Press Release No. 04/90

Press Release: IMF Completes Fifth Review Under PRGF for the Republic of Armenia, Approves Request for Extension of the Arrangement Through December 2004

May 3, 2004

The Executive Board of the International Monetary Fund (IMF) today completed the fifth review of the Republic of Armenia's economic performance under a three-year Poverty Reduction and Growth Facility (PRGF) arrangement, and approved a request for the extension of the arrangement by seven months to December 31, 2004. The completion of the review enables Armenia to draw an amount equivalent to SDR 10 million (about US$15 million).

Armenia's PRGF arrangement for the equivalent of SDR 69 million (about US$100 million) was approved on May 21, 2001 (see Press Release No. 01/25). So far, the equivalent of SDR 50 million (about US$73 million) have been disbursed.

The PRGF is the IMF's concessional facility for low-income countries. PRGF-supported programs are based on country-owned poverty reduction strategies adopted in a participatory process involving civil society and development partners, and articulated in a Poverty Reduction Strategy Paper, or PRSP. This is intended to ensure that each PRGF-supported program is consistent with a comprehensive framework for macroeconomic, structural, and social policies, to foster growth and reduce poverty. PRGF loans carry an annual interest rate of 0.5 percent, and are repayable over 10 years with a 5 ½-year grace period on principal payments.

Following the Executive Board discussion, Agustín Carstens, Deputy Managing Director and Acting Chair, said:

"The Armenian authorities should be commended for the satisfactory implementation of macroeconomic policies and structural measures under the PRGF-supported program. These policies have contributed to an improved business environment and a strong economic performance in 2003.

"Raising revenues and reforming tax and customs administration remain critical objectives in the period immediately ahead. The recent reduction in VAT exemptions and reform of the profit tax are welcomed steps in this regard, but further efforts are needed to improve the tax system and generate resources for poverty reduction. In particular, it will be important to improve the transparency of tax and customs operations, ensure the equal treatment of taxpayers, and implement risk-based audit systems. Additional steps are needed in the medium term to strengthen the overall coherence of the tax system and the management of the tax and customs agencies.

"Recent increases in bread and utility prices pose the risk of rekindling inflationary expectations, and the central bank will need to maintain a tight monetary policy to bring inflation down to its goal of 3 percent by end-2004. To further develop Armenia's financial system, it will be important to build capacity and promote sound corporate governance in the banking system, and strengthen the legal framework and the judiciary.

"The recent process of fiscal decentralization has the potential to improve the quality and efficiency of services delivered by state-owned noncommercial organizations in the health, water, and education sectors. Complementary capacity building initiatives and a properly functioning reporting framework remain essential to ensure transparency and accountability in the operations of these entities.

"Other structural reforms will be important to sustain growth and reduce poverty in the medium term. The anti-corruption strategy needs to be implemented forcefully and in consultation with civil society. The authorities are encouraged to move forward with their plans to reform the energy and water sectors, including establishing market rules for electricity trading, and liquidating the state-owned company Armenergo," Mr. Carstens said.