Thursday, March 17 2016 14:51

ArmInfo. Armenia has become the first country to sign a Memorandum of Understanding with the European Bank for Reconstruction and Development (EBRD) to become eligible for lending to local small and medium-sized enterprises (SMEs) in local currency, to the EBRD told ArmInfo.

In exchange for access to funds the country has committed itself to a reform programme which will improve, broaden and deepen local currency and capital markets in Armenia. To achieve this goal the authorities will promote a macroeconomic and market environment and take regulatory measures that support local currency borrowing and lending.

The Memorandum was signed in Yerevan on Tuesday by Armenia's Minister of Finance, Gagik Khachatryan, Central Bank Governor Arthur Javadyan and Andre Kuusvek, EBRD Director, Local Currency and Capital Markets.

The signing pursues Armenia's involvement in the EBRD's Early Transition Countries (ETCs) Local Currency Programme that aims to develop capital markets and encourage local currency lending in Armenia, Georgia, Kyrgyz Republic, Moldova, Mongolia and Tajikistan. It includes a new ?500 million SME Local Currency Lending Facility that will combine EBRD capital and donor resources to provide eligible companies with access to affordable funding. How much will be provided to Armenia is not reported.

According to the source, the development of local currency finance remains a challenge in most of the Bank's countries of operations, and many have the highest exposures in the world to exchange rate movements. SMEs that sell their goods and services domestically in local currency, but borrow in foreign currency, are highly exposed to this currency risk. Andre Kuusvek, EBRD Director, Local Currency and Capital Market Development, said: "Expanding the availability of local currency financing is crucial for the growth of local businesses by providing them with fund at affordable rates and manageable risk."

According to ArmInfo's Financial Rating of Armenian Banks, dollarization of Armenia's economy has increased dramatically over the last years. In 2015, foreign exchange deposits accounted for 44% (versus 40% a year ago) of total portfolios of deposits in Armenia. As bank financing was in terms of foreign currency too, the foreign currency component in the total loan portfolio of banks reached 66%. This circumstance is one of the reasons behind the dramatic slackening of the business lending rates. SME finance decreased by 16% in 2015 versus 32.7% growth in 2014 to 630.1 billion drams ($1.3 billion).

The EBRD financed 14 projects with total investments reaching US$ 140 million in 2015, unprecedented level in the 24 years that the Bank has worked in Armenia, and a clear indication of both the investment opportunities in the country and strong demand for EBRD funding. Since the start of its operations in Armenia in 1992, the EBRD has invested over $1.13 billion in 148 projects in the country's financial, corporate, infrastructure and energy sectors, with 88 per cent of these investments being in the private sector.