Friday, November 20 2020 17:33

ArmInfo.An International Monetary Fund (IMF) team led by Nathan Porter conducted discussions on the third review of Armenia's reform program supported by the IMF  Stand-By Arrangement (SBA). According to the IMF's press release,  discussions were held during September 2-November 16, 2020. At the  conclusion of the discussions, Mr. Porter issued the following  statement:

"We are pleased to announce that the IMF team has reached a  staff-level agreement with the Armenian authorities on the conclusion  of the third review under their economic reform program, which is  supported by a three-year SBA. The agreement is subject to approval  by the IMF's Executive Board, which is scheduled to consider this  review in mid-December. About US$ 36.7 million (SDR 25.714 million)  would become available to be disbursed immediately after the Board  meeting. This financing will be allocated to the budget to help the  authorities' efforts in meeting the urgent medical and socio-economic  needs. 

"Armenia's economy has been hard hit by the COVID-19 pandemic  and the worst military confrontation since the early-1990s and is set  to contract in 2020. These shocks have created domestic demand and  supply disruptions and have been exacerbated by a sharp decline in  export and tourism revenues, remittances, and to some extent, weaker  capital flows. Real GDP is now expected to decline by over 7 percent  in 2020. While uncertainty about the recovery is high, growth is  projected to remain modest in 2021 and then pick-up as the economy  gradually adapts to, and moves past, the impact of these shocks and  associated economic scarring. Over the medium term, inflation should  rise and gradually converge to its target from below. Near-term  downside risks associated with external developments, an uncertain  economic and political environment, elevated regional tensions, and  the intensity and duration of the pandemic, are balanced against  potential upsides from a faster recovery from the pandemic, more  limited scarring, and faster reform implementation.  "Key near-term  priorities include supporting the most vulnerable while ensuring the  adequate public health response to the second COVID-19 wave. As the  recovery gains momentum, it will be essential to unwind the remaining  temporary support measures. 

"Lower revenues and higher spending on healthcare, socio-economic  support, and security will significantly raise the fiscal deficit and  public debt in 2020. The fiscal deficit in 2020 is expected to widen  to AMD430 billion (7 percent of GDP) before narrowing to AMD355  billion (5? percent of GDP) next year. The budget will be financed by  mobilizing resources from domestic and external sources, including  development partners. Government debt is expected to exceed 60  percent of GDP in 2020 and rise to around 69 percent in 2021. Staff  welcomes the authorities' strong commitment to fiscal sustainability,  guided by their fiscal rule, despite the pressures they are facing.  To this end, the authorities will intensify revenue mobilization  efforts, undertaking tax policy and administration measures, while  containing current spending and safeguarding priority spending. As a  result, central government debt is expected to gradually decline over  the medium term and fall below 60 percent of GDP by 2026.  "The  current accommodative monetary policy stance is appropriate and helps  ensure adequate liquidity in the banking system and support domestic  credit. The Central Bank of Armenia (CBA) should monitor developments  carefully and stand ready to adjust the monetary stance as necessary,  while allowing the exchange rate to be a shock absorber.  The  financial system shows no signs of stress, but the full impact of the  twin shocks is not yet evident. The CBA's regulatory and supervisory  response to the shocks has been appropriately balancing the goals of  preserving financial stability, maintaining banking system soundness,  and sustaining economic activity. The CBA should continue identifying  vulnerabilities and take any necessary actions.

"Despite delays partly inflicted by the twin shocks this year, the  authorities have continued making progress on their economic reform  agenda and are committed to staying the course. Reform priorities,  among others, include making the public investment process more  robust and efficient, strengthening the management of fiscal risks,  enhancing fiscal governance and transparency, improving efficiency  and fairness of the tax system to foster compliance and boost revenue  collection, and strengthening the education sector and  anti-corruption efforts."

To note, on May 17, 2019, the IMF approved the provision of a  stand-by credit line to Armenia for a three- year "transit period" in  the amount of SDR 180 million (equivalent to almost $ 248.2 million),  or about 139.75% of Armenia's quota in the IMF. From this amount, it  was planned to immediately receive SDR 25.714 million (equivalent to  nearly $ 35.5 million) with the remainder foreseen based on six half-  year estimates. A year later, in mid-May 2020, the IMF increased its  financial support to Armenia by SDR 128.8 million (about $ 175  million), which, together with the authorities' intention to attract  resources accumulated under the SBA, made it possible to receive SDR  206 million (about $ 280 million) payable immediately. These loan  funds are aimed at strengthening Armenia's economic foundations and  policies, as well as carrying out structural reforms, in particular,  improving management efficiency and improving the business  environment.