Three-year, SDR 266.8 (approximately US$404 million) arrangements under the Extended Fund (EFF) and Extended Credit Facilities (ECF) concluded in July 2013, with six program reviews completed without major delay. The authorities have expressed interest in a successor arrangement. A mission visited Yerevan in September to initiate discussions; further talks are expected during the Annual Meetings.
Background
Economic performance has weakened in 2013, and growth is now expected to be below 4թԹ percentթ§Չ-Չdown from 7.2 percent last yearթ§Չ-Չwhile higher food and energy prices have driven inflation above the CBAթ§Չ-Չ§s target of 4 թԹ՞ 1.5. The 2013 fiscal deficit will likely be below 2թԹ percent of GDP. The current account deficit is narrowing, led by mining exports and remittances, but remains elevated. In early September, President Sargsyan announced that Armenia will join the Eurasian Customs Union (ECU), and a free-trade agreement (FTA) with the European Union (EU) will not go forward. ECU membership is expected to lock in lower gas prices and could lead to financing for major infrastructure projects in Armenia. It may also lead to higher tariffs on imports from outside the ECU. Risks stem from a further slowdown in China and Russia and a tightening of global financing conditions.
Role of the IMF
The EFF/ECF-supported program aimed to achieve strong growth and poverty reduction, fiscal and external sustainability, and financial sector stability, with a focus on:
- Reducing the fiscal deficit, while protecting key social expenditures;
- Implementing reforms to improve the tax system, cast a wider tax net, and achieve gains in revenue administration;
- Ensuring greater exchange rate flexibility and strengthening of the monetary framework;
- Further strengthening financial sector supervision to maintain robust confidence in the banking system and improve its resilience to shocks; and
- Improving the business environment, enhancing competitiveness, and reducing poverty.
The possible successor program will aim at consolidating stability and implementing further reforms to support Armeniaթ§Չ-Չ§s transition to a dynamic emerging market economy.
In addition to financial support, the IMF has provided a wide-ranging program of technical assistance to Armenia, focused on tax policy and revenue administration, management of public finances, macroeconomic modeling and the inflation-targeting framework, contingency planning in the banking sector, and statistics. A full update under the Financial Sector Assessment Program took place in 2012. The IMF has coordinated its efforts with other agencies, including the World Bank, the EBRD, the Asian Development Bank, the EU, and other bilateral partners.
Progress to Date
Under the 2010թ§Չ-Չ13 program, growth was firmly re-established, and the overall fiscal deficit was reduced by 6 percentage points of GDP to the debt-stabilizing level of 2 percent of GDP. The external current account deficit declined from nearly 16 percent of GDP in 2009 to around 9 percent of GDP this year. On September 19, the authorities successfully issued Armeniaթ§Չ-Չ§s first Eurobond (7-year, $700 million, 6.25 percent yield).
Challenges Ahead
The key challenge is to implement fiscal and external adjustment firmly, while protecting the poor and adjusting policies as needed should developments impede the recovery.
- Armeniaթ§Չ-Չ§s economic growth remains dependent on continued growth in Russia, which in turn is influenced by the economic outturn in Europe and by global oil prices. Given the shift from the EU FTA and the anchor for reforms of EU harmonization, clarity and ambition on the structural reform agenda are now even more important than before.թԹ
- Fiscal consolidation is moving forward, but further efforts are needed to raise revenues and increase social and capital spending. This would help support growth prospects. Sustained political consensus will be needed in support of tax reforms.
- The banking sector remains sound and well-capitalized, but also heavily dollarized, exposing banks to indirect credit risks. Sound prudential, supervisory, and crisis management infrastructures are paramount, especially given the banking sectorթ§Չ-Չ§s high dollarization.
- While Armeniaթ§Չ-Չ§s թԹ international reserves are above most accepted metrics, balance of payments pressures remain. Continued fiscal discipline, together with exchange rate flexibility and structural reforms will be needed to mitigate pressures, along with continued support from external partners.
- Protecting the poor will continue to be critical. To this end, the authorities have committed to improving the efficiency and targeting of social spending.
- Armenia is well placed to weather these challenges. The policy package under discussion should enable Armenia to sustain strong economic growth, foster rising incomes and employment, and help reduce poverty.
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