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IMF Concludes 2001 Article IV Consultation with the Republic of Armenia

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International Monetary Fund
Published Date:
April 2002
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On May 21, 2001, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with the Republic of Armenia.1

Background

The economic situation has improved since mid-2000 following the deterioration in late 1999 and early 2000. Real GDP began to recover in the second quarter and increased by 6.0 percent for 2000 as a whole, despite a severe drought affecting part of agriculture during the summer. Growth was led by industry, construction, and trade and services. Inflation remained low in 1999 and 2000 owing to a variety of factors, including generally non-inflationary monetary and fiscal policy during the period. Cumulative inflation for 2000 as a whole was only 0.4 percent.

Fiscal policy was characterized by a very substantial run-up in budgetary expenditure arrears in late 1999 and the first half of 2000, reflecting shortfalls in tax revenues and delays in disbursements of external budgetary financing related to policy slippages. The authorities increased revenue collections in the second half of 2000 relative to the budget as the political situation stabilized, economic activity recovered, and tax administration improved. Moreover, the World Bank disbursed the fourth tranche under its SAC III loan to Armenia in December 2000. The government also reduced budgetary expenditure commitments in the fourth quarter equal to 2.6 percent of quarterly GDP, and cleared socially significant arrears (such as family allowances, pensions, and wages), using proceeds borrowed from the Special Privatization Account (SPA), amounting to 2.3 percent of quarterly GDP. State budgetary expenditure arrears decreased slightly in the second half of 2000, to 4.3 percent of GDP at end-2000.

While monetary aggregates grew substantially during 1999 and 2000, inflation was low, suggesting a rapid growth in real money demand. In particular, reserve money growth was moderate in the first half of 2000, but exceeded the upper limit of the Central Bank of Armenia’s (CBA) indicative reserve money corridor starting in July. In the fourth quarter, however, reserve money increased by 25 percent, because the net foreign assets of the CBA increased due to official inflows and spending of proceeds from the SPA on capital expenditures and—through the bridging operation—on clearance of arrears. Reserve money was brought down significantly in the first quarter of 2001. Armenia’s currency, the dram, remained broadly stable during the 1999-2000 period.

The external current account improved significantly, with the deficit falling from 21.2 percent of GDP in 1998 to 14.6 percent in 2000, reflecting a reduced trade deficit. The capital account surplus decreased from around US$400 million in 1998 to around US$300 million in both 1999 and 2000, in the absence of major international privatizations which had boosted foreign direct investment in 1998. At end-2000, external debt amounted to US$862 million, the equivalent of 45 percent of GDP or 196 percent of (current year) exports. In present value terms, external debt at end-2000 is estimated at US$535 million, or the equivalent of 135 percent of exports, down from US$549 million (154 percent of exports) in 1999.

The authorities have made progress in reforming the energy sector, which remains a considerable financial drain on the budget and the rest of the economy, through taking steps to privatize the energy distribution companies (EDCs). In August 2000, the government adopted the EDC Privatization Law, which allows the privatization of the four EDCs through an international tender. The authorities have made good progress in the tender process for privatizing the EDCs.

Executive Board Assessment

Executive Directors commended the authorities for implementing macroeconomic policies following the political turbulence of late 1999 and early 2000 that have succeeded in maintaining low inflation and slowing the build-up in expenditure arrears. Directors welcomed the authorities’ determination to maintain a rate of monetary growth consistent with continued price stability, tighten fiscal policy to eliminate the outstanding stock of budgetary arrears in 2002 and lower the external debt burden over time, progressively eliminate financing gaps in the quasi-fiscal sectors, further improve regulation of the banking sector, and improve governance and reduce corruption through increased transparency and accountability. All these policies were viewed as essential to laying the foundation for sustained economic growth and poverty reduction.

Directors noted that the authorities had made a good start in the process of fiscal consolidation by strengthening tax collections and cutting expenditures in the second half of 2000, and that the approved state budget for 2001 entails a further adjustment in revenues and expenditures. However, Directors stressed the need for stronger revenue-enhancing measures, while cautioning against excessive cuts in social spending. They strongly recommended that attention be paid to the effectiveness and transparency of social spending. Directors encouraged the authorities to enact swiftly the treasury law and to rationalize expenditure over the medium term in the context of the planned public expenditure review.

