IMF Released Statement at Conclusion of Staff Mission to Armenia
OREANDA-NEWS. October 07, 2010. An International Monetary Fund (IMF) mission headed by Ms. Ratna Sahay, Deputy Director of the IMF’s Middle East and Central Asia Department, visited Yerevan from September 9?24, 2010. The team completed the 2010 Article IV Consultation discussions and reached a staff-level agreement with the authorities on their economic reform program under the First Review of the Extended Fund Facility (EFF)/Extended Credit Facility (ECF) Arrangements with the
The Armenian economy is slowly recovering from a sharp downturn of over 14 percent last year. While rebounding trade and remittances are reviving industry and services, agriculture has been hit hard by adverse weather conditions. As a consequence, overall economic activity is expected to grow by about 4 percent in 2010 and 4? percent in 2011. Reflecting the pick-up in activity, credit has also begun to flow to the private sector.
The contraction of agricultural output, together with the spike in imported wheat prices, has translated into higher food prices. With nearly half the weight in the consumer price index, higher food prices have pushed annual inflation to 9.6 percent in August. Looking ahead, inflation is expected to moderate and decline to about 7 percent by the end of this year.
During the 2009 crisis, the authorities successfully mitigated the negative impact on the population by appropriately pursuing countercyclical fiscal policy. These policies inevitably lead to a widening of the deficit, an increase in public debt, and contributed to the deterioration in the current account balance. With the onset of the global crisis and a postponement of the exchange rate adjustment in 2009, dollarization increased rapidly.
As a consequence of domestic and external developments in 2009 and this year, important medium term challenges have emerged. There is a need to consolidate public finances to ensure fiscal and debt sustainability. Given the fragile economic outlook of its key economic partners—
Policies to secure fiscal and debt sustainability.
The mission supports the authorities’ fiscal stance for 2010, which envisages substantial consolidation given the need to anchor the fiscal policy framework around debt sustainability. With the pick-up in revenue performance in the first eight months of this year, the overall deficit is expected to narrow by more than 3 percent of GDP relative to 2009, reaching about 4? percent of Gross Domestic Product (GDP) in 2010.
The main focus of fiscal consolidation should continue to be to strengthen revenue collection in the short and medium term, rather than expenditure compression that could hurt spending on important sectors—education and health—as well as the poor. The authorities’ recent revenue and expenditure reform initiatives are steps in the right direction. These include: setting up an Appeals Council under the government to deal with tax disputes; establishing greater transparency in interpreting the law; extending e-filing coverage of tax returns; and improving the quality of taxpayer services. The IMF mission calls for further steps to modernize tax administration and reduce tax evasion and corruption, including a revamping of the value added tax (VAT) refund system, stepping up the monitoring of large taxpayers, streamlining the reporting system, and introducing a risk-based system for tax audits. On the expenditure side, the authorities aim to reverse the recent increase in poverty and improve access to social services, including in education and health sectors.
With the right policies, the fiscal deficit is projected to fall to about 2 percent of GDP in the medium term, which will ensure that public debt remains sustainable. The mission welcomes the re-introduction of the medium-term expenditure framework, suspended during the crisis, and the adoption of the new debt management strategy which intends to lower the debt over the medium term.
Policies to strengthen competitiveness of and competition in the economy
Policies to control inflation and raise the effectiveness of monetary policy
While monetary policy will continue to focus on price stability, a small open economy like
The Central Bank of
The banking sector proved resilient to the crisis. The authorities’ measures to ensure the stability of the financial system by enhancing the capital base of banks, strengthening risk management and the supervisory framework have helped at limiting financial sector vulnerabilities. Measures to enhance crisis preparedness and contingency planning are also welcome. Further measures to strengthen and develop the financial sector will be considered under the forthcoming update of the Financial Sector Assessment Program in 2011.
During their visit, the IMF mission consulted with a wide section of the Armenian society—government officials, parliamentarians, central bank officials, representatives of the international community, banking and business sectors, and civil society. The mission would like to thank the authorities and the Armenian people for their kind hospitality, fruitful collaboration, and open discussions. The IMF team looks forward to continuing their close cooperation with the authorities under the current program.
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