Press Release No. 04/258

Press Release: IMF Executive Board Completes Final Review Under PRGF Arrangement for the Republic of Armenia

December 1, 2004

The Executive Board of the International Monetary Fund (IMF) today completed the sixth and final review of the Republic of Armenia's economic performance under a three-year Poverty Reduction and Growth Facility (PRGF) arrangement. The completion of this review enables Armenia to draw an amount equivalent to SDR 9.0 million (about US$13.7 million).

In completing the final review, the Executive Board also approved Armenia's request for a waiver of two structural performance criteria.

At the time of the fifth review on May 3, 2004 the period of the arrangement was extended through December 31, 2004 (see Press Release No. 04/90). Armenia's PRGF arrangement was initially approved with effect from May 23, 2001 (see Press Release No. 01/25) for an amount equivalent to SDR 69 million (about US$105.3 million). With the completion of the sixth review, the arrangement will be fully disbursed. The authorities have also stated their intention to begin discussions with the IMF on a new three-year PRGF arrangement that would support an economic program through 2008.

Following the Executive Board's discussion of Armenia's performance under the current PRGF-supported program, Agustín Carstens, Deputy Managing Director and Acting Chair, said:

"The Armenian authorities should be commended for Armenia's strong economic performance in recent years, in the context of satisfactory implementation of the PRGF-supported program. Prudent monetary and fiscal policies, external financial support, and progress with structural reforms have contributed to double-digit economic growth, poverty reduction, low inflation, and a sustainable debt burden.

"Looking ahead, the authorities should maintain a cautious fiscal stance and ensure that the expenditure envelope is in line with PRSP priorities on social and infrastructure spending. Monetary policy should remain tight while maintaining a flexible exchange rate regime in order to bring inflation down to the authorities' objective of 3 percent. To facilitate further financial intermediation, reforms are needed to enhance corporate governance in banks, streamline collateral recovery procedures, and improve court processes.

"Notwithstanding the progress made in recent years, the authorities need to tackle more forcefully the remaining deficiencies and reduce discretion in tax and customs administration. This will contribute to an improved business environment and yield higher tax revenues to finance pro-poor spending. On the expenditure side, a balanced mix between current and capital spending will be critical to sustain the high trajectory of growth. This will require higher allocations to capital expenditures in the transport, agriculture, and water sectors. At the same time, the envisaged increases in social spending highlight the importance of ensuring that they will be utilized efficiently and transparently.

"The authorities should be commended for the improvement in the energy sector in recent years. Looking ahead, the authorities need to complete the reform agenda in this sector and step up the implementation of reforms in the water and irrigation sectors, including through an increase in tariffs to cost recovery levels.

"Armenia's medium-term prospects are likely to remain favorable provided the authorities move ahead with the implementation of the reform agenda and redouble their efforts to improve governance," Mr. Carstens stated.

The PRGF is the IMF's concessional facility for low-income countries. PRGF-supported programs are based on country-owned poverty reduction strategies adopted in a participatory process involving civil society and development partners, and articulated in a Poverty Reduction Strategy Paper, or PRSP. This is intended to ensure that each PRGF-supported program is consistent with a comprehensive framework for macroeconomic, structural, and social policies, to foster growth and reduction poverty. PRGF loans carry an annual interest rate of 0.5 percent, and are repayable over 10 years with a 5 ½-year grace period on principal payments.