ARMENIAN GOVERNMENT INTENDS TO APPLY MECHANISMS ON REDUCTION OF FINANCIAL SYSTEM DOLLARIZATION
ArmInfo
2010-04-23 11:23:00
ArmInfo. The Armenian Government intends to apply mechanisms on
reduction of financial system dollarization, says the Letter of Intent
drawn up by the Armenian Government with respect to International
Monetary Fund’s Third Review under the Stand-By Arrangement.
"On the back of a strong policy response, Armenia is leaving
behind a crisis of enormous proportions. Since the last review, our
continued fiscal and monetary stimulus has stabilized the economy. Our
exchange rate policy stabilized the dollarization process and has been
instrumental in allaying concerns for financial stability. Structural
reforms in the program are building the foundation for increased tax
collection and improving safety nets to minimize the effects of the
crisis on the poor.
Our performance under the program continues to be very strong. Almost
all quantitative targets for end-December were met. The fiscal
deficit, while providing key support to the economy, has been kept
under control, allowing us to attain the end-December targets for the
fiscal balance and net banking system credit to the government. We
also met the end-September target for fiscal balance, for which, with
provisional data, we had cautiously asked for a waiver of nonobservance
at the time of the last review. The net international reserves target
was comfortably met. However, despite our prudent monetary policy,
the end-December performance criterion on net domestic assets of the
Central Bank was narrowly missed due to strong temporary liquidity
demands in the last few days of the year in advance of the unusually
long holiday period. Also, the indicative target on the stock of tax
credits for end-December was missed. As outlined below, structural
benchmarks were implemented largely as planned.
This Letter of Intent builds on these achievements, laying out an
agenda for 2010 that supports the exit path from the crisis. Our
macroeconomic policies will need to strike a balance between the risk
of choking off economic recovery and containing macroeconomic pressures
that may emerge. We will also continue efforts on structural reforms
to increase tax revenue, develop a sound financial system, and build
the foundations for sustained diversified economic growth and poverty
reduction. We remain committed to implementing the measures contained
in previous letters of intent.
Economic activity has stabilized, while inflation has increased.
Domestic demand, mainly for non-durable goods, has held steady thanks
to our stimulus package. Recovery is evident in some sectors, including
the mining and metallurgy industries. Inflation has increased on the
basis of strengthening international commodity prices, some lagged
pass-through effects from the exchange rate depreciation observed
in the first part of 2009, and initial signs of pressure in selected
services.
We expect a mild recovery in 2010. Prospects for the world economy
and the Russian economy in particular have improved moderately,
providing support for remittances and the tradable sector. Financial
sector intermediation is picking up, and will support growth and
domestic demand. Changes in private consumption and investment,
which were contributing to the negative GDP growth in 2009, should
make a positive contribution in 2010, whilst public consumption is
expected to continue to show positive growth.
The external position remains vulnerable, but we aim to reduce
the current account deficit over time. Despite the contraction
in domestic demand and real depreciation, the 2009 current account
deficit diminished only moderately in dollar terms and stands close to
14 percent of GDP, strongly influenced by the effect of regional trends
in exports and remittances. External imbalances are expected to persist
in 2010, reflecting the weak recovery of our main trading partners
and continued strong public investment, while our gross financing
needs broadly remain as envisaged in the beginning of the program.
We are adjusting our monetary stance in line with inflation
developments. Inflation has now fallen out of our target band, so
consistent with our price stability objective, we increased our policy
rate by 100 basis points since the beginning of the year. We have also
decreased the amount of outstanding repos significantly, while tight
liquidity conditions have created a moderate wedge between our policy
and market rates. We will further gradually adjust the policy rate to
become positive in real terms. In this setting, inflation will come
down from highs in the first quarter, and we will continue pursuing
policies to bring it within the target band in the near future.
We will continue to strengthen our monetary framework. In light
of increased dollarization, we will pay more attention to monetary
aggregates, including base money, and consider the effectiveness of
current rules of monetary policy implementation and communication in
consultation with the Fund, including if necessary on-site discussions,
assistance or studies by IMF experts. We aim to strengthen the
transmission mechanism by implementing several dedollarization
measures. And to enhance the effectiveness of our policy rate, we will
use more frequently our available instruments to offset government’s
lumpy spending, therefore reducing the volatility of short-term
market rates. To deepen the secondary market, we will also introduce
an overnight interbank market trading platform in NASDAQ-OMX. Lastly,
we will outline an effective communications strategy to explain to
the public the temporary nature of price developments behind the
headline index.
We remain committed to the floating exchange rate regime. We have
intervened in the foreign exchange market to smooth excessive
volatility and counter speculative pressures to prevent large
depreciations from threatening monetary and financial stability. We
will continue to allow increased flexibility in exchange rate movements
aiming at creating two-way risks in the market. In order to facilitate
economic adjustments needed to maintain external stability, we will
not intervene to resist fundamental trends in the exchange rate",-
says the Letter of Intent.