The IMF team and the Armenian authorities have reached staff-level agreement on a precautionary Stand-By Arrangement for the amount of USD 250 million to support the new government’s reform plans and strengthen resilience against external shocks.

This was stated by Head of IMF Armenia Mission Hossein Samiei following the visit to Yerevan on February 12-26.

Banks.am has outlined the most important points from his statement.
 
Robust economic performance

Guided by sound macroeconomic policies, Armenia’s economic performance has been robust. Growth moderated somewhat to more sustainable levels in 2018, reflecting in part a slowdown in trading partners. Fiscal consolidation remained on track, supported by strong tax administration effort, and public debt as a percentage of GDP declined.

Monetary and financial conditions remain stable, with CPI inflation below 1 percent in January 2019 and limited pressure on the exchange rate.
 
Banking sector is well-capitalized

The banking sector is well-capitalized and credit growth has been supporting economic activity. On the structural front, pension reform came into effect in July 2018; the upgraded fiscal rule has been operationalized; and a draft public-private partnership (PPP) law is being prepared.

Growth: 4-5 percent

Looking ahead, growth is expected to moderate to about 4½ percent in 2019, reflecting a weaker global environment and copper prices, and remain in the 4-5 percent range over the medium term. CPI inflation is projected to gradually converge to the CBA’s target of 4 percent over the next two years, as one-off factors wane. The current account deficit is expected to gradually narrow to around 5 percent of GDP. The risks to the outlook are mainly external.
 
Fiscal deficit
 
On the policy front, fiscal efforts should continue to aim at preserving debt sustainability while maintaining space for investment and social spending.

In this regard, staff welcomes the authorities’ commitment, guided by the revamped fiscal rule, to bring central government debt below 50 percent of GDP within five years. The fiscal deficit is projected at around 2½ percent of GDP in 2019 and 2 percent of GDP in the medium term.

Tax reforms

The fiscal objectives will be supported by tax and spending reforms. The authorities are considering a tax reform package to promote compliance and medium-term growth. This reform will entail revenue losses in the near term as the anticipated expansion in compliance is likely to materialize only over time.

Therefore, it is crucial to implement the envisaged package of tax policy measures to fully offset these losses, while being mindful of the reform’s possible impact on equity.

In this regard, staff particularly welcomes the authorities’ commitment to overhaul property taxation within 2019-20 to increase fairness, and urges further efforts to strengthen tax administration and combat deep-seated tax evasion.

Medium-term expenditure

On the expenditure side, the 2019-21 medium-term expenditure framework aims at increasing capital spending as a share of GDP by restraining current spending.

Accelerating public finance management reforms and strengthening the public investment management are among the priorities.
 
Monetary policy

Monetary policy should remain focused on price stability. The current policy stance is appropriate and in line with the CBA’s medium-term target.

Staff welcomes the authorities’ intention to maintain the existing flexible exchange rate regime, while aiming to ensure international reserves adequacy.

Access to credit has improved

The financial sector has continued to strengthen, and access to credit has improved. Drawing on the recommendations of the 2018 financial stability assessment program (FSAP) the authorities are taking steps to strengthen financial stability and promote financial development.

Specific measures include building stronger liquidity buffers, improving systemic liquidity management, strengthening macroprudential measures to reduce dollarization, and developing capital markets.

Ambitious reforms are necessary

The new government’s ambitious structural reform agenda appropriately focuses on fighting corruption, improving the business environment, and developing human capital and infrastructure.

In this regard, key measures include establishing an anti-corruption agency, strengthening corporate transparency and governance, and implementing active labor market policies.

These reforms should be carried out decisively to help promote fair competition and equal opportunity, boost the private sector’s role as a growth engine, and reduce poverty and unemployment.