Second Wave Of The Crisis In Armenia Is Not Likely


Dec 15, 2009

Exclusive Interview with the IMF Resident Representative to Armenia,
Nienke Oomes, by ARKA Information Agency

ARKA: Mrs. Oomes, can we expect a revision of the IMF projections for
2009 and 2010 macroeconomic indicators in Armenia before the end of
this year?

N. Oomes: Our last projections made in September have not changed and
they are published in our latest report, which is now on our website
(). We still project that the annual GDP decline
will be about 15.6% and we expect 1.2% GDP growth in 2010. Our latest
official inflation forecast is 5.2% for end-2009, which is the average
growth rate of prices in December 2009 compared to December 2008.

However, during the last few months, inflation has increased, and in
November it already totaled 4.6%.

We hope that inflation in December will remain within the level
targeted by the CBA, although there is a risk that it could slightly
exceed the upper band of the target, which is 5.5%. According to our
projections, inflation in 2010 will also remain within the target
band (i.e., will be between 2.5% and 5.5%) and should be around 3.7%
on average.

ARKA: Earlier you mentioned that Armenia should continue to maintain an
expansionary fiscal policy (provide fiscal stimulus) under the 2010
state budget. Which should be the priority areas of using foreign
financing in order to achieve the maximum effect?

N. Oomes: The budget deficit in percent of GDP is expected to be
around 7,5% in 2009, and 6% in 2010. In our view, having a 6% deficit
in 2010 is reasonable and feasible.

On the one hand, it is important for the government to gradually reduce
the deficit, because at some point of time it will have to repay
its debts. On the other hand, the IMF advices most countries not to
reduce the deficit too sharply, because this could risk delaying or
even preventing the economic recovery.

During recession periods, it is especially important not to cut
social expenditures, because in such circumstances poor people tend
to suffer more than others. We also think that it would make sense
for the government to continue to spend money on infrastructure and
other types of investments that will in turn stimulate the economic
recovery and economic growth.

Furthermore, we think it is appropriate that the government is using
the loans from international donors to provide financing to small and
medium enterprises, because SMEs play an important role in ensuring
future growth and in fostering the diversification of the economy.

All these areas should be the priorities of the budget expenditure
policy, so that Armenia will be able to overcome the crisis in a
relatively short time.

ARKA: Is there a need to take additional measures for stabilization
of the financial sector? Please describe these measures, if any.

N. Oomes: We think that the CBA has been doing a very good job
in ensuring financial stability. Compared to other countries,
Armenia succeeded in avoiding a banking crisis. The CBA has already
strengthened banking supervision and took several measures to protect
the financial sector. Subsequently, we are satisfied with the CBA’s
financial sector policies.

ARKA: What do you think would be the share of non-performing banking
loans at the end of 2009?

N. Oomes: We are not making such projections, however, given the
existing situation, the level of non-performing loans has probably
stabilized. It recently fell from 9.3 percent in September to 8.1
percent in October.

ARKA: How effective is the crisis management policy of the Armenian
authorities? Given current trends, which should be the priority
measures in 2010?

N. Oomes: If we compare Armenia with other countries again, then the
crisis management program implemented in Armenia is quite good.

Immediately after the first signs of the crisis, the government
succeeded in attracting loans from the IMF, the World Bank, the
Asian Development Bank and the Russian government. In other words,
the authorities responded very rapidly to the emerging crisis.

Subsequently, the government has been able to largely execute the
budgeted expenditures for 2009 thanks to the US$150 million portion
of the IMF loan that was made available for budget financing, as
well as the budget support received from other sources, including
the World Bank and the Asian Development Bank. This budget support
has enabled them not to cut social expenditures and to support the
most vulnerable categories of the population.

As I said before, it has been very wise of the government to not just
spend the attracted loans, but to on-lend them to businesses. First,
it is a very good idea to channel them to small and medium businesses,
since the latter can give a new impetus to growth. Second, we hope
that most of the companies who received these loans will be able to
repay them after the crisis is over, which will help the government
to repay its debts.

ARKA: Should Armenia suspend implementation of the crisis management
policies in order to prevent further accumulation of foreign debt
and fully benefit from the resumption of the global economic growth?

N. Oomes: No, we think that the government should continue its
anti-crisis policies and should continue to stimulate the economy,
at least during 2010. Generally, the IMF advises its member countries
not to suspend the anti-crisis policies too abruptly, because this
could lead to a second wave of the crisis.

To this end, we think that in 2010 it makes sense to keep the budget
deficit at a relatively high level. During a crisis, it is generally
a good idea for governments to take loans and use these to stimulate
the economy. When the crisis is over, these governments should then
start to repay these debts. Therefore, while the economy will be
recuperating in 2010, we think that it is still early to withdraw
the government stimulus during the next year.

ARKA: While it is difficult to project, would it be realistic to do
this in 2011?

N. Oomes: It is indeed difficult to make forecasts at the present
stage. However, if the economy will continue to recover at the
same rate as now, and if a second wave of the crisis is avoided,
the government should be able to stop the anti-crisis measures in 2011.

