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IMF EXECUTIVE BOARD APPROVES THREE YEAR, US$13.6 MILLION POVERTY REDUCTION AND GROWTH FACILITY ARRANGEMENT FOR REPUBLIC OF ARMENIA
US Fed News
November 18, 2008 Tuesday 3:46 AM EST
The Executive Board of the International Monetary Fund (IMF)
has approved a three year, SDR 9.2 million (about US$13.6 million)
arrangement under the Poverty Reduction and Growth Facility (PRGF) for
the Republic of Armenia to support the government's economic program
through 2011. The decision will enable the Republic of Armenia to
draw an amount equivalent to SDR 1.31 million (about US$1.9 million)
from the IMF immediately.
Following the Executive Board's discussion, Mr. Murilo Portugal,
Deputy Managing Director and Acting Chair, stated:
"After the successful conclusion of its third PRGF-supported
program in May 2008, Armenia's economic performance has remained
very strong. High growth has been maintained and has contributed
significantly to the marked reduction in poverty. Inflation has
increased in the wake of rising international food and fuel prices
and growing domestic demand pressures, although it remains lower than
in other CIS countries. Adherence to prudent macroeconomic policies
and the progress made in structural reforms has helped to achieve
these results.
"The worsened global macroeconomic outlook has increased uncertainty,
but Armenia is in a strong position to withstand the impact of the
global economic downturn. A gradual deceleration of growth in Armenia
may help dampen inflationary pressures. It may also contribute to
reducing the external current account deficit, which has increased
on the back of rising imports and sluggish exports, despite strong
remittance inflows. Medium-term prospects, although highly uncertain,
remain benign in view of favorable investment opportunities.
"Continued sound fiscal and monetary policies remain key to maintaining
macroeconomic stability. Prudent policies are necessary to reduce
the current macroeconomic imbalances. Current challenges highlight
the need to strengthen policy frameworks. The floating exchange
rate regime continues to be the best option for Armenia, and the
authorities are encouraged to complete the transition to full-fledged
inflation targeting. At the same time, building capacity for fiscal
policy analysis will help strengthen the budgetary process and enhance
fiscal policy credibility, increasing its effectiveness as a demand
management tool. In addition, the authorities must be prepared to
adjust swiftly to a rapidly changing economic environment. A weakening
external environment might also increase Armenia's financing needs
and possibly call for an early review of the situation.
"Improving external competitiveness requires a renewed push for
structural reforms. Focus should be on enhancing productivity,
improving the business environment, and boosting domestic
competition. In this regard, the completion of the unfinished
tax policy and administration reform agenda is particularly
important. These reforms would significantly reduce the cost of doing
business, particularly in the export sector, and contribute to leveling
the playing field, ultimately promoting private sector development,"
Mr. Portugal said.
ANNEX
Recent Economic Developments
Armenia is poised for another year of double-digit growth, but
inflation and external imbalances have been growing. Notwithstanding
the temporary trade disruptions during the Georgia conflict, annual
real GDP grew by 10.4 percent in the nine months to September 2008, and
is projected to remain around 10 percent this year, assuming continued
strong activity in construction and services. Annual inflation remained
high through September at 11.3 percent, but dropped to 8.6 percent
in October on the heels of falling food prices, remaining lower than
in some neighboring countries.
While inflation was driven mainly by the global spike in food and
energy prices (including the elimination of a natural gas subsidy
last May), demand pressures have played an increasing role. Indeed,
rising wages, persistently large foreign exchange inflows, rapid
credit growth, and a sharply widening current account deficit have
raised concerns about overheating. But the downward risks from the
global economic downturn could help unwind accumulated macroeconomic
imbalances.
Budget execution in 2008 has been prudent. Tax collection has been
well above expectations, driven by a surge in VAT revenue partly
associated with high import growth. The overall deficit remained lower
than projected through September 2008, at 0.5 percent of projected
annual GDP.
Monetary policy has been tightened to address rising inflationary
pressures. To limit the second-round effects of higher food and energy
prices, the Central Bank of Armenia (CBA) raised the repurchase rate
gradually from 4.5 percent in June 2007 to 7.75 percent in September
2008, but left the rate unchanged since, in response to the uncertain
external economic environment.
Despite large private transfers, the current account has continued to
deteriorate. Imports have surged on the back of high international
food and energy prices and buoyant demand, while export performance
has been disappointing. With appreciation pressures dampened by rising
import demand, the dram/dollar exchange rate has been broadly stable
since December 2007. International reserve coverage dropped somewhat,
but remains adequate, at about 3 ? months of imports.
Program Summary
Armenia's PRGF-supported economic program builds on the authorities'
Sustainable Development Program (SDP). The main goals of the new
program are to sustain and broaden economic growth, and further reduce
poverty, consistent with SDP priorities.
Appropriate fiscal and monetary policies will underpin the
macroeconomic objectives of the program. Its main focus will be on
strengthening the fiscal and monetary policy frameworks and their
coordination, while deepening productivity-enhancing structural
reforms, and improving governance. In particular, reforms in tax
policy and tax administration will be essential for the success of
the program.
Strengthening the policy frameworks will require, among other things,
strengthening the institutional and analytical capacity at the Ministry
of Finance, and adopting a Forecasting and Policy Analysis System for
inflation targeting at the Central Bank of Armenia. The current global
crisis highlights the need to minimize Armenia's vulnerabilities by
stepping up efforts to diversify production and reduce dependence on
remittances. In view of increasing global risks, Armenia's external
financial requirements may increase as well, possibly calling for
higher access than under the current PRGF arrangement.
