The IMF Stand-By Arrangement Helps Armenia Cope with Shocks and Maintain Macroeconomic Stability

ArmInfo. Armenia’s current economic reform program has been supported by the IMF since May 2019. The program has helped Armenia preserve macroeconomic stability and maintain access to international financial markets, and was adjusted to help Armenia respond to the major challenges that it faced in 2020. ArmInfo correspondent spoke with Nathan Porter, the IMF’s mission chief for Armenia, about the program and how Armenia has fared during these difficult times.

How has Armenia’s economy fared the shocks that hit the country in 2020?

Porter: Armenia’s economy was deeply affected in 2020 by the COVID-19 pandemic and the military hostilities. The authorities responded promptly to these shocks with healthcare and anti-crisis measures to protect vulnerable groups, and support businesses and jobs. Yet, GDP declined by 7.6 percent in 2020, reflecting the severity of the shocks and the importance of high-contact sectors, like tourism, to Armenia’s economy. Naturally, the fiscal deficit widened, and the government debt rose considerably. From an external perspective, Armenia’s balance of payment has remained manageable, despite a contraction in private inflows and remittances, although the latter recovered later in the year. Foreign reserves declined somewhat but remained adequate. Importantly, Armenia’s financial system weathered the storm in 2020 without signs of financial sector strain, although we will keep an eye on the situation as the full impact of the pandemic is still unfolding.

How did the IMF Stand-By arrangement help Armenia confront the shocks of 2020?

Porter: You may remember that Armenia’s economic reform program has been supported by an IMF Stand-By arrangement (SBA) since May 2019. Armenia did not need IMF financial support at that time, and this arrangement was intended to be precautionary, meaning that it would provide insurance against any external shocks faced by Armenia. The key goals of this IMF-supported program were to anchor fiscal sustainability, maintain financial stability, and support the implementation of the authorities’ ambitious structural reform agenda with a renewed emphasis on growth inclusiveness and governance. The IMF-supported program helped the authorities outline a policy course to ensure macro stability and growth, while also supporting the economy during the crisis and managing emerging risks. The program was broadly on track when COVID-19 hit, and the decision to take out this “insurance” paid off. To help cover the urgent financing needs facing Armenia after the pandemic hit, it was able to draw on the accumulated insurance available under the SBA as well as seek additional IMF financing, which was provided. Overall, in 2020, the IMF released US$332 million for Armenia for budget support purposes which directly helped the country confront the twin shocks. The program’s objectives were also adjusted to reflect changing nature of the challenges posed by the pandemic and, later, by the military conflict. The credibility of Armenia’s program to foreign investors was demonstrated when it issued a $750 million euro bond at a yield below 4 percent this January.

When will we see the recovery?

Porter: We think that the recovery will start in 2021 but it will take time to gather speed. As you may know, our conservative outlook expects growth of around 1 percent in 2021, with a potential pick-up to around 3½ percent in 2022. The uncertainty around the shape and pace of the recovery is very high, as it will depend on various external and domestic factors, including the course of the pandemic, pace of vaccination roll out, the strength of Armenia’s trading partners and external financing conditions, the extent of scarring through labor market, and the pace of quality infrastructure investment and structural reforms. Having said that, though, 2021 is the year to set the stage for the recovery.

What are Armenia’s key economic priorities going forward? Is there anything that can be done to accelerate the recovery?

Porter: The immediate policy priorities are to protect vulnerable households, accelerated planned public investment from the budget, and fast-track large-scale vaccinations to support economic recovery in 2021 and beyond. Quick vaccinations will allow an earlier reopening of the tourism sector. A sustained recovery also hinges on safeguarding financial stability and preserving fiscal sustainability. I would like to underscore that implementation of key tax policy reforms including turnover tax reforms and individual tax declarations as well as current expenditure restraint are critical to ensuring adequate space for priority social and development spending while ensuring the public debt can gradually come down to a more manageable level over coming years.

Meanwhile, structural reforms need to be accelerated to achieve faster, inclusive, and private-led growth in Armenia. Ensuring efficient execution of the government’s infrastructure spending is critical for addressing Armenia’s infrastructure gaps and, along with other reforms to the business environment, also support Armenia’s competitiveness and foreign investment, promote trade integration. All these efforts will ultimately boost economic potential. The fallout from COVID-19 has also underscored the need to improve the effectiveness of the national social safety net, while boosting inclusion through reduced informality. Finally, continued reforms to strengthen governance and transparency will facilitate access to finance and improve the business environment ultimately fostering long-term growth.

With the upcoming parliamentary elections, how do you see the IMF continuing its engagement with Armenia?

Porter: We have just finished a virtual staff visit during which we discussed with the authorities not only recent developments but also appropriate economic policies for the period ahead. From our side, our primary goal is to continue to support policies that can help Armenia manage the recovery from the COVID-crisis and transition successfully to strong and inclusive growth in the coming years. In cases where IMF-supported arrangements overlap with national elections, it is a standard IMF practice to delay a program review until the new government is formed and has decided on its economic policy priorities. We intend to promptly engage with the new government once it is formed to discuss its policy priorities and facilitate a smooth continuation of the progress already seen under the current IMF-supported program. In the meantime, the IMF will continue to support Armenia through the provision of technical assistance across a number of areas, including tax administration, public financial management, fiscal statistics, and capital market development.