World Markets Research Centre
Global Insight
May 21 2010

IMF Announces Preliminary Agreement on Extended Support with Armenia

BYLINE: Venla Sipila

The International Monetary Fund (IMF) has reached a staff-level
agreement with Armenia over a three-year assistance programme,
supported by the IMF’s Extended Fund Facility and the Extended Credit
Facility. Financial support under the extended arrangements would
total 267 million Special Drawing Rights (US$392 million) over the
next three years. On approval, Armenia would immediately be able to
withdraw some US$52 million. On announcing the staff-level approval,
the international lender noted that although the economy is now
recovering, with external inflows picking up and public finances
strengthening, conditions remain difficult. Moreover, Armenia
continues to face major medium-term challenges, and it needs to boost
growth and reduce poverty, at the same time as reducing debt
accumulation and securing financial stability. Key macroeconomic
policy targets agreed under the new suggested programme foresee
gradually easing budget deficits, even if fiscal policy will still
need to buttress economic activity in order to secure solid recovery
of the economy. Low inflation will remain the key monetary-policy
objective. The programme also outlines measures to strengthen tax
administration and increase the efficacy of spending. The preliminary
agreement is still subject to approval by the IMF management and the
executive board, due to discuss the issue in late June.

Significance:Given Armenia’s recent fairly good progress with reforms
and satisfactory compliance to IMF conditionality, the programme is
likely to receive board approval. Armenia’s recent challenges led the
IMF to allow for some modification in performance criteria under
Armenia’s current stand-by programme with the Fund (seeArmenia: 31
March 2010:). Meanwhile, a positive outcome is very important for
Armenia, given its weak external position and vast reform needs. The
task of strengthening tax administration has for a long time already
featured at centre-stage in Armenia’s IMF programmes, and although
progress has been made, a lot still remains to be accomplished in this
sense. Another major task remaining is to increase financial
intermediation. Both of these reform needs are connected with the need
to reduce the degree of dollarisation.