Press Release No. 98/65

The International Monetary Fund (IMF) has approved the third annual loan for Armenia under the Enhanced Structural Adjustment Facility (ESAF),¹ which has been increased by SDR 8.1 million (about US$11 million) to SDR 41.85 million (about US$59 million), in support of the government’s program for 1999. The loan is available in two equal semiannual installments of SDR 20.925 million (about US$29 million), the first of which is available at the end of December. The total commitment under the three-year loan is thus increased to the equivalent of SDR 109.35 million (about US$154 million).

Background

Overall, Armenia’s macroeconomic performance improved markedly during the first nine months of 1998, reflecting the lagged impact of the financial policies that have been implemented since late 1997. Inflation fell sharply and growth accelerated. Nominal interest rates declined and the exchange rate remained stable for most of the period. Exports rose, the current account deficit declined relative to GDP, inflows of private capital surged, and gross official international reserves strengthened.

The robustness of the economic stability achieved during the year has, however, been put to a test since late August when Armenia started experiencing the adverse spillover effects of the Russian crisis. Net exports to Russia and net transfers from Armenian workers in Russia have fallen sharply, officially guaranteed flows of financing from Russia have been delayed, and some private investment has been canceled. The crisis is beginning to affect important trading partners of Armenia in the region, adding to the overall impact.

The Program for 1999

The key objectives of Armenia’s development strategy are to address the spillover effects of the Russian crisis while trying to move forward in consolidating the gains achieved so far in stabilization and deepening structural reform. The authorities intend to take measures that would help Armenia absorb at least half of the external shock. The balance would be met through a concerted international donor effort to assist Armenia, as well as neighboring ESAF transition countries, to address the balance of payments difficulties resulting from the Russian crisis. It is anticipated that the steadfast implementation of these measures would provide the conditions to maintain real annual GDP growth of at least 5.5 percent in 1998 and 4.0 percent in 1999, in spite of the unfavorable external environment. End-period inflation is targeted at single-digits in both1998 and 1999, and the current account deficit is targeted to decline from a projected 24 percent of GDP in 1998 to about 22 percent in 1999. To achieve these macroeconomic objectives the program calls for maintaining a tight fiscal policy stance, with a state government budget deficit of about 5.5 percent of GDP in 1998 and about 6 percent of GDP in 1999. The Government has submitted a draft budget for 1999 to Parliament for approval which is consistent with these objectives. On the monetary side, tight monetary and credit policies will continue to be implemented . The government and the Central Bank of Armenia (CBA) will enhance the coordination between fiscal and monetary policy by preparing monthly financing strategies for the budget to be evaluated against the monthly liquidity management program of the CBA.

Structural Reforms

The government will deepen the reforms in the areas of privatization and banking. The privatization effort will be guided by the program approved by parliament a year ago, including cash privatization and international tenders. Regarding those enterprises remaining under public sector domain, the government will develop a system to monitor their financial operation on a regular basis. The government intends to develop a comprehensive strategy for the use of privatization proceeds by mid-1999 with the assistance of the IMF and the World Bank. In the meantime, the use of these resources for budgetary support will be limited and geared toward financing clearly identified investment projects and unbudgeted maintenance expenditures. The Central Bank of Armenia will seek to bolster the soundness of the commercial banks by introducing stricter prudential regulations and by strengthening supervision.

The government is also committed to implementing the revised strategy to rehabilitate the energy sector, which combines efficiency-enhancing measures, debt workouts, and tariff increases. The authorities intend to proceed with the privatization of energy enterprises and measures to strengthen the management, accountability, and reporting of the financial situation of the energy complex.

Armenia assigns high priority to raising productivity in the civil service and to increasing the real wages of public servants. Such efforts will be framed in the context of a comprehensive strategy.

Social Issues

The authorities are conscious that the process of transition may have some adverse consequences for the most vulnerable groups of the population, therefore their program attaches particular importance to developing and implementing a well-targeted, means-based, and cost-effective social safety net, as well as reforming those sectors with the greatest social incidence including education, health, and the pension system.

