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IMF reaches staff-level agreement with Armenia on $165.6 mln stand-by loan

International Monetary Fund staff have reached agreement with Armenia on a $165.6 million, three-year precautionary stand-by lending arrangement, the IMF said on Wednesday.

The fund said the agreement is subject to approval by its executive board, which is expected to consider it next month.

It said the three-year deal would support the Armenian government’s economic program to preserve macroeconomic, fiscal, and financial stability, while moving forward with reforms aimed at promoting inclusive growth.

At the request of the Armenian authorities, a staff team from the International Monetary Fund, led by Ms. Iva Petrova, visited Yerevan from September 26 to October 6 to discuss a three-year economic program supported by an IMF precautionary Stand-By Arrangement . At the conclusion of the discussions, including a series of virtual meetings, 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 a precautionary Stand-By Arrangement for SDR 128.8 million (about $165.6 million) to support the government’s economic program to preserve macroeconomic, fiscal, and financial stability, and to advance reforms to promote inclusive growth. The agreement is subject to approval by the IMF Executive Board, which is expected to consider it in December 2022.

“Guided by sound macroeconomic policies amid significant global and regional challenges, Armenia is on course to achieve growth of about 11 percent in 2022, in part driven by large inflows of external income, capital, and labor into the country. Fiscal overperformance and dram appreciation have contributed to a significant decline in public debt, which is expected to drop to 51 percent of GDP this year from 60.3 percent of GDP in 2021. While inflation has temporarily increased on the back of supply and demand shocks, the Central Bank of Armenia has proactively raised the policy rate by 625 basis points since December 2020, aiming to steer inflation toward its medium-term target of 4 percent. International reserves have risen, while the dram has appreciated strongly in the past few months. Important structural reforms have taken place in the areas of public financial management, revenue administration, the inflation targeting framework, the financial sector, and governance.

“Economic growth is expected to decelerate in 2023, reflecting weaker external demand and tighter global financial conditions, and to remain in the 4-5 percent range over the medium term. CPI inflation is projected to gradually converge to the CBA’s target over the medium term, supported by tight monetary policy and as the impact of external shocks wane. The current account deficit, which has widened with the rapid growth of the economy, is expected to gradually narrow to around 5 percent of GDP. The risks to the outlook are mainly external.

“Given a highly uncertain outlook and overheating risks, the 2023 budget needs to avoid creating excessive demand pressures. Within the budget envelope, priority should be given to high-quality expenditure and strengthening the social safety net. The increase in much needed capital spending should be supported by expanding reforms of the public investment management process to ensure a strategic, transparent, and consistent project selection and timely and efficient implementation. Continued compliance with the rules-based fiscal framework would keep the debt to GDP ratio on a declining path.

“The authorities’ efforts to adopt a more transparent, equitable, efficient, and environmentally friendly tax system and a stronger revenue administration will support the government’s revenue raising objectives and create space for much needed development spending. Plans to improve the efficiency and effectiveness of government spending, enhance public financial management—including through robust fiscal risk management, transparency, and governance—and ensure higher-quality public investment are also welcome.

“The current monetary policy stance is appropriate, and further policy changes should remain dependent on the evolution of inflation and inflation expectations. Efforts to foster capital market development and deepen financial inclusion will continue to enhance the effectiveness of the monetary policy transmission mechanism. Staff welcomes the CBA’s continued commitment to the existing flexible exchange rate regime, which has served Armenia well in the face of successive external shocks, and to maintaining healthy reserve buffers.

“Thanks to prudent risk management and strong supervision, the banking system is well capitalized and liquid. Continued monitoring of financial sector risks and enhancing the macroprudential tools would help stem risks associated with the rapid rise in housing prices and mortgage lending. Staff welcomes the CBA’s plans to strengthen risk-based bank supervision and incentivize banks to improve their risk management capacity, as well as to develop an enhanced bank resolution framework.

“The government’s structural reform agenda appropriately focuses on improving the business environment, fostering productivity, reducing unemployment and poverty, and addressing pressing climate mitigation and adaptation challenges. Achieving these objectives requires developing stronger trade links, building infrastructure to support connectivity; improving transportation, land, and water management and encouraging green energy generation; fostering access to financial services and labor force participation; completing governance reforms, and reducing informality. Ambitious digitalization efforts should spearhead public administration reforms and improve public service quality and delivery.

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

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