iii) improve the efficiency and transparency of customs operations; (iv) strengthen transparency and accountability in noncommercial enterprises; (v) proceed with the resolution of the two intervened large banks; and (vi) bolster corporate governance in state-owned utility companies. Lastly, the government expects to finalize an appropriately targeted anti-corruption strategy by year-end.