Abstract
This paper examines Armenia’s Fifth Review Under the Poverty Reduction and Growth Facility (PRGF) and Request for Extension of the Arrangement. Performance under the PRGF-supported program since mid-2003 has been satisfactory: the authorities met all quantitative targets and implemented most of the envisaged structural measures. Tax revenue collection was somewhat disappointing in 2003, although it has improved in early 2004. Future growth in Armenia will increasingly depend on the ability of the banking system to mobilize and allocate domestic savings.
1. The following information has become available since the issuance of the staff report on April 19. It does not change the thrust of the staff appraisal.
2. Supplementary budget. The authorities have initiated discussions with World Bank staff on a Poverty Reduction Support Credit that could be submitted to the Bank’s Executive Board in the fourth quarter of this year. The associated budgetary support in 2004 is estimated at US$20 million (0.6 percent of GDP). The authorities intend to prepare a supplementary budget to allocate some or all of the additional resources to priority expenditures on maintenance and reconstruction of the public infrastructure. Any remaining amount would be attached to expenditures in the 2005 budget. This would help compensate for the projected reduction in grant-financed investment this year. As a result, the fiscal deficit for 2004 would increase from 1.9 percent of GDP to no more than 2.5 percent of GDP. The latter figure is consistent with the PRSP macroeconomic framework (which envisaged a higher level of grants) and does not compromise fiscal sustainability. The authorities have indicated that they would seek understandings with the staff on the supplementary budget in coming weeks, and revised end-December indicative targets will be proposed in the context of the next review.
3. Quantitative targets. All indicative monetary targets for end-March 2004 have been met. The stock of reserve money declined to AMD 103.4 billion, just above the lower level of the indicative band. Net international reserves stood at US$272 million compared to a target of US$267 billion. Net credit to the government fell slightly to AMD –17.9 billion, suggesting that the fiscal deficit target was also met. During the first quarter of 2004, cumulative tax revenues exceeded the program target by AMD 1.5 billion (3 percent).
4. Inflation and exchange rate. The 12-month rate of inflation in April was 7.8 percent compared to 8.6 percent in December 2003. The dram appreciated by 3 percent with respect to the U.S. dollar between end-December 2003 and end-April 2004.