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.