IMF Executive Board Concludes 2010 Article IV Consultation for the Republic of Armenia

Public Information Notice (PIN) No. 10/151
December 1, 2010

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.

On December 1, 2010, the Executive Board of the International Monetary Fund (IMF) concluded the 2010 Article IV consultation1 with the Republic of Armenia on a lapse of time basis.2


The global financial crisis brought to an end a long period of high, but unsustainable growth. Large remittances were funneled to construction and contributed to double-digit growth during 2000–07. These contracted during the crisis, along with exports and Foreign Direct Investment (FDI), so that the external current account deficit increased sharply and output declined abruptly, by over 14 percent in 2009. A postponement of exchange rate adjustment led to a crisis of confidence, and a sharp fall in fiscal revenues added to concerns. The authorities’ strong policy response, supported by the international community, helped alleviate the impact of the crisis and restore confidence, albeit at the cost of a substantial increase of public debt.

Recovery is underway in Armenia in 2010, but the pace is slow. As the external environment has improved, industry and services are rebounding, but agriculture has been hit hard by adverse weather. With a rebound of agriculture, output is expected to grow by 4 percent in 2010, slower than the 6½ percent pace registered in the first half of the year, and by 4½ percent next year. The contraction of agricultural output and a rise in imported wheat prices have translated into higher food prices. Comprising nearly half of the weight of the consumer price index, higher food prices have pushed annual inflation over 9 percent in recent months. However, as food price shocks recede, inflation should decline to 7 percent by end-2010, and with appropriate monetary and fiscal policies in place, to the central bank’s target of 4±1.5 percent during the second half of 2011.

As the economy recovers, the authorities’ focus is shifting to medium-term challenges, including restoring strong growth—from new sources—and reducing poverty, ensuring fiscal and debt sustainability, and maintaining financial sector stability. Post-crisis policies include fiscal consolidation, increased exchange rate flexibility, continued commitment to price stability, strengthening the banking sector, and stepping up structural reforms.

Fiscal consolidation has proceeded in 2010. The crisis took a toll on public finances, with the overall deficit rising to 8 percent of Gross Domestic Product (GDP) last year. Fiscal performance has improved markedly in 2010, with tax collection increasing by 20 percent in the first eight months of the year, reflecting the rebound of activity, spending restraint, and progress in tax administration reforms. The fiscal adjustment is frontloaded, with the deficit targeted to come down by over 3 percentage points in 2010 and by a further 1 percentage point in 2011 and 2012. This will reduce public debt, which should peak at just below 50 percent of GDP in 2011, compared with 16 percent before the crisis. To protect social spending, the authorities are increasing the efficiency of health and education spending and improving the targeting and coverage of anti-poverty programs.

The authorities are committed to greater exchange rate flexibility, restricting interventions in the foreign exchange market to smoothing volatility and rebuilding reserves. Reflecting seasonal trends and external borrowing by domestic banks, the nominal exchange rate has appreciated by 10 percent since March. Limited foreign exchange purchases have helped rebuild reserves and stemmed a loss of competitiveness.

Monetary policy remains focused on price stability in an environment of higher dollarization, and efforts to strengthen the effectiveness of monetary policy continue. Liquidity conditions have eased with the central bank’s foreign exchange purchases, and as the recent price pressures are mainly supply-driven, the central bank has kept the policy rate unchanged since May.

The banking sector remains stable, and credit has picked up in recent months, although mainly in foreign exchange. Prudential measures have focused on ensuring proper management of foreign exchange risks, by increasing capital and provisioning requirements. Nonperforming loans have declined from a peak of more than 10 percent last year to less than 5 percent at present.

The authorities are pursuing structural reforms to improve competitiveness and raise Armenia’s growth potential. These include strengthening the competition framework, further reducing barriers to entry for new businesses, and improving governance by addressing conflicts of interest of public officials. Measures to improve tax administration are also part of efforts to strengthen the business environment.

Executive Board Assessment

In concluding the 2010 Article IV consultation for the Republic of Armenia, Executive Directors endorsed the staff appraisal, as follows:

The Armenian economy suffered a major setback during the global crisis with output contracting by more than 14 percent in 2009. The swift policy response of the authorities, with the assistance of the international community, rightly shifted to a countercyclical mode, dampening the impact of the crisis, especially on the most vulnerable segments of the population.

Armenia is on the right trajectory as it exits the crisis. Recent macroeconomic developments are encouraging, despite some—largely supply driven—inflationary pressures. Fiscal consolidation is moving forward, while the monetary policy stance remains neutral. Structural reforms have also progressed, but need to proceed faster to raise the growth potential of the economy.

Over the medium term, Armenia faces several challenges precipitated by the crisis. The external environment is difficult, and external imbalances must to be tackled expeditiously to avoid a disorderly adjustment. Decisive fiscal consolidation is needed to preserve debt sustainability and support medium-term external adjustment. Broader reforms are essential to promote growth and poverty reduction, namely, to address significant weaknesses in tax administration and the business environment, strengthen financial stability, and deepen financial intermediation.

