IMF FINALISES ARMENIAN PROGRAMME REVIEW, OUTLINES CHALLENGES WITH FRAGILE RECOVERY
BYLINE: Venla Sipila

World Markets Research Centre
Global Insight
March 31, 2010

The International Monetary Fund (IMF) has completed its third review
of Armenia’s performance under the current Stand-By Arrangement
(SBA), allowing for Armenia to withdraw a disbursement of 48.485
million Special Drawing Rights (SDR, some US$73.6 million), bringing
the total support so far extended under the SBA to 350.425 million
SDR. The lender also approved a request for a waiver of non-observance
of the end-2009 performance criterion regarding the targeted level of
net domestic assets at the Central Bank of Armenia (CBA). Armenia’s
28-month IMF programme was first approved in March last year, then
amended in June, and in a slight modification, some payment instalments
were brought forward in late 2009 (seeArmenia: 3 November 2009:). Upon
completion of the review, the IMF noted that Armenia’s performance
under the programme has been strong, and supportive macroeconomic
policies have contributed to the emerging economic recovery.

However, this recovery still remains fragile and external
vulnerabilities persist, while a medium-term fiscal consolidation
plan needs to be credibly implemented. The latter task remains
challenging in light of the continued need for high social spending,
especially given the fragility of the upturn. However, the IMF trusts
in the authorities’ commitment to progress with reforms of tax policy
and fiscal administration. Further, in order to control inflation
pressures, monetary policy should become more neutral following an
accommodative period that was needed to support the real economy in
the deep recession. Flexible exchange rate policy will be continued,
while the authorities seek to strengthen the monetary transmission
mechanism so as to increase effectiveness of monetary policy. The
current IMF programme also seeks to continue on a wide structural
reform path, in order to strengthen the production base and to support
long-term growth potential.

Significance:Finalisation of the programme review follows a preliminary
approval by an IMF mission in February (seeArmenia: 19 February
2010:). The immediate liquidity boost from the IMF instalment is
badly needed given Armenia’s vast external financing gap. Due to the
deepness of the recent recession, challenges in Armenian recovery
are considerable. At the same time, Armenia naturally also has to
address numerous long-standing reform tasks, such as strengthening
fiscal administration and making the economy more competitive.

Continued access to concessionary credits remains important. Assuming
further reform progress, Armenian access to external support from
international financial institutions should remain good. Thus,
its external solvency risks, while high, should remain manageable,
although debt ratios are likely to deteriorate this year (seeArmenia:
1 February 2010:).