IMF Staff Reaches Staff-Level Agreement with Armenia on Third Review of Stand-By Arrangement

IMF Staff Reaches Staff-Level Agreement with Armenia on Third Review of Stand-By Arrangement

May 3, 2024

End-of-mission press releases include statements by IMF staff teams that convey preliminary findings after a country visit. The views expressed in this statement are those of the IMF staff and do not necessarily represent the views of the IMF Executive Board. Based on the preliminary findings of this mission, staff will prepare a report that, subject to management approval, will be presented to the IMF Executive Board for discussion and decision.

• IMF staff and Armenian authorities have reached a staff-level agreement on the third review under the 2022 Stand-By Arrangement, which Armenian authorities consider precautionary. The SBA aims to support the government’s policy and reform agenda to preserve economic and financial stability and support strong and sustainable growth.
• Thanks to high domestic consumption and investment, GDP growth remained very strong by historical standards, at 8.7 percent in 2023, and is expected to moderate to more sustainable levels of around 6 percent in 2024.
• Policy priorities are to preserve macroeconomic stability, further mobilize tax revenues to support priority spending, including on refugee integration, strengthen institutional frameworks, and continue structural reforms to boost productivity and foster more inclusive growth. .

Washington DC: A team from the International Monetary Fund (IMF), led by Iva Petrova, visited Yerevan from March 11 to 21, 2024 to conduct talks for the third review under the Stand-By Agreement (SBA) with Armenia. At the conclusion of the discussions, Ms. Petrova issued the following statement:

“I am pleased to announce that the IMF team and the Armenian authorities have reached a staff-level agreement on policies for the completion of the third review under the three-year SBA, which supports Armenia’s economic reform program. The agreement is subject to approval by the IMF’s Executive Board, which is scheduled to consider this review in mid-June. Board approval would allow access to around USD 24.4 million (SDR 18.4 million), bringing total access to around USD 97.7 million (SDR 73.6 million) since the inception of the SBA .

“Armenia’s strong growth momentum continued in 2023, with the economy growing 8.7 percent, supported by strong private consumption, trade and investment. Inflation decreased significantly, reaching -1.2 percent in March (year-on-year), mainly due to the decline in food prices, the appreciation of the dram, and the delayed effect of tightening monetary policy. 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 projected due to under-execution of spending. The banking system has strong capital and liquidity reserves, and its profitability remains high.

“Growth is expected to moderate but remain strong 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. Significant risks to the outlook arise from geopolitical tensions and the possibility that growth in trading partners falters or capital inflows reverse abruptly. Growth could also surprise on the upside if export revenues are higher than expected and the structural reforms planned in the 2021-26 Government Program are implemented more quickly.

“The 2024 budget deficit target remains appropriate and accommodates priority spending on social protection, infrastructure and national security. Given the highly uncertain outlook and current overheating risks, the medium-term expenditure framework for 2025-27 must avoid creating excessive demand pressures and must strike a balance between preserving macrofiscal stability and supporting Armenia’s development needs. In the face of increasing spending pressures, careful medium-term prioritization and decisive efforts in tax policy and revenue management will be needed to create fiscal space and keep debt at a moderate level. Implementing reforms to improve the efficiency of public spending, improve public financial management (including through strong fiscal risk management, transparency and governance) and ensure higher quality public investment remains critical to support the effort. fiscal.

“The Central Bank of Armenia (CBA) has gradually reduced the policy rate, which is appropriate in the current conditions of low inflation. Future rate decisions should continue to depend on developments in inflation and inflation expectations. The implementation of the CBA’s new communication strategy to improve the transparency of monetary policy and ensure the clarity of its objectives will support the recently adopted risk-based approach to monetary policy decision-making. The flexible exchange rate should remain a key buffer, and the authorities’ commitment to maintaining healthy international reserves is welcome. Efforts should continue to strengthen the CBA’s prudential and supervisory frameworks to help curb financial sector risks, as well as preserve the operational independence of the CBA.

“The government’s structural reform agenda appropriately focuses on fostering inclusive growth, including by boosting the participation of vulnerable population in the labor force, improving the insolvency framework and encouraging diversification in the country’s export basket and markets. To achieve these objectives, it is necessary to develop and implement concrete and fully costed employment and export strategies; and prioritize governance reforms to support investment and improve the business environment.

“The IMF team thanks the Armenian authorities, the private sector, development partners and the diplomatic community for their fruitful discussions and cooperation.”