The Challenge Ahead

Armenia’s medium term prospects underscore the need to act decisively to restore conditions for sustained high growth, higher domestic savings, and a stronger officialinternational reserve position, especially in light of Armenia’s rising external debt service starting in the year 2000. As Armenia meets the challenge of firm implementation of its program policies, this should contribute significantly to achieve these goals. Armenia will require continued, albeit declining, external concessional financing in the years to come. Armenia has recently received some additional external financing assistance in the context of an international effort to cushion the immediate impact of the current external shock while the measures adopted under the program take hold.

Armenia joined the IMF on May 28, 1992. Its quota² is SDR 67.5 million (about US$95 million). It’s outstanding use of IMF resources currently totals SDR 114 million (about US$161 million).

Armenia: Basic Economic Indicators 1996 1997 1998 1999 Prel. Proj. Program GDP (billions of dram) seasonally adj. 660 799 940 1,100 Real GDP growth (percent change)1 5.8 3.1 5.5 4.0 GDP in millions of US dollars 1,594 1,613 1,864 2,025 GDP deflator (percent change) 19.5 17.3 11.6 12.5 Inflation (in percent) Period average 18.7 14.0 9.4 9.9 End-period 5.8 21.9 3.8 9.9 Exchange rates (drams/US$) Period average 413 491 504.5 -- End period 435 495 520.0 -- Fiscal Sector (in percent of GDP) State budget Total Revenue and Grants 15.1 16.9 18.7 19.0 of which: Tax Revenue 10.7 13.6 17.6 17.3 Total Expenditure and Net Lending 23.7 22.8 24.3 25.1 of which: Current expenditure 17.1 18.6 16.6 18.3 State budget balance (cash deficit'-')2 -9.3 -5.9 -5.6 -6.1 Statistical discrepancy -- 0.1 -- -- Identified financing 9.3 5.8 5.6 6.1 Consolidated budget Revenue and Grants 17.7 19.8 21.5 21.6 of which: Tax Revenue 12.9 16.4 18.1 17.9 Expenditure 26.3 25.7 27.1 27.7 of which Current Expenditure 19.6 21.5 19.4 20.9 Consolidated Budget Balance (cash deficit'-')2 -9.3 -5.9 -5.6 -6.1 Statistical discrepancy -- 0.1 0.0 -- Identified financing 9.3 5.8 5.6 6.1 Monetary Sector Net domestic assets of the CBA3 15.6 -45.0 10.6 11.4 Reserve Money (end of pd. growth rate, in percent) 40.5 22.5 4.6 9.2 Broad Money (end of pd. growth rate, in percent) 35.1 29.1 30.6 13.9 Broad Money Velocity4 13.8 12.8 11.3 11.2 Dram Broad Money (end of pd. growth rate, in percent) 34.1 8.7 15.2 15.3 Dram Broad Money Velocity4 17.4 19.3 19.2 18.8 External Sector Current account balance (millions of US dollars)5 -428 -452 -441 -442 in percent of GDP -27.9 -27.8 -23.7 -21.8 Total External debt ( millions of US dollars) US$ millions 611 786 801 894 in percent of annual GDP 38 48.3 43.0 44.1 External debt service (In percent of exports of G&NFS) On amounts due 20.3 14.7 12.3 15.5 On amounts paid 12.4 15.6 14.6 15.5 Gross official international reserves (millions of US $) 168 247 291 309 In months of imports of goods & non-factor services 2.2 3.1 3.6 3.6 Sources: Armenian authorities; and IMF staff estimates. 1With respect to the same period in the previous year. 2Deficit as measured by revenues minus expenditures, including contingent expenditures in 1999. 3Change in percent of reserve money at the beginning of the period. 4Calculated as the ratio between the annualized quarterly GDP in the last quarter of each period (seasonally adjusted) and the end-period money stock. 5Excludes official transfers. 1 The ESAF is a concessional IMF facility for assisting eligible members that are undertaking economic reform programs to strengthen their balance of payments and improve their growth prospects. ESAF loans carry an interest rate of 0.5 percent a year and are repayable over 10 years with a 5½-year grace period. 2A member’s quota in the IMF determines, in particular, the amount of its subscription, its voting weight, its access to IMF financing, and its share in the allocation of SDRs.