December 18, 1998

Mr. Michel Camdessus
Managing Director
International Monetary Fund
Washington D.C. 20431

Dear Mr. Camdessus:

In our letter to you dated December 8, 1998, we committed ourselves to the firm implementation of a comprehensive set of policies which should help us both in cushioning the impact of the adverse external environment and in setting a solid base for achieving our medium-term goals. On the strength of these policies, and several policy actions scheduled to be taken prior to consideration by the Fund Executive Board, we requested the Fund to approve Armenia’s third annual arrangement under the ESAF. Additional external financial assistance for the program was also being sought in the context of the special financing meeting organized by the Fund and the World Bank to help ESAF countries in transition weather the impact of the Russian crisis, which took place in Washington, D.C. on December 11, 1998.

We are pleased to inform you that the implementation of the program is proceeding as envisaged. All prior actions under ESAF III have been undertaken, and there is a concerted effort at ensuring a successful implementation of the financial policies and structural reforms.

Concerning the additional external financial assistance, we would like to express our sincere appreciation to the governments of the United States and the Netherlands for their pledges amounting to about $9½ million, and to the World Bank for its decision to consider increasing the size of the SAC III loan by $15 million. However, even after these positive responses, there would still be an uncovered external financing gap of about $21 million for the five quarters ending December 1999. Thus, we would like to request an increase of SDR 8.1 million (equivalent to 12 percent of our Fund’s quota, or $11½ million), which would raise the access to Fund resources under the current ESAF from SDR 101.25 million (150 percent of quota) to SDR 109.35 million (162 percent of quota). We will endeavor to close the remaining gap either by seeking additional external assistance following indications received from several donors that they would be willing to consider further financial assistance for Armenia in 1999, or by taking offsetting measures.

In line with the Memorandum of Economic and Financial Policies, we would like to reiterate our commitment to observe the quantitative performance criteria and benchmarks established under the program (as specified in the attached Table 1), including the revised limits on the state budget deficit, which have been adjusted to reflect the identified additional external financing mentioned above. Moreover, we are committed to seek ways to lower the fiscal deficit at the time of the mid-term review if higher than expected revenues were to materialize. As we have indicated in the past, we are prepared to take further measures to ensure the success of our program, after consulting with the Fund.

The government of Armenia and the Central Bank of Armenia request the Fund to make this letter and the Memorandum of Economic and Financial Policies for 1998/99 forwarded to you on December 8, 1998 available to the general public, including through its Internet site.

Sincerely yours,