Armenia: Selected Economic and Financial Indicators, 2003-09.
US Fed News
November 18, 2008 Tuesday 3:46 AM EST
The Executive Board of the International Monetary Fund (IMF)
has approved a three year, SDR 9.2 million (about US$13.6 million)
arrangement under the Poverty Reduction and Growth Facility (PRGF) for
the Republic of Armenia to support the government's economic program
through 2011. The decision will enable the Republic of Armenia to
draw an amount equivalent to SDR 1.31 million (about US$1.9 million)
from the IMF immediately.
Following the Executive Board's discussion, Mr. Murilo Portugal,
Deputy Managing Director and Acting Chair, stated:
"After the successful conclusion of its third PRGF-supported
program in May 2008, Armenia's economic performance has remained
very strong. High growth has been maintained and has contributed
significantly to the marked reduction in poverty. Inflation has
increased in the wake of rising international food and fuel prices
and growing domestic demand pressures, although it remains lower than
in other CIS countries. Adherence to prudent macroeconomic policies
and the progress made in structural reforms has helped to achieve
these results.
"The worsened global macroeconomic outlook has increased uncertainty,
but Armenia is in a strong position to withstand the impact of the
global economic downturn. A gradual deceleration of growth in Armenia
may help dampen inflationary pressures. It may also contribute to
reducing the external current account deficit, which has increased
on the back of rising imports and sluggish exports, despite strong
remittance inflows. Medium-term prospects, although highly uncertain,
remain benign in view of favorable investment opportunities.
"Continued sound fiscal and monetary policies remain key to maintaining
macroeconomic stability. Prudent policies are necessary to reduce
the current macroeconomic imbalances. Current challenges highlight
the need to strengthen policy frameworks. The floating exchange
rate regime continues to be the best option for Armenia, and the
authorities are encouraged to complete the transition to full-fledged
inflation targeting. At the same time, building capacity for fiscal
policy analysis will help strengthen the budgetary process and enhance
fiscal policy credibility, increasing its effectiveness as a demand
management tool. In addition, the authorities must be prepared to
adjust swiftly to a rapidly changing economic environment. A weakening
external environment might also increase Armenia's financing needs
and possibly call for an early review of the situation.
"Improving external competitiveness requires a renewed push for
structural reforms. Focus should be on enhancing productivity,
improving the business environment, and boosting domestic
competition. In this regard, the completion of the unfinished
tax policy and administration reform agenda is particularly
important. These reforms would significantly reduce the cost of doing
business, particularly in the export sector, and contribute to leveling
the playing field, ultimately promoting private sector development,"
Mr. Portugal said.
ANNEX
Recent Economic Developments
Armenia is poised for another year of double-digit growth, but
inflation and external imbalances have been growing. Notwithstanding
the temporary trade disruptions during the Georgia conflict, annual
real GDP grew by 10.4 percent in the nine months to September 2008, and
is projected to remain around 10 percent this year, assuming continued
strong activity in construction and services. Annual inflation remained
high through September at 11.3 percent, but dropped to 8.6 percent
in October on the heels of falling food prices, remaining lower than
in some neighboring countries.
While inflation was driven mainly by the global spike in food and
energy prices (including the elimination of a natural gas subsidy
last May), demand pressures have played an increasing role. Indeed,
rising wages, persistently large foreign exchange inflows, rapid
credit growth, and a sharply widening current account deficit have
raised concerns about overheating. But the downward risks from the
global economic downturn could help unwind accumulated macroeconomic
imbalances.
Budget execution in 2008 has been prudent. Tax collection has been
well above expectations, driven by a surge in VAT revenue partly
associated with high import growth. The overall deficit remained lower
than projected through September 2008, at 0.5 percent of projected
annual GDP.
Monetary policy has been tightened to address rising inflationary
pressures. To limit the second-round effects of higher food and energy
prices, the Central Bank of Armenia (CBA) raised the repurchase rate
gradually from 4.5 percent in June 2007 to 7.75 percent in September
2008, but left the rate unchanged since, in response to the uncertain
external economic environment.
Despite large private transfers, the current account has continued to
deteriorate. Imports have surged on the back of high international
food and energy prices and buoyant demand, while export performance
has been disappointing. With appreciation pressures dampened by rising
import demand, the dram/dollar exchange rate has been broadly stable
since December 2007. International reserve coverage dropped somewhat,
but remains adequate, at about 3 ? months of imports.
Program Summary
Armenia's PRGF-supported economic program builds on the authorities'
Sustainable Development Program (SDP). The main goals of the new
program are to sustain and broaden economic growth, and further reduce
poverty, consistent with SDP priorities.
Appropriate fiscal and monetary policies will underpin the
macroeconomic objectives of the program. Its main focus will be on
strengthening the fiscal and monetary policy frameworks and their
coordination, while deepening productivity-enhancing structural
reforms, and improving governance. In particular, reforms in tax
policy and tax administration will be essential for the success of
the program.
Strengthening the policy frameworks will require, among other things,
strengthening the institutional and analytical capacity at the Ministry
of Finance, and adopting a Forecasting and Policy Analysis System for
inflation targeting at the Central Bank of Armenia. The current global
crisis highlights the need to minimize Armenia's vulnerabilities by
stepping up efforts to diversify production and reduce dependence on
remittances. In view of increasing global risks, Armenia's external
financial requirements may increase as well, possibly calling for
higher access than under the current PRGF arrangement.
Armenia: Selected Economic and Financial Indicators, 2003-09.