Amid high growth, prudent fiscal stance would help avoid overheating  of economy, prevent inflationary pressures - Jihad Azour

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