STRUGGLING WITH BUDGET FINANCING, ARMENIA SEEKS TO RESTRUCTURE EXTERNAL LOANS
Venla Sipila

World Markets Research Centre
Global Insight
November 2, 2009

The Armenian government wants to revise the terms of its external
loans with international financial institutions. According to
Interfax quoting Finance Minister Tigran Daytyan, talks are currently
being held with the International Monetary Fund (IMF) and the World
Bank. In particular, the authorities are hoping to loosen the terms
of the second tranche of the current IMF arrangement, consisting of
$150US million to be used for financing the 2010 budget. The IMF in
June approved an increase in the current stand-by loan, lifting the
sum to some $823US million from the previously agreed $540US million
(seeArmenia: 24 June 2009:). In addition, a staff-level agreement has
been reached on the second review of Armenia’s current IMF programme
(seeArmenia: 17 September 2009:). The government hopes to extend
the term of the loan from its current maturity of five years with a
three-year grace period. The interest rate of the first instalment
of $270US million is 1.56%, while the following payment of $135US
million is at 2.56% and the remainder of the credit at 3.56%. In
addition, it was reported that negotiations are also under way with
the World Bank over the conditions of an already approved loan of
$545US million in the framework of a Country Partnership Strategy for
2009-2012 (seeArmenia: 17 June 2009:). Daytyan estimates that Armenia’s
external debt to GDP ratio is expected to rise from 28.5% to peak at
48%, growth in this ratio necessitating an achievable repayment plan.

According to ARKA News, Daytyan also expressed hopes that next year’s
economic growth may exceed the rate of 1.2% projected in the 2010
budget draft.

Significance:The loan restructuring talks comes as the Armenian
government seeks to contain its budget deficit. In particular,
it is hoping to find savings on capital expenditures and spending
on government management. Around half of the budget deficit relies
on external sources for funding. The global economic downturn has
had a strong negative impact on remittance and investment inflows,
highlighting the crucial importance of concessional lending from
international financial institutions (seeArmenia: 30 September 2009:).

The lenient terms of these loans have been critical in securing
Armenia’s ability to meet its external financing needs. When concluding
its recent visit to Armenia, the IMF commended the policy response
of the authorities to the current economic challenges, and thus,
revision the loan terms may be possible. However, the IMF has also
reiterated that continued progress in improving tax administration will
be critical, in order to secure fiscal sustainability (see Armenia:
14 October 2009: ).