IMF COMPLETES ARMENIAN REVIEW, APPROVES MODIFICATIONS TO STAND-BY PROGRAMME
BYLINE: Venla Sipila

World Markets Rsearch Centre
Global Insight
November 3, 2009

The International Monetary Fund (IMF) has completed the second review
of Armenia’s performance under its current stand-by programme. It
notes that the global crisis has continued to take a serious toll on
the economy, and although the output collapse seems to have bottomed
out, the collapse in construction activity and the drastic fall in
remittance inflows have resulted in a more severe GDP contraction and
deterioration in the fiscal balance than expected. In recognition of
these facts, the IMF also approved Armenia’s request for a waiver of
the end-September fiscal criterion, thus allowing for weaker budget
performance than outlined at the beginning of the current programme.

In addition, the IMF modified the criteria for end-2009 performance,
and allowed for a revision in payment schedules to bring forward
amounts scheduled to become available following the second and third
reviews to completion of the second review. Consequently, Armenia may
immediately withdraw a tranche of 37.72 million Special Drawing Rights
(SDR, some $60US million), bringing to the total amount extended
to Armenia under the current arrangement to SDR 301.94 million. The
28-month stand-by program was approved in March, and extended in June
(seeArmenia: 24 June 2009:).

Significance:The news of the programme review conclusion and
modification of its terms follows staff-level agreement on the review,
and reports that Armenian officials were seeking to soften the loan
terms with both the IMF and the World Bank (seeArmenia: 17 September
2009:) andArmenia: 2 October 2009:). The extensive leniency reflected
in the modification of the programme terms signals the severity of
the current Armenian economic predicament and was facilitated by full
implementation of the Armenian officials of the agreed stabilisation
programme. So far, this has included both fiscal and monetary easing,
and implementation of a flexible exchange rate regime. As noted
by the IMF, fiscal easing this year is needed in order to finance
anti-crisis measures with the collapsing domestic demand, and to
protect social spending. On the other hand, the Armenian authorities
have outlined fiscal consolidation from 2010, in order to ensure
debt sustainability. The Fund also reiterated its recommendation of
continued strengthening of tax administration, as well as for reform
of the financial sector and improvement in the business environment.

Given that about half of Armenia’s budget gap relies on external
financing, whereas the short-term outlook for the economy remains very
bleak and not much choice in covering the wide external financing
needs is available, continued adherence to IMF programme terms is
crucially important, both concerning its economic performance and
financial stability.