Following the rapid growth in monetary aggregates in the second half of 2000, Directors commended the CBA for bringing reserve money down in the first quarter of 2001. Directors welcomed the CBA’s decision to continue to use an indicative path for reserve money to guide the day-to-day implementation of the monetary program, and urged the authorities to stand ready to tighten monetary policy, should inflation turn out to be higher than projected. Directors also underscored the importance of enhanced coordination of monetary and fiscal policies.

Directors considered the authorities’ flexible exchange rate policy to be appropriate, noting that indicators of external competitiveness and recent macroeconomic performance suggested that Armenia weathered well the Russian currency crisis in 1998. They praised the authorities for maintaining a liberal trade and exchange system and for their pursuit of WTO membership.

While the Financial System Stability Assessment report pointed to a relatively healthy financial system, Directors noted that the underlying situation contains a number of weaknesses and vulnerabilities. They urged the authorities to tighten bank’s accounting standards, prudential rules for loan classification and loss provisioning, and capital standards to build trust in the banks and reduce financial system vulnerability to macroeconomic shocks.

Directors welcomed the recent progress in reducing the external debt burden and the steps being taken by the authorities to eliminate external payments arrears. They stressed that a cautious approach to external borrowing must continue to be pursued and supported the authorities’ intention to use privatization proceeds to improve the country’s debt profile.

Directors stressed that successful implementation of the government’s plans for financial rehabilitation of the quasi-fiscal sectors is necessary to ensure macroeconomic stabilization and should be accorded high priority. In this regard, they attached particular importance to the planned privatization of the energy distribution companies, and urged the authorities to move ahead with the tender process in a transparent manner.

Directors welcomed the progress made in implementing the General Data Dissemination Standard, and encouraged the authorities to further improve the quality and timeliness of economic statistics.

Public Information Notices (PINs) are issued, (i) at the request of a member country, following the conclusion of the Article IV consultation for countries seeking to make known the views of the IMF to the public. This action is intended to strengthen IMF surveillance over the economic policies of member countries by increasing the transparency of the IMF’s assessment of these policies; and (ii) following policy discussions in the Executive Board at the decision of the Board. The Staff Report for the 2001 Article IV Consultation with Armenia is also available.

Republic of Armenia: Selected Economic Indicators, 1998-2000
199819992000
Real sector
Nominal GDP (in billion of drams)9599881,032
Real GDP growth (percent change)1/7.33.36.0
Nominal GDP (in millions of U.S. dollars)1,8991,8471,915
Inflator (In percent)2/
Period average1/8.70.7−0.8
End-of-period3/−1.22.10.4
Exchange rates (drams/U.S. dollar)2/
Period average505535540
End-of-period522524552
State budget (in percent of GDP)
Revenue and grants17.119.316.5
of which: tax revenue13.616.114.8
Expenditure21.926.522.8
of which: current expenditure16.319.217.5
Cash deficit3/−4.7−5.5−4.0
Accrual deficit−4.8−7.2−6.4
Change in arrears0.52.01.9
Measures/Gap0.00.00.0
Statistical discrepancy−0.4−0.20.5
Monetary indicators2/
Reserve money (end-of-period growth rate, in percent)6.50.034.4
Broad money (end-of-period growth rate, in percent)36.013.638.7
Broad money velocity6/10.09.16.9
External indicators
Current account balance7/
(in millions of U.S. dollars)−515−401−382
(in percent of GDP)−27.1−21.7−19.9
Total external debt
(in millions of U.S. dollars)787855862
(in percent of GDP)41.446.345.1
External debt service (in percent of exports of goods and services)19.014.310.7
Gross official international reserves (in millions of dollars)298305314
(in months of next year’s imports of goods and services)3.93.83.6
Sources: Armenia authorities; and IMF staff estimates.

With respect to the same period in the previous year

Figures for Q1 2001 are preliminary actuals

Inflation during the previous 12 months

Deficit as measured by financing

Change in percent of reserve money at the beginning of the period

Based on GDP for the period, seasonally unadjusted for quarterly figures

Excludes official transfers

Sources: Armenia authorities; and IMF staff estimates.

With respect to the same period in the previous year

Figures for Q1 2001 are preliminary actuals

Inflation during the previous 12 months

Deficit as measured by financing

Change in percent of reserve money at the beginning of the period

Based on GDP for the period, seasonally unadjusted for quarterly figures

Excludes official transfers

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.

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