Friday, March 15 2019 15:20

ArmInfo. Following the two-week visit to the Armenia, Hossein Samiei, the Head of the International Monetary Fund (IMF) Armenia Mission, said that the organization is  ready to support the government's reforms with a $ 250 million loan.  The stand-by tool, through which support will be provided, is  designed to help countries overcome short-term  problems related to  balance of payments. So what is the matter?

Is the situation so critical or "better safe than sorry"

Armenia became a member of the International Monetary Fund (IMF) on  April 28, 1992. During this period, the country has repeatedly  applied for financial and technical support to the IMF, and the  organization has consistently assisted the country's economy through  supporting the balance of payments, as well as macroeconomic policy  agreed with the Armenian authorities.

The latest program assistance in the framework of  the Extended Fund  Facility (EFF) was provided from 2014 to 2017. During the April 2017  visit to Armenia, the Head of the IMF Mission in Armenia, Hossein  Samiei stated that the agreements reached with the government of  Armenia on the basis of the last general conclusion were, in fact,  fulfilled. Since then, the Armenian authorities have consistently  declared a desire to continue cooperation with the IMF in order to  ensure the continuity of programs to reform the country's economy.

And only now the IMF team and the authorities of Armenia, at the  administration level, have reached agreement on a preventive stand-by  program with a budget of $ 250 million. Stand-by is still subject to  approval by the IMF Executive Board, discussions on it are scheduled  for May 2019, but it is already known that, in general, it is aimed  at supporting the reforms of the new government and strengthening the  economy's ability to withstand external shocks.  "The new program  does not envisage immediate financing, but if there is a program  agreed with the government, and in the event of external shocks that  could adversely affect the country's economy, Armenia can receive  funding under the program," Hossein Samiei said at a meeting with  journalists.

Stand-By Arrangement: Addiction or a reliable "airbag"

The stand-By Arrangement economic policy support program is in fact a  credit line, each tranche of which is provided to a country if it  fulfills certain conditions set forth in the agreement. The stand-by  loan mechanism is aimed at helping IMF member countries experiencing  short-term problems with stable financing of the current balance of  payments. That is, Armenia, and more specifically the Central Bank of  Armenia, will be able to use these funds to replenish reserves only  when necessary, during the planned 3 years. Plus, the use of this  tool is an indication that the borrowing country, although is a state  with relatively low incomes,  has a relatively stable economy.

As of today, as Armenian Deputy Finance Minister Armen Hayrapetyan  pointed out, Armenia has no problems with foreign exchange reserves  and covering its international obligations. That is why Armenia does  not want to take a loan in its classical sense, but only such as  standby, which will wait somewhere "in the corner for its turn" if  necessary, that is, a kind of overdraft.

The government realizes that the republic continues to import  significantly more goods and services than it exports. As a result,  it finances thereby the economies of countries - foreign trade  partners, but is not able to cover these with its exports.  This gap, as Hayrapetyan notes, needs to be somehow filled. It can  also be foreign direct investment, for example, the inflow of foreign  investment in Armenian enterprises.  Or, Armenian banks should  attract more loans from abroad in order to finance importers in order  to meet domestic demand for foreign currency to purchase goods and  services from abroad. Among other things, the state can take out a  loan in order to fulfill its debt obligations.

"But if at some stage we start to aggressively import, the current  account deficit will increase, and there will be no corresponding FDI  in the country, financing will be made through debt instruments, and  the country may not have enough currency. Then we will not be able to  pay for imports. In such cases, we can use the funds from the IMF.  And when the situation with the current account normalizes, we will  refund this money, "the Deputy Minister of Finance of Armenia  explains .

At the same time, as the Deputy Minister assured, the reserves of the  Armenian Central Bank are at a sufficient level. In particular, this  is evidenced by one of the elementary indicators of the adequacy of  the reserves of the Central Bank - the number of months the country  has enough currency to cover the volume of imports. A period of three  months is considered as standard, while in Armenia this figure is  usually and has long been more than four months.

Thus, the new Stand-By Arrangement (the first was provided in 2009)  from the IMF is not aimed at saving a "drowning" country, but is  intended to become an "airbag" in case of force majeure.

Will Stand-By take care of Armenia`s reputation for nothing?

According to the representative of the Ministry of Finance, there are  nuances that make the stand-by more than attractive. As part of  reaching an agreement around getting a stand-by the state, in  addition to monetary resources, receives from the IMF comprehensive  diagnostics of the economy twice a year.  Approving the economic  policy of the country, the IMF indirectly, raises its investment  attractiveness - primarily for global capital. "We are most attracted  by the fact that the IMF, as an authoritative organization, applying  this tool to a specific country, increases the level of trust of  other international donor institutions with regard to the policy  pursued by the borrowing country," the Deputy Minister explained.

The main condition for the provision of borrowed funds within the  Stand-By Arrangement is the country's readiness to reform its economy  and follow the IMF regulations in solving economic problems. The  reforms in the field of fiscal monetary policy, as well as structural  changes, are considered as priorities aimed at ensuring in overall a  stable macroeconomic environment, leading to the development of the  entire economy. These commitments, which are largely consonant with  government policies, are detailed in the so-called Letter of Intent.  Further, consistent discussions are held with the IMF on the policy  being implemented. "We ourselves choose what obligations to undertake  and their terms. At the same time we do not agree to recommendations  that do not comply with the government's policy. The IMF, for the  duration of the agreement, strictly monitors the implementation of  the agreed program," Armenian Deputy Finance Minister Armen  Hayrapetyan said.