World Markets Research Centre
Global Insight
February 19, 2010

Staff Level Conclusion Reached on Armenian IMF Programme Review

BYLINE: Venla Sipila

An International Monetary Fund (IMF) mission has reached a preliminary
agreement on its third review under Armenia’s stand-by arrangement.
The Fund notes that the government has successfully implemented
policies addressing the vast macroeconomic challenges encountered last
year. Further, it observes that output now seems to be stabilising,
and the real economy is expected to recover this year. Macroeconomic
policies remain on track to support the economic recovery, while at
the same time managing any potential emerging demand pressures. The
Fund further notes that, while inflation has picked up, this mainly
reflects exogenous effects and pass-through from the dram depreciation
experienced in early 2009, in addition to administrative price
increases over last year, rather than representing worrying
potentially destabilising price pressures. Indeed, the Fund trusts
that the policies are in place to guide the inflation rate back down
to the target level in the near term. Public finances are
strengthening, and the level of external reserves is comfortable,
allaying fears related to balance of payments weakness. Looking
forward, the IMF recommends that Armenia continues on its structural
reform path to strengthen tax administration, to further support
financial sector soundness, and to increase competition and
productivity of the economy, as means of securing sustained economic
growth and safeguard macroeconomic stability.

Significance:The staff-level completion of the programme review now
needs to be followed by the final approval of the IMF’s Executive
Board, due to discuss the review in late March. A successful
conclusion would allow Armenia to withdraw an additional disbursement
of 48.49 million SDR (Special Drawing Rights, some US$74 million). It
is important that Armenia continues to comply with the terms of its
IMF programme, as access to concessional credits for now remains
crucial for the economy to find its way back towards sustained growth
and towards consolidation of its external balances. Poverty reduction
still remains a key programme goal, and the sovereign could not
service a heavy commercial debt load. Assuming that reforms keep
progressing and Armenian access to external support from international
financial institutions thus remains good, Armenian external solvency
risks, while high, should remain manageable, although debt ratios are
still expected to deteriorate this year .