IMF Executive Board completes Third Review under Stand-By Arrangement  with Armenia

ArmInfo.The Executive Board of the International Monetary Fund (IMF) completed the third review  under the Stand-By Arrangement (SBA) with Armenia. The completion of the review enables access of SDR 18.4 million (about US$24.5 million), bringing total access to SDR 73.6 million (about US$97.7 million). The SBA was approved by the IMF's Board on December 12, 2022 (see Press Release No. 22/429). The Armenian authorities  continue to treat the arrangement as precautionary. The Executive Board's decision on the third review of the SBA was taken without a meeting.

Armenia's strong growth momentum continued in 2023, with the economy  growing by 8.7 percent, supported by robust private consumption,  trade, and investment. Inflation declined significantly, reaching -  0.7 percent in April year-on-year, mainly due to lower global and  domestic prices of key food items, Dram appreciation, and tight  financial conditions. The current account deficit remained contained  at 2.0 percent of GDP in 2023, supported by strong tourism. The 2023  fiscal deficit at 2 percent of GDP was lower than anticipated due to  spending under-execution. The banking system has strong capital and  liquidity buffers, and its profitability continues to remain high.

Growth is expected to moderate but to remain robust at 6.0 percent in  2024, driven by consumption and public capital spending. Inflation is  expected to pick up in the second half of the year. Risks to the  outlook are elevated, stemming from geopolitical and regional  tensions, potential slowdown in major trading partners, lower trade,  and capital outflows. Growth could also surprise on the upside in the  event of stronger-than-anticipated export receipts, and faster  implementation of structural reforms.

The program is broadly on track. All quantitative performance  criteria and indicative targets for end- December 2023 were met.  However, low inflation breached the lower outer MPCC band. Progress  on structural benchmarks continues, with all but two completed, some  with delay.

The uncertain outlook calls for continued prudent policies and  steadfast implementation of structural reforms:

Fiscal policy should strike a balance between preserving macro-fiscal  stability and accommodating rising spending pressures. Careful  spending prioritization and decisive tax policy and revenue  administration efforts will be needed to create fiscal space,  including for social integration, security spending, further  infrastructure development, and a healthcare overhaul.

The Central Bank of Armenia (CBA) has successfully lowered inflation,  but inflation is likely to remain volatile, and future policy rate  decisions should remain dependent on the evolution of inflation and  inflation expectations. The flexible exchange rate should continue to  serve as a key shock absorber, with foreign exchange interventions  limited to addressing disorderly market conditions and  opportunistically building reserves to maintain strong buffers.

Structural reforms should focus on strengthening revenue  mobilization, fiscal risk and public investment management, the CBA's  supervisory framework, the employment and social assistance programs,  export diversification, enhancing governance, and reducing corruption  vulnerabilities.

The IMF forecasts Real GDP (percent change) at $8428 in 2024 and  $9005 in 2025 against $8095 in 2023; Gross domestic product (in  billions of drams) 9,503 in 2023, 10.4 in 2024 and 11.4 in 2025;  Exports of goods and services (percent change) 1.4% in 2024, 10.4% in  2025; Imports of goods and services (percent change) 2.8% in 2024,  5.4% in 2025; Current account balance (in percent of GDP) 2.1% in  2023, 2.5% in 2024 and 4.9% in 2025; 3.3% inflation at the end of  2024, 4% inflation in 2025; Unemployment rate (in percent) 13% in  2024 (against 12.6% in 2023) and 13.5% in 2025; Private sector credit  growth (percent change) 18.5% in 2023, 11.4% in 2024 and 9.2% in  2025; Investment and saving (in percent of GDP) 20.6% in 2024  (against 21.3% in 2023), and 20.4% in 2025; Gross international  reserves (in millions of U.S. dollars) $3.8bln in 2024 ($3.6bln in  2023), and $3.5 in 2025. Public and publicly-guaranteed (PPG) debt  (in percent of GDP) 52.5% in 2024 (50.5% in 2023) and 53.1% in 2025;  Central Government's PPG debt (in percent) 48.1% in 2023, 49.9% in  2024 and 50.8% in 2025; Share of foreign currency debt (in percent)  56.3% in 2024 (against 52.7% in 2023) and 57.8% in 2025.

The SBA's reserve program is viewed as a precautionary measure aimed  at supporting the government's policies and reform agenda aimed at  preserving economic and financial stability and supporting strong,  inclusive and sustainable growth.

The World Bank predicts a slowdown in GDP growth in Armenia in 2024  to 5.5% and in 2025 to 4.9%.  The EBRD forecasts Armenia's GDP growth  by 6.2% in 2024, with a slowdown in 2025 to 4.8%. Almost identical  GDP growth in Armenia is predicted by international rating agencies  for 2024, in particular S&P Global Ratings expects a slowdown to  6.2%, and Fitch Ratings - to 6%. The Central Bank of Armenia, with  the transition to a new improved system for developing monetary  policy (FPAS MARK II), began to calculate the GDP forecast for  several scenarios from 2024, henceforth indicating not a specific  forecast rate, but an expected range. Thus, according to the forecast  of the Central Bank of Armenia updated in June, GDP growth in 2024  will be in the range of 6.8-6.1% and will slow down in 2025 to  6.1-3.8%.