Press Release No. 22/77

IMF Reaches Staff-Level Agreement on Sixth Review for Armenia’s Stand-By Arrangement

March 17, 2022

• The 6th review of Armenia’s program finds the country in a stronger economic position but, at the same time, facing significant uncertainty from the spillovers from the Russia-Ukraine conflict.
• Policy priorities are to preserve macro-fiscal and financial stability, mitigate the impact of the ongoing external shock, and continue reforms to foster a stronger and more inclusive growth.

Washington, DC: An International Monetary Fund (IMF) team, led by Thanos Arvanitis, conducted discussions during March 1–16, 2022 for the sixth review of Armenia’s economic program, which is supported by an IMF Stand-By Arrangement (SBA). The SBA was approved on May 17, 2019 and will expire on May 16, 2022. At the conclusion of the discussions, Mr. Arvanitis issued the following statement:

“The IMF team has reached a staff-level agreement with the Armenian authorities for the conclusion of the sixth, and final, review of the economic reform program supported by a three-year Stand-By Arrangement. The agreement is subject to approval by the IMF’s Executive Board, which is scheduled to consider this review in mid-May. About $36 million (SDR 25.716 million) would become available after the Board meeting, bringing total disbursements under the program to about $430 million.

“The Armenian economy has continued to recover, posting 5.7 percent growth in 2021, and continuing to grow strongly in early 2022. Annual CPI inflation has steadily declined to 6.5 percent in February supported by monetary policy tightening. Fiscal policy helped to cushion the impact of the shocks on the economy in the last two years, but remains anchored on the broader objective of debt sustainability, and tax policy and administration reforms continue to broaden the tax base. The fiscal deficit is estimated to have narrowed to 4.7 percent of GDP in 2021, largely on the back of lower government spending. The external position has strengthened, especially in 2021, as the current account deficit narrowed during the Covid-19 pandemic while remittances stayed strong, and the Eurobond issuance and the SDR allocation added to international reserves. The banking system has remained adequately capitalized and liquid, and asset quality has improved.

“The regional and global spillovers from the Russia-Ukraine conflict, however, weigh on the outlook and would inevitably have a notable impact on Armenia. The wide-ranging sanctions on Russia, higher food and fuel prices, lower remittances, increased global financial market volatility, are expected to widen the current account deficit, lead to a pickup in inflation, and reduce economic growth in the coming months. While there is considerable uncertainty about the magnitude of the impact on Armenia, as the situation is still evolving, our preliminary assessment is that the economy could grow at around 1½ percent in 2022—a much slower pace than previously expected.

“To mitigate adverse economic spillovers to Armenia, the authorities should continue to allow the exchange rate to function as a key shock absorber and adjust monetary policy to contain any second-round effects of higher imported inflation and supply-side disruptions while considering the evolving assessment of the outlook. In this context, the CBA increased policy rates by 125 basis points on March 15. The CBA is also closely monitoring the liquidity position of banks and their credit risks and should take any measures necessary to ensure the stability of the financial system under appropriate safeguards. To contain the effects of the shock on the budget deficit and government debt-to-GDP ratio, the expenditure reserve fund should be used judiciously, and non-priority spending curtailed. It is also important that any public assistance to vulnerable households and viable firms be temporary and targeted.

“Beyond the near-term, it is critical to maintain the strong policy and reform efforts. This includes improving the medium-term fiscal framework and placing government debt on a declining path in line with fiscal rules; reducing inflation towards the Central Bank’s target of 4 percent; safeguarding financial stability; and delivering sustained, green, and inclusive growth. To achieve these objectives, it is important to fully operationalize the recently approved public investment management decree; complete the PPP operational framework; introduce a progressive mining taxation regime that moves away from price-based royalty schedules and ad-hoc export duties to avoid discouraging investment in this sector; strengthen fiscal risk management, transparency and governance; and improve the business environment, while at the same time creating space through growth-friendly revenue-enhancing tax policies, current spending prioritization, and higher quality public investment and enhanced social protection.

“The IMF team thanks the Armenian authorities, private sector, and development partners for fruitful discussions and cooperation.”