IMF COMPLETES FIRST REVIEW UNDER STAND-BY ARRANGEMENT WITH ARMENIA AND APPROVES INCREASE IN FINANCIAL SUPPORT TO $822US.7 MILLION

States News Service
June 22, 2009 Monday
Washington

The following information was released by the International Monetary
Fund:

The Executive Board of the International Monetary Fund (IMF) today
completed the first review of Armenia’s economic performance under
a Stand-By Arrangement (SBA) and approved an increase in the IMF’s
financial support to an amount equivalent to SDR 533.6 million
(about $822US.7 million; or 580 percent of Armenia’s quota). These
decisions enable the immediate release of SDR 102.7 million (about
$158US.3 million), bringing the total disbursed to SDR 264.2 million
(about $400US million). The Board also granted a waiver of performance
criteria on net banking system credit to the government and the
program’s fiscal balance.

The revised arrangement will support the government’s economic
program amid a sharper-than-expected impact from the global financial
crisis. The 28-month SBA was approved on March 6 (see Press Release
09/68).

The key objectives of the program are to help Armenia adjust to the
external shock, maintain confidence in the currency and the financial
system, and protect the poor. The sharp contraction in economic
activity, the fall in remittances, an increase in unemployment,
and difficult conditions in credit markets require an easing of
macroeconomic policies and the implementation of several measures to
stimulate domestic demand and create new jobs.

The main policies under the revised program are:

Monetary conditions will be eased, including by widening the range
of central bank instruments to provide longer-term dram liquidity
to banks, and by increasing targeted on-lending to small and medium
enterprises.

Fiscal policy will also be eased. Despite the fall in fiscal revenue,
the government will aim to maintain its overall expenditure at a
level close to the original 2009 budget, protecting social spending
while increasing expenditure on high-priority infrastructure projects,
financed in large part by bilateral donors.

Reforms will focus in particular on the continued strengthening of
financial sector supervision and improving tax administration.

Social safety nets will be enhanced by targeting social services to
the poor.

Following the Executive Board’s discussion on Armenia, Mr. Murilo
Portugal, Deputy Managing Director and Acting Chair, stated:
Since the approval of the stand-by arrangement in March 2009,
the external economic outlook has deteriorated significantly
for Armenia. Falling private transfers and capital inflows have
aggravated external imbalances and affected household incomes and
investor confidence. Construction activity, the main driver of growth
in previous years, has collapsed, and the economy is experiencing a
deep contraction.

The additional financial assistance from the Fund will help cover
Armenia’s growing financing needs, while the recalibration of the
authorities’ economic program will help them better respond to the
deepening downturn. The program envisages an easing of monetary and
fiscal policy to mitigate the severity of the crisis, while laying
the ground for future fiscal consolidation primarily through one-off
investment expenditures and measures to strengthen tax policy and
administration. The authorities remain firmly committed to achieving
the program’s objectives of adjusting to the changed external
environment, supporting confidence in the currency and the banking
system, and protecting the poor.

Following the successful return to a flexible exchange rate, monetary
policy will focus on maintaining low inflation. With the fall in
inflation rates, the recent reductions of policy interest rates are
appropriate. In addition, the authorities are taking active measures to
provide liquidity to the banking system and help resume lending. Fiscal
policy will provide crucial support by accelerating growth-enhancing
investment in infrastructure and strengthening social safety nets.

As external conditions improve in 2010, growth is expected to
resume gradually. The short-term outlook remains, however, very
challenging. Continued reforms will be necessary to boost the
medium-term growth potential of the economy, including efforts to
improve the business climate, completion of the unfinished tax policy
and tax administration reform agenda, and progress on financial
sector reforms.

From: Emil Lazarian | Ararat NewsPress