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IHS Global Insight
December 27, 2013
IMF sends positive signal for a potential 38-month loan to Armenia
by Lilit Gevorgyan
The IMF's latest statement indicated that Armenia was on the right
track to receive a new 38-month credit facility to help with
structural reforms and fiscal deficit, projected to rise in 2014.
"Competition, competitiveness, and connectivity"
The International Monetary Fund (IMF) mission issued a statement after
concluding its nine-day visit to Armenia to discuss a new 38-month
Extended Fund Facility (EFF) arrangement. The mission held high-level
meetings with the country's top officials responsible for economic
policy formation and implementation. The follow-up statement briefly
recognised the progress that Armenia has made since the global
economic crisis, including some structural reforms in financial
sector, pensions and social welfare, civil aviation and business
environment.
However, the Fund took the opportunity to highlight again the
challenges that the country currently faces. These include slowing
real economic activity in 2013, receding private and foreign direct
investment, high levels of unemployment and poverty. The current
account deficit has been closing, mainly due to decline in imports,
which overall the gap remains high. More importantly, IMF once again
pointed out that structural reforms need to be deeper and the
government has to work on three main areas: "competition,
competitiveness, and connectivity".
These recommendations and assessment come in addition to an earlier
statement made by the IMF on 18 September 2013. Then, the Fund
indicated that it expected the Armenian economy to slow down in 2013
compared to the impressive growth in 2012, when real GDP expanded just
under 4.0% in 2013. However, the IMF is hopeful that with consistent
implementation of structural reforms as well as an improvement in the
external environment, Armenia's economic performance is likely to
improve, with GDP growth rising to 5% annually in the medium term.
Tackling inflation will also be another challenge in the near term.
The IMF has recognised Armenian monetary authorities' successful
inflation targeting policy, as they managed to keep inflation within
the target band of 4%, with +/-1.5% fluctuation during most of the
2013. However, nearly 60% increase in gas prices, which partially were
introduced in July as well as surge in food prices were the main
culprits for inflation overshooting the target set by the Armenian
Central Bank (CBA). The CBA has already introduced rate increases in
August and December to combat inflationary pressures, which averaged
at 6.0% year-on-year during the third quarter of 2013. The Fund also
commended Armenia's efforts to shore up international reserves in
recent months due to better-performing exports. This has in turned
helped the central bank to limit upward pressure on the Armenian dram.
EFF to assist reforms
The new multi-year concessional lending from the IMF will help the
Armenian government to carry out further structural reforms that will
help Armenia to "transition to a dynamic emerging market economy". In
its previous recommendations, the IMF had suggested that the Armenian
government needed to increase its capital spending as well as address
some social issues. Hence the 2014 budget deficit is expected to be
higher than in 2013. Earlier in September, the IMF stated that
Armenia's fiscal deficit in 2013 is projected to be below 2% of total
GDP, and 2.6% of the budget. During the latest discussions, the IMF
has recommended the Armenian government to remain on the course of
improving tax collection to maintain the country's fiscal deficit
under 2% of GDP in 2014.
The EFF is expected to help the government to cover the shortfall
while starting from 2015 the government will have to also start
looking into investing more in capital spending but at the same time
address fiscal deficit. The latter can be achieved with improvement of
tax collection which in turn will generate revenues for government
fixed investment, social spending and poverty reduction. Tax reforms
need to go in the locked step with continued improvement of regulatory
and law enforcement environment, to aid Armenia's attractiveness as an
investment destination.
The talks are ongoing but it is clear that the Armenian government has
incorporated the IMF's recommendations in its economic development
plan for 2014-17, which in turn has prompted the Fund to state that a
possible new EFF arrangement would be put in place to assist Armenia
with the implementation of this multi-year plan.
Outlook and implications
Given Armenia's very close relations with international donors and its
strict adherence to the IMF's recommendations for over two decades,
the country is likely to secure a new credit line. Still, Armenia has
to make a serious effort to ensure that the structural reforms, which
were also highlighted by the IMF, do not remain a mere pledge. It also
appears from the Fund's conclusions that the Armenian government had
decided in favour of fiscal consolidation, including a serious
reduction in capital spending. While this has helped to keep the
budget deficit under control, it also masked, although not
successfully, the failures to increase tax collection, especially when
it comes to government linked large private businesses.
Providing level field for all economic agents, improving tax
collection from big and government related businesses, protection of
business and property rights remain serious issues. This is also
affecting the competitiveness of Armenian exports, especially due to
losses to corruption and dominance of large businesses. Conversely,
the reduction in capital spending by the government has also curtailed
economic performance in 2013, while cuts in social spending have
worsened social inequality. Hence the IMF's recommendation to the
Armenian government is to replace severe austerity measures with
improved tax collection and business environment, which will then
generate revenues to fund government spending on welfare and
investment.
The Armenian government's efforts to develop its exports sector
appears to bear results as well but once again Armenian exports have
yet to diversify away from mining and food tradables to be more
resilient to external shocks. In the meantime Armenia is facing the
repayment of two large loans in 2014. But with external demand looking
weak, particularly in Russia- Armenia's largest trading partner,
generating strong foreign-exchange income in 2014 is unlikely. Hence
Armenia would need to raise funds on financial markets and also borrow
from international donors to replenish its international reserves and
meet its foreign debt repayment obligations.
