RIA Oreanda, Russia
March 11 2009
IMF Approves USD 540 Million Stand-By Arrangement for Armenia
Yerevan. OREANDA-NEWS . On 11 March 2009 was announced, that the
Executive Board of the International Monetary Fund (IMF) today
approved a 28-month SDR 368 million (about USD 540 million) Stand-By
Arrangement for Armenia to support the countrys program to adjust to
the deteriorated global outlook, restore confidence in the currency
and financial system, and protect the poor. The approval makes the
amount equivalent to SDR 161.5 million (about USD 237 million)
immediately available and the remainder in nine installments subject
to quarterly reviews. The Stand-By Arrangement entails exceptional
access to IMF resources, amounting to about 400 percent of Armenias
quota. It was approved under the Funds fast-track Emergency Financing
Mechanism procedures.
The authorities program is based on a consistent set of measures
regarding exchange rate, monetary, financial, and fiscal policies, as
well as continued structural reforms.
Key elements include:
Return to a flexible exchange rate regime. The Central Bank of Armenia
(CBA) announced on March 3 that it will no longer intervene in the
market, except to smooth extreme volatility, and raised its policy
interest rate by 100 basis points. Following the announcement, the
dram depreciated about 20 percent, and since then, has broadly
remained in that range.
Strengthening of the financial sector to maintain stability and
confidence. Key aspects of the CBAs policy response include liquidity
support operations, as needed, and enhanced banking supervision.
A revision of fiscal priorities to maintain macroeconomic stability,
while protecting social outlays and public investment, in light of the
expected revenue shortfall. The authorities intend to cut back on
non-priority spending while providing an increase in social spending
of 0.3 percent of GDP, relative to the budget, to protect the poor
through well-targeted social safety nets. Additional external
financing will be used to boost public investment.
Armenias gross external financing requirements are projected at about
USD1.6 billion for 2009, and will remain elevated through 2011, albeit
with a slight downward trend. The Stand-By Arrangement will cover a
large share of the countrys 2009-2011 financing gap. Additional
financing will be provided by Armenias donors and international
partners, including the World Bank.
Following the Executive Board discussion on Armenia, Mr. Murillo
Portugal, Deputy Managing Director and Acting Chair, said:
Since the approval of a low-access PRGF arrangement in November 2008,
Armenia has been confronted by a variety of major external
shocks. Reflecting the sharp deterioration in global economic
conditions, private transfers and capital inflows slowed considerably
and international commodity prices have dropped severely, affecting
mining exports and production. In light of a rapid decline in
international reserves and growing financing needs, the authorities
have requested additional financial assistance from the Fund.
With the adverse global developments, real growth is expected to
contract in 2009, reflecting the downturn in Russia and other
countries in the region. Falling international prices, lower growth,
and exchange rate depreciation will help reduce the external current
account deficit. Medium-term prospects remain good.
Sound policies are essential to maintain macroeconomic stability. The
recent return to a flexible exchange rate will help cushion the impact
of the global downturn and eventual further regional deterioration. An
appropriately tight monetary policy is necessary to contain the
inflationary pressures stemming from the depreciation and support
demand for dram-denominated assets. While potential negative impact of
the depreciation on the financial sector seems unlikely, contingency
plans are available to help address any such effects. In light of the
expected revenue shortfall, fiscal policy will remain prudent,
protecting social outlays and public investment by reducing
non-priority spending.
Maintaining the structural reform agenda will contribute to
macroeconomic stability and a strengthened business environment. Key
elements include the completion of the unfinished tax policy and tax
administration reform agenda, and progress on financial sector
reforms.
The Fund is confident that the policy package put in place by the
authorities is appropriate and strong, Mr. Portugal said.
ANNEX
Recent Economic Developments
The global crisis has confronted Armenia with a number of large
external shocks. Remittances and capital inflows, which sustained
rapid economic growth in recent years, have decelerated
markedly. Falling international commodity prices adversely affected
mining, a key export sector. GDP growth came to a halt in the fourth
quarter, and fell to 6.8 percent for the year as a whole, from over 13
percent in 2007. Following the rapid unwinding of international prices
and domestic demand, annual CPI inflation fell to 1 percent in
February 2009. With exports being hit by the global downturn and
imports growing strongly through October, the external current account
deficit rose to an estimated 12½ percent of GDP in 2008.
The rapid and unexpected deterioration of the economic situation had a
strong impact on program performance under the PRGF arrangement. Most
of the end-December 2008 quantitative performance criteria were
missed. The authorities, recognizing the changed circumstances and the
large increase in their financing needs, have requested the Stand-By
arrangement and also requested the cancellation of the PRGF
arrangement.
Program Summary
The authorities program aims to achieve the necessary external
adjustment, restore confidence in the domestic currency and the
banking sector, and protect the poor. Their program is based on a
consistent set of policies in the exchange rate, monetary, financial,
and fiscal areas as well continued structural reforms.
As part of the program, the authorities are returning to a flexible
exchange rate regime. In particular, the authorities have indicated
that they will no longer intervene in the market, except to smooth
extreme volatility. Under a managed float, the authorities would
gradually return to their inflation-targeting framework.
Strengthening financial stability will be a key part of the
authorities program. The authorities will implement short-term
emergency measures to stabilize the system, while at the same time
enacting more structural measures to ensure the soundness of the
system going forward. Key aspects to be addressed are liquidity
support operations and enhancing banking supervision.
Fiscal priorities will be revised. To partly offset the anticipated
revenue shortfall for 2008, the authorities intend to cut back on
non-priority spending and introduce some tax policy measures, yielding
savings of about 0.8 percent of GDP. Accordingly, the program aims at
limiting the deficit, excluding non-programmed externally financed
investment projects, to 2.8 percent of GDP compared to a deficit
target of 1 percent of GDP in the announced budget.
The IMF supports the protection of social spending embedded in the
program. The program accommodates an increase in social spending of
0.3 percent of GDP, relative to the budget, to protect the poor
through well-targeted social safety nets. The program also provides
room for additional infrastructure and investment spending as foreign
financing materializes.
The authorities will continue their wide-ranging structural reform
agenda outlined in their Sustainable Development Program. This agenda
is aimed at deepening productivity-enhancing structural reforms, and
improving governance. A key area will be continued efforts to
strengthen the business environment, with a focus on tax
administration reforms and the fight against corruption.
Armenia joined the IMF on May 28, 1992; its quota is SDR 92 million
(about USD135.2 million) and its outstanding credit to the IMF (as of
end-January 2009) is SDR 87.495 million (USD128.6 million).
From: Emil Lazarian | Ararat NewsPress
