IMF APPROVES NEW POVERTY REDUCTION PROGRAMME FOR ARMENIA
Venla Sipila

World Markets Research Centre
Global Insight
November 19, 2008

Armenia’s fourth poverty reduction programme with the IMF keeps the
focus on strengthening of the macroeconomic policy framework and tax
sector reform.

Building on Past Success

The now approved new loan arrangement follows the completion of
Armenia’s third PRGF-supported reform programme in May (see Armenia:
22 May 2008: ). As in the last review of the completed programme,
the International Monetary Fund (IMF) now reiterated that Armenia’s
progress with its structural reforms and its responsible macroeconomic
policies have allowed for rapid economic growth rates and reduction
in poverty. Inflation initially remained low even in the face of
high GDP growth rates, while it has recently accelerated as rising
international food and fuel price have been combined with growing
demand side pressures. However, IMF notes that, nevertheless, inflation
in Armenia still remains relatively low in peer comparison with other
countries of the Commonwealth of Independent States (CIS).

Global Insight Perspective Significance: The Executive Board of the
IMF has approved a new three-year assistance programme under the
Poverty Reduction and Growth Facility (PRGF) for Armenia.

Implications The arrangement supports the government’s economic reform
programme until 2011 with a loan of 9.2 million Special Drawing
Rights (SDR, some $13US.6 million, with 1.31 million SDR available
for withdrawal immediately.

Outlook Especially given the deteriorating global financial and
economic outlook, and considering that Armenia’s external deficit
remains wide, it remains important that the Armenian authorities
make further progress with structural reforms. The focus of the new
IMF programme remains strengthening the fiscal and monetary policy
frameworks and deepening of structural reforms, the ultimate goal
being to support growth potential by improved productivity and
competitiveness.

Risks and Challenges Persist

Further, the international lender notes that, while the deteriorated
global growth outlook has increased uncertainty also regarding
development and prospects of the Armenian economy, the country
remains in a strong position to weather the global turmoil. Indeed,
the IMF expects that the expected gradual deceleration of Armenian
growth will lead to a moderation of inflation, while it may also help
in containing the widened current-account deficit. Looking forward,
the IMF sees the medium-term outlook as favourable, given attractive
investment opportunities, even if risks remain.

The IMF also reiterated that keeping to responsible macroeconomic
policies remains the key for continued stability, given the sizeable
imbalances in the economy. The international lender urges strengthening
of the macroeconomic policy frameworks. In particular, it states that
the floating exchange rate regime remains the most appropriate approach
for Armenia, while the monetary authorities are urged to complete
their journey to fully-fledged inflation targeting. In addition, the
effectiveness of fiscal policy as a tool for managing demand needs
to be increased by strengthening the capacity for policy analysis,
which allows for improvement of the budgetary process and increases
credibility of fiscal policy.

The Fund also stresses the need to complete the important tax policy
and administration reforms. Reforms in these areas would strengthen
the business environment and improve competitiveness and productivity.

Outlook and Implications

Given Armenia’s so far relatively convincing reform progress, the
approval of the new IMF lending facility was expected. As announced
earlier, the new development programme is worth less than the
previous arrangement which had totalled 23 million SDR (seeArmenia:
18 September 2008: ). This is because Armenia has been able to increase
its income level.

Before the intensification of the current international financial
crisis and marked weakening of global growth prospects, we were
increasingly concerned about the risk of overheating of the Armenian
economy, while acknowledging the good reform progress. With the
gloomier global outlook, the inflow of foreign exchange is likely
to moderate, and the resulting cooling economic momentum will aid
in suppressing inflation. Moreover, cost-side price pressures are
also easing with the falling global commodity prices. We also believe
that, with growth slowing, cooling domestic demand and the resultant
moderation in import growth will lead to easing of the current
account deficit. However, as the IMF notes, medium-term prospects
remain subject to uncertainty.

While noting Armenia’s progress in tax reforms, the IMF has repeatedly
stressed the importance of continued focus in strengthening tax
collection and administration further. With the rapid deterioration in
the global growth outlook and the uncertainty related to investment
inflows, this remains as important as ever. With external financial
and economic conditions weak, the risks related to finding financing
for the wide current account gap have increased. Thus, it remains
crucial to support Armenia’s attractiveness for foreign investment
by improving the operational environment by completing the reforms
in the fiscal sector.