ARKA: How real is the possibility of a second wave of the crisis in
the world, and particularly in Armenia, and what should be done in
order to mitigate its impacts?

N. Oomes: Personally, I don’t think that a second wave of crisis in
Armenia is likely. As for the rest of the world, it depends on steps
that the governments of those countries will take. If governments
continue to follow the IMF’s advice and will not stop their anti-crisis
measures too quickly, then it should be possible to avoid a second
wave of the crisis in 2010. However, different economists express
different views on this issue.

Actually, the reason why it is so difficult to make economic
forecasts is that economic developments strongly depend on people’s
expectations. When people expect that a second wave of the crisis will
happen, they will stop making investments or cut their expenses and
this by itself can lead to a second wave. However, if people expect
that the economy will recover, they will increase their spending and
then the second wave of the crisis can be avoided.

ARKA: Earlier you said that, if the authorities comply with the
IMF conditionality on enhancing the economy, the authorities can
use another US$150 million from the IMF loan for financing the 2010
budget. Which are the targets that the authorities should achieve
under the IMF conditionality?

N. Oomes: The conditionality is reflected in our report which is
now available on the IMF web site (). One of the
major targets for the upcoming months is to ensure the continuity
of tax administration reforms. In particular, we expect progress in
implementing risk-based auditing of VAT refund claims.

In our view, it is very important that the tax authorities audit
only those VAT refund claims that have a high risk of being fake
or fraudulent. However, up to now, all VAT refund claims are being
audited, which is exerting excessive pressure on businesses.

Another condition under the IMF program is that, before the end of this
year, the Ministry of Labor and Social Affairs should submit, with
the help of the World Bank, their strategy to improve the targeting
of social safety nets, in particular, the family benefits program, so
that those who really need those benefits will all be able to get them.

Another goal is to move taxation of oil and tobacco products from
the presumptive into the general taxation field. This is an important
step and we have already spent much effort in this direction. For a
long time, fuel and cigarettes have been taxed in a priviliged way,
while we think that these products should be taxed in the same way as
others. The government has undertaken a commitment to introduce the
necessary legislative changes in this sector by the end of this year.

All these measures are preconditions for the authorities to receive
the next tranche of the IMF loan.

ARKA: Given moderate recovery trends, what should be the CBA foreign
exchange policies in 2010?

N. Oomes: We have always advised Armenia to stick to a floating
exchange rate. This, however, does not necessarily mean that the CBA
should not intervene in the foreign exchange market at all. We think
it is reasonable that the CBA will intervene in the market from time to
time in order to prevent unexpected sharp daily exchange rate changes.

At the same time, it is important that the CBA does not resist the
overall objective exchange rate trends and follows them. In the
beginning of this year, there were clear pressures for the foreign
exchange rate to depreciate, because of the large drop in remittances,
exports, etc, and it was clear that the CBA could not resist this
depreciation. During the next year, it is possible that there will
be pressures for the exchange rate to appreciate, when global growth
resumes, in which case the CBA should also not resist these pressures.

In our view, the exchange rate should be determined by the market,
based on foreign exchange inflows and outflows. However, I repeat
that occasional interference of the CBA is justified in order to
prevent sharp short-term exchange rate fluctuations.

ARKA: Do you think that Armenian foreign debt is sustainable and can
be retained within 50 percent of GDP?

N. Oomes: The Armenian foreign debt level has indeed increased
significantly, but should still be sustainable and is expected to
remain below 50 percent. In 2008, gross state debt, which includes
the government and the CBA debt, was around 16% of GDP, but it grew
sharply in 2009 and is expect to reach around 37%. Given the attracted
borrowings, we expect that the debt will grow further in 2010, up to
44%. The peak of the deficit will be reached in 2011, when the debt
will be equal to almost 47% of GDP.

The debt should therefore remain below 50% of GDP, unless new large
loans will be contracted.

ARKA: Do you think there is a need for attracting new loans by Armenia
in 2010?

N. Oomes: No, we think that the government has already contracted
sufficient loans, a significant portion of which has not been received
yet and will be disbursed in 2010 or 2011. Subsequently, we don’t
think that there is currently a need for new loans.

ARKA: Since your mission in Armenia will soon finish, we would like
to know your opinion about changes in our country that you witnessed.

N. Oomes: I am very sad that I have to leave Armenia, because I
very much enjoyed living and working here. Both from a personal and
a professional point of view, I have spent three very interesting
years here, and have witnessed substantial changes in the economy of
the country.

When I first arrived in Armenia in August 2006, the most serious
problem for the country was the huge inflow of remittances as a
result of which the dram was appreciating. As a result, there was a
significant "dramatization" of the economy (people converting their
dollars back into dram).

Currently, the situation has changed radically: now the problem is
that not enough money is coming into the country, as a result of which
the exchange rate has depreciated and people again have changed their
drams back into dollars.

However, I am convinced that the Armenian economy will overcome
all difficulties, as was always the case during the history of this
country. The Armenians are proud, hard working, and entrepeneurial
people and they are successful in any country where they live.

Therefore, I am convinced that Armenia will continue to do well in
the long run.