December 27, 2013
IMF sends positive signal for a potential 38-month loan to Armenia
by Lilit Gevorgyan
The IMF's latest statement indicated that Armenia was on the right
track to receive a new 38-month credit facility to help with
structural reforms and fiscal deficit, projected to rise in 2014.
"Competition, competitiveness, and connectivity"
The International Monetary Fund (IMF) mission issued a statement after
concluding its nine-day visit to Armenia to discuss a new 38-month
Extended Fund Facility (EFF) arrangement. The mission held high-level
meetings with the country's top officials responsible for economic
policy formation and implementation. The follow-up statement briefly
recognised the progress that Armenia has made since the global
economic crisis, including some structural reforms in financial
sector, pensions and social welfare, civil aviation and business
environment.
However, the Fund took the opportunity to highlight again the
challenges that the country currently faces. These include slowing
real economic activity in 2013, receding private and foreign direct
investment, high levels of unemployment and poverty. The current
account deficit has been closing, mainly due to decline in imports,
which overall the gap remains high. More importantly, IMF once again
pointed out that structural reforms need to be deeper and the
government has to work on three main areas: "competition,
competitiveness, and connectivity".
These recommendations and assessment come in addition to an earlier
statement made by the IMF on 18 September 2013. Then, the Fund
indicated that it expected the Armenian economy to slow down in 2013
compared to the impressive growth in 2012, when real GDP expanded just
under 4.0% in 2013. However, the IMF is hopeful that with consistent
implementation of structural reforms as well as an improvement in the
external environment, Armenia's economic performance is likely to
improve, with GDP growth rising to 5% annually in the medium term.
Tackling inflation will also be another challenge in the near term.
The IMF has recognised Armenian monetary authorities' successful
inflation targeting policy, as they managed to keep inflation within
the target band of 4%, with +/-1.5% fluctuation during most of the
2013. However, nearly 60% increase in gas prices, which partially were
introduced in July as well as surge in food prices were the main
culprits for inflation overshooting the target set by the Armenian
Central Bank (CBA). The CBA has already introduced rate increases in
August and December to combat inflationary pressures, which averaged
at 6.0% year-on-year during the third quarter of 2013. The Fund also
commended Armenia's efforts to shore up international reserves in
recent months due to better-performing exports. This has in turned
helped the central bank to limit upward pressure on the Armenian dram.
EFF to assist reforms
The new multi-year concessional lending from the IMF will help the
Armenian government to carry out further structural reforms that will
help Armenia to "transition to a dynamic emerging market economy". In
its previous recommendations, the IMF had suggested that the Armenian
government needed to increase its capital spending as well as address
some social issues. Hence the 2014 budget deficit is expected to be
higher than in 2013. Earlier in September, the IMF stated that
Armenia's fiscal deficit in 2013 is projected to be below 2% of total
GDP, and 2.6% of the budget. During the latest discussions, the IMF
has recommended the Armenian government to remain on the course of
improving tax collection to maintain the country's fiscal deficit
under 2% of GDP in 2014.
The EFF is expected to help the government to cover the shortfall
while starting from 2015 the government will have to also start
looking into investing more in capital spending but at the same time
address fiscal deficit. The latter can be achieved with improvement of
tax collection which in turn will generate revenues for government
fixed investment, social spending and poverty reduction. Tax reforms
need to go in the locked step with continued improvement of regulatory
and law enforcement environment, to aid Armenia's attractiveness as an
investment destination.
The talks are ongoing but it is clear that the Armenian government has
incorporated the IMF's recommendations in its economic development
plan for 2014-17, which in turn has prompted the Fund to state that a
possible new EFF arrangement would be put in place to assist Armenia
with the implementation of this multi-year plan.
Outlook and implications
Given Armenia's very close relations with international donors and its
strict adherence to the IMF's recommendations for over two decades,
the country is likely to secure a new credit line. Still, Armenia has
to make a serious effort to ensure that the structural reforms, which
were also highlighted by the IMF, do not remain a mere pledge. It also
appears from the Fund's conclusions that the Armenian government had
decided in favour of fiscal consolidation, including a serious
reduction in capital spending. While this has helped to keep the
budget deficit under control, it also masked, although not
successfully, the failures to increase tax collection, especially when
it comes to government linked large private businesses.
Providing level field for all economic agents, improving tax
collection from big and government related businesses, protection of
business and property rights remain serious issues. This is also
affecting the competitiveness of Armenian exports, especially due to
losses to corruption and dominance of large businesses. Conversely,
the reduction in capital spending by the government has also curtailed
economic performance in 2013, while cuts in social spending have
worsened social inequality. Hence the IMF's recommendation to the
Armenian government is to replace severe austerity measures with
improved tax collection and business environment, which will then
generate revenues to fund government spending on welfare and
investment.
The Armenian government's efforts to develop its exports sector
appears to bear results as well but once again Armenian exports have
yet to diversify away from mining and food tradables to be more
resilient to external shocks. In the meantime Armenia is facing the
repayment of two large loans in 2014. But with external demand looking
weak, particularly in Russia- Armenia's largest trading partner,
generating strong foreign-exchange income in 2014 is unlikely. Hence
Armenia would need to raise funds on financial markets and also borrow
from international donors to replenish its international reserves and
meet its foreign debt repayment obligations.