IMF's Current Views on Armenia's Economic Progress

IMF MISSION ANNOUNCED CONCLUDING STATEMENT ABOUT ARMENIA
RIA Oreanda
Economic News
September 23, 2008 Tuesday
Russia

Yerevan. OREANDA-NEWS On 23 September was announced, that an IMF
staff team, led by Ms. Marta Castello-Branco, IMF Mission Chief for
Armenia, visited Yerevan during September 3-16, 2008 to meet with
representatives of the government, the Central Bank of Armenia (CBA),
the international donor community, and the private sector. Mr. Lorenzo
Prez, Deputy Director of the IMF, also participated in the concluding
policy discussions. The goal of the mission was to review recent
economic developments, reach agreement on the 2009 budget, and conduct
negotiations on a new IMF-supported program for Armenia.

Macroeconomic Performance and Outlook

GDP growth continues to be strong, but inflationary pressures are
still high. Thus far, the conflict between Georgia and Russia does
not seem to have significantly affected the growth outlook and, unless
tensions persist, a 10 percent real growth rate is within reach this
year. Annual inflation surged to 11.5 percent in August, mostly
due to external shocks, but also as a result of higher domestic
demand-driven by rising incomes, rapid credit growth, and large
foreign exchange inflows.

Tightened monetary and fiscal policies and the recent fall in
international food and fuel prices are expected to bring inflation
back to around 7.5 percent by the end of this year. In the next few
years, growth should remain robust, and inflation should stabilize
around the central bank's target rate of 4 percent.

Under the current macroeconomic conditions, fiscal policy could
play a more active stabilization role, notably with a tighter fiscal
stance this year. Budget execution in 2008 has been prudent thus far,
due to strong revenue performance and under-execution of expenditure,
despite the increase in average pensions by 60 percent. On this basis,
we expect the 2008 fiscal deficit to be significantly lower than
budgeted. Fiscal policy will need to remain tight in 2009 in order
to help keep inflation low.

To limit the effect of higher food and energy prices on other
price increases, the CBA has raised its policy interest rate
gradually from 4.5 percent in June 2007 to 7.75 percent in September
2008. Nevertheless, private sector credit and monetary aggregates
continue to grow at a rapid pace, reflecting strong domestic demand
and the still limited impact of monetary policy on bank lending rates.

The widening current account deficit is a growing concern. Although
private transfers have remained strong, the current account has
continued to deteriorate. Imports have surged on the back of high
international food and energy prices and strong import demand, while
exports have been sluggish. With appreciation pressures diminished
by rising import demand, the dram/dollar exchange rate has remained
broadly stable thus far in 2008.

Structural Reforms

The new government has given clear priority to tax and customs
reform. It approved a comprehensive and ambitious plan to make
the tax administration more efficient, and create more equal
conditions for businesses. To make tax compliance simpler for small
businesses, a VAT threshold of AMD 58.3 million will be introduced
in January 2009. Starting in 2010, trade fairs will be moved from
the presumptive to the general VAT and income tax regime. However,
there are still delays in processing VAT refunds, which negatively
affect exporters. The authorities are planning to reform the VAT
refund process following best international practices, clear the
stock of late VAT refund claims, and process all VAT refund claims
within the legal time limit. In the financial sector, the authorities
have introduced legislation to improve consumer protection, market
transparency, and financial intermediation. Finally, preparations
for the introduction of a funded pension pillar are underway.

New IMF Program

Under the previous three-year IMF program, which ended in May 2008,
Armenia achieved double digit growth, single digit inflation, and a
significant reduction in poverty. Nevertheless, more progress needs to
be made with structural reforms in several areas, particularly in tax
policy and tax and customs administration. The government has requested
a new IMF program to support this unfinished reform agenda. Given the
progress made so far, this new IMF program would provide less financing
than its predecessors. Its main purpose is to signal the IMF's support
for Armenia's macroeconomic policies and structural reform agenda in
the country's transition from low-income to emerging market economy
status, thus facilitating Armenia's integration into the world economy.

Structural conditionality under the new program will focus mainly on
tax administration and tax policy reforms, given their positive impact
on the business environment, financial intermediation, economic growth,
and poverty reduction. In addition, the program aims at making fiscal
policy a more effective demand management tool, improving the fiscal
framework, and strenghtening coordination between the monetary and
fiscal authorities.

Armenia Slips In Global Competitiveness Study
By Shakeh Avoyan

Armenia has a less competitive economy than the majority of 133 other
countries assessed in an annual global survey conducted by the
Geneva-based World Economic Forum (WEF), its authors said on Thursday.

The Armenian economy ranked only 97th in the WEF's Global
Competitiveness Index (GCI) 2008-2009 released the same day. It slipped
four places from the previous survey that covered 131 nations. Armenia's
aggregate GCI score similarly dropped from 3.8 to 3.7 in the past year.

`All in all, it can be concluded that there hasn't been much change in
term of our competitiveness,' said Manuk Hergnian, head of the
Yerevan-based group Economy and Values which interviewed 100 local
entrepreneurs for the worldwide poll.

The score assigned by the WEF is based on 12 `pillars of
competitiveness,' including government transparency and fiscal
responsibility; transport and telecommunications infrastructure;
openness to innovation; intellectual property protection; and the ready
availability of talent. Armenia was judged to be lacking competitiveness
primarily because of the small size of its market, insufficient
innovation as well as poor `technological readiness' and `business
sophistication.'

Armenia would have fared even worse in the overall rankings had it not
scored above the world average in the `labor market efficiency'
category. It also received a relatively high mark for macroeconomic
stability. Even so, the WEF said macroeconomic stability in the country
has weakened considerably since the previous survey.

Pollsters asked business figures to rate the 134 countries surveyed
according to factors that promote economic growth. Armenian
entrepreneurs interviewed by the Economy and Values singled out
government corruption and tax administration as the main obstacles to
faster growth.

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