ArmInfo. A delegation of the International Monetary Fund (IMF) led by Mr Jihad Azour, Director of the IMF Middle East and Central Asia Department, and Ms Iva Petrova, IMF Mission Chief for Armenia, was on a visit to Armenia recently. In an interview with Mr Emmanuil Mkrtchyan, CEO, ArmInfo News Agency, Mr Jihad Azour said that the IMF delegation visited Armenia on the occasion of the 30th anniversary of the Armenian national currency and foundation of the Central Bank of Armenia, landmarks in Armenia's history.
Three decades of financial and economic reforms resulted in great progress. The IMF has its own program and had an opportunity to meet with Armenia's president, prime minister and vice-premiers to discuss the economic situation in the country, exchange views on reforms and on the IMF assistance in further implementation of the reforms. The IMF is effectively cooperating with Armenia and is hopeful that it is this cooperation that assisted Armenia in implementing the reforms capable of stabilizing the economy, making it highly resilient, with greater potential. It is also important for the IMF to understand the impact of the Russian-Ukrainian war on the neighboring countries, Mr Azour said.
By the way, IMF officials' availability to mass media and public, in contrast to their WB and EBRD counterparts, is cause of not only joy, but also optimism and confidence for journalists.
Below is an interview of Mr Jihad Azour, Director of the IMF Middle East and Central Asia Department, with the ArmInfo news agency.
Question: In April, the IMF improved its forecast for Armenia's GDP growth for 2023 from the previous 4.5% to updated 5.5%. What is the reason for the forecast revision? What are the factors that support it? But the forecast for 2024 - up to 5% -is also pretty bold. Does this mean that the external factors supporting the actual growth of Armenia's GDP, according to the IMF, will persist next year?
Answer: Growth in Armenia continues to be very strong, reaching 10.5 percent in the first half of 2023 supported by expansion in the services, construction, and trade sectors. Relocation of individuals, businesses, and capital from Russia has largely contributed to the remarkable growth in economic activity in 2022-23. Nonetheless, we expect some moderation towards the end of the year, as the impact of migration and capital inflows on growth dissipate, with growth easing from its current very high rate. Our revised growth projections will be available after the conclusion of the discussions for the second review under the Stand-By Arrangement and Article IV consultation in September.
Question: In the context of strengthening of the real effective exchange rate of Armenian dram, analysts are worried about the loss of competitiveness of the export-oriented industries and agriculture of Armenia. What do you think could be the measures to be taken by the Government to neutralize the negative effect of excessive appreciation of the national currency?
Answer: Advancing structural reforms that boost diversification and the economic complexity and sophistication of Armenia's exports will be critical to strengthening the country's competitiveness. These reforms could focus on improving the quality of infrastructure, including transport network and telecommunication, reducing nontariff barriers including documentary and border costs, and measures to diversify trading partners and integrate Armenia better with global trade networks. Broader reforms are also important to raise the value added and complexity of Armenia's goods and services. Investing in health, strengthening education and research, and enhancing access to finance will help build human and physical capital and raise overall productivity, which will support the long-term competitiveness of the export- oriented industries in Armenia.
Question: The RA Ministry of Economy expressed its disagreement with the reduction of the medium-term expenditure program aimed at stimulating the development of the economic infrastructure programs (for example, the Stock Market Development Support Program). Don't you think that it is the best time now for the large-scale implementation of such programs? After all, it is they who are aimed at structural reforms, including advancing trade ties and diversification, expanding access to finance, completing governance reforms and building climate resilience - all that the IMF advocates for.
Answer: There are two issues here - about Armenia's fiscal policy priorities and about overall structural reforms that foster higher and more resilient growth. Armenia's robust economic growth and persistent fiscal overperformance present a good opportunity to strengthen fiscal buffers. Amid high growth, a prudent fiscal stance would help avoid overheating of the economy, prevent inflationary pressures, and buttress the authorities' ability to respond to potential adverse shocks in the future. It would also help create fiscal space for much needed infrastructure and other development spending, such as education and health care and better labor policies.
At the same time, it is important to continue and accelerate the pace of structural reforms. Under the IMF supported program, the authorities are making efforts to develop financial markets, improve the insolvency legislation, and adopt a new corporate governance code that aim at expanding access to finance. They also work to improve public investment management and address bottlenecks in the implementation of the foreign financed projects seeks to foster investment. The development of an export strategy will aim to improve competitiveness and trade diversification.
Question: High flows of capital and remittances to Armenia give rise to fears that the "Dutch disease" may develop again in Armenia. How do you feel about such warnings and how one could avoid it?
Answer: Armenia is not at a point that needs to be worried about a Dutch disease at this stage. However, it needs to think carefully about how best to take advantage of the influx of capital, remittances, and labor to raise productivity, promote business creation, and support the economy over the long-term. Pressing ahead with structural reforms to improve economic diversification is critical to mitigate any risk of Dutch disease. Building human capital, developing infrastructure, and improving the business environment are good strategies to preserve and strengthen export competitiveness. Maintaining sound fiscal policy is also key to preventing the trade and the current account deficits from widening.
Question:How would you assess the stability of the banking system of Armenia, which has significantly increased its non-interest income due to a significant reduction in the level of lending to the economy, although the overall loan portfolio (interbank loans, consumer loans and mortgages) shows growth? However, according to market analysts, it is in the consumer lending and mortgages, where the main risks of NPL accumulate. Doesn't the fact that the system well-being today depends mainly on exogenous factors create risks?
Answer: The banking system in Armenia continues to perform well. Banks have Pillar 1 capital well above the capital requirements, comfortable liquidity levels, and relatively low non-performing loans (NPLs). Capital inflows following the war in Ukraine have boosted profitability from non-interest-bearing activities, raising banks' loss absorption capacity.
The key risks for the financial system stem from the strong loan growth of mortgage and construction lending and rising real estate prices. The large inflow of non-resident deposits also poses new risks that need to be monitored carefully.
The CBA's efforts to strengthen its supervisory tools and frameworks is critical to addressing these risks. The CBA raised banks' countercyclical capital buffers in two steps to 1.5 percent as of August 2023 and is making further efforts to assess real-estate related risks. Monitoring banks' exposures associated with the fast increase in non-resident deposits and enhancing supervision to ensure banks are implementing AML/CFT preventive measures in relation to non-resident customers and deposits is also key.
Question: In June, when the IMF provided Armenia with access to $24.5 million under the Stand-by Arrangement, the Fund's statement noted the need to prevent overheating of the economy. Can you tell us what measures and instruments can make it possible? What benefits can Armenia get from creation of budgetary reserves and what level of those we would need?
Armenia's economy is growing very rapidly, and robust domestic demand could cause a resurgence of inflationary pressures. The role of fiscal policy in such circumstances is very important. The budgetary reserve fund helps smoothen expenditures during fluctuations in revenue collections. This is a good practice that allows the authorities to build reserve buffers and limit expenditure pressures when revenue collections are strong during an economic boom and use them to streamline important expenditures when revenue collections are low during a downturn. Accordingly, the reserve buffers, if effectively utilized, could help ease domestic demand and prevent overheating of the economy during a period of high growth. There is no magical number for budgetary reserves, but they should be high enough to provide flexibility to the authorities to respond to adverse shocks. Further, improving macroeconomic and fiscal forecasts and effective coordination between monetary and fiscal policies could also help improve the authorities' response to economic upturns and downturns.
Thank you