The government’s fiscal policy strategy appropriately addresses the medium-term fiscal and debt vulnerabilities. With the economy gradually recovering, the fiscal stimulus is being gradually withdrawn. The budget deficit is projected to decline by 3 percent of GDP in 2010 and by a further 1 percent of GDP in 2011. The focus of consolidation is appropriately on enhancing revenue collection, rather than expenditure compression that could hurt spending on important sectors—education and health—as well as the poor. With these policies, the fiscal deficit is projected to fall to about 2 percent of GDP in the medium term, which will ensure that public debt remains sustainable. The MTEF and the new debt management strategy should substantially contribute to sound public finances.

The CBA’s monetary policy response since the crisis has been appropriate. The move to a more flexible exchange rate, the gradual lowering of the policy rate during the crisis, and its gradual increase as the recovery started were steps in the right direction. In the near term, monetary policy should continue to remain vigilant, increasing the policy rate if demand pressures or second-round effects from food price shocks arise. The CBA should continue to improve its communications to ensure that inflation expectations remain anchored around the inflation target. Planned dedollarization efforts could facilitate the monetary transmission mechanism, but sustained and sound macroeconomic policies are essential to reduce dollarization.

The increased flexibility of the exchange rate is serving Armenia well. The authorities’ commitment to maintaining a flexible exchange rate is welcome. The CBA intervention policy should continue to aim at only smoothing sharp fluctuations in the market, while guarding foreign exchange reserves and ensuring that the economy remains competitive. Any appreciation bias in the interventions will further contribute to a misalignment of the exchange rate with the equilibrium rate and delay external adjustment.

Armenia’s banking sector remains sound and proved resilient to the global shocks. After rising in the first half of 2009, NPLs came down and have remained at low levels throughout 2010. Staff is encouraged by the recent pick up in lending to the private sector. It is essential that the authorities continue to implement measures to preserve financial stability, including strengthening the supervision framework, tightening foreign exchange-related prudential regulations, and improving crisis preparedness and contingency planning.

Further improvements in tax administration will be needed to support fiscal consolidation and achieve stronger growth. While the government’s commitment to reforming the tax administration is welcome, efforts to strengthen tax administration and advance tax policy reforms have had mixed success, in part reflecting political economy constraints. The recent actions are a step in the right direction, but decisive implementation in line with international best practices will be crucial to realize gains.

Structural reforms will be essential if Armenia is to enhance its competitiveness and raise its growth potential. Bolder and deeper reforms are needed to improve governance, enhance competition, diminish monopolistic behavior, diversify exports, and more generally, modernize the economy. Measures to address conflicts of interest of public officials, strengthen the competition framework, and reduce barriers to entry by firms are welcome and should be followed by further trade reforms.

Armenia: Selected Economic Indicators
  2007 2008 2009 2010 2011
            Proj. Proj.

Real Sector


Real GDP growth (percentage change)

13.7 6.9 -14.2 4.0 4.6

GDP (in millions of U.S. dollars)

9,206 11,662 8,541 8,836 8,858

GDP per capita (in U.S. dollars)

2,853 3,606 2,615 2,678 2,658

Inflation (in percent)


Period average

4.4 9.0 3.5 7.8 5.5


6.6 5.2 6.6 7.1 4.6

Central government operations (in percent of GDP)


Revenue and grants

20.1 20.5 21.1 21.8 22.7

Expenditure and net lending

22.4 22.2 28.9 26.6 26.6

Overall balance (cash basis)

-2.2 -1.2 -8.0 -4.8 -3.9

Monetary indicators


Reserve money (end-of-period growth rate, in percent)

50.9 5.3 13.8 5.5 10.4

Broad money (end-of-period growth rate, in percent)

42.3 2.4 16.4 13.1 13.5

Broad money velocity

4.6 5.0 3.8 3.7 3.6

External Sector


Current account balance (including transfers)


In millions of U.S. dollars

-589 -1,382 -1,367 -1,289 -1,112

In percent of GDP

-6.4 -11.8 -16.0 -14.6 -12.6

External debt


In millions of U.S. dollars

1,449 1,577 2,967 3,336 3,700

In percent of exports of goods and services

81.6 89.8 222.2 220.4 215.1

Gross official international reserves


In millions of U.S. dollars

1,659 1,407 2,004 1,740 1,790

In months of imports of goods and services

4.2 4.6 6.2 5.1 4.9

Sources: Armenian authorities; and IMF staff estimates.

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. 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:

2 This year’s Article IV consultation was concluded on a lapse of time basis. Under the Fund’s lapse of time procedures, the Executive Board completes Article IV consultations without convening formal discussions.


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