Armenia strategy overview

Full strategy  (0.5Mb) Approved 7  Feb 2006

Armenian translation of strategy  (0.4Mb)

Summary of public comments  (0.1Mb)

Armenia is committed to the principles of multiparty democracy, pluralism and market economics in accordance with the conditions outlined in Article 1 of the Agreement Establishing the Bank, although application of these principles in the previous Strategy period has been somewhat uneven. Since elections were last held in 2003, politics was dominated by the powerful executive branch and the pro-presidential majority in the parliament. Some progress has been made in democratising the electoral code, reforming legislation on the mass media and freedom of information, and strengthening public governance. Constitutional reforms that would enable reinforcement of checks and balances in the political system have been endorsed in a national referendum. However, the political will to implement these commitments remains uncertain. Progress toward a resolution of the longstanding dispute over Nagorno-Karabakh has been slow, which leaves Armenia partially isolated in the region, impeding the country’s economic development and largely excluding it from regional projects and initiatives.

Macroeconomic performance

Armenia’s macroeconomic performance has been favourable in recent years. Real economic growth averaged 12.4 per cent over the last three years, mainly driven by the construction and services sectors. Consumer spending has increased significantly, supported by higher incomes and growing remittances.  Tight monetary policy has been maintained, keeping annual inflation at single-digit levels since 1997. Fiscal performance also improved with increased tax revenues and better management of targeted expenditures. The current account deficit has narrowed to 4.6 per cent of GDP in 2004, in part due to growing remittances. The external debt situation has continued to improve, and most of the outstanding liabilities are on concessional terms.  However, as advised by the IMF, careful management of the sovereign debt capacity should remain a priority for the government and the authorities will continue to refrain from incurring non-concessional borrowings.

Poverty reduction remains a top priority for the country. Although the government has made good progress in implementing its Poverty Reduction Strategy Programme (PRSP) and the overall poverty ratios have been falling, poverty remains a critical issue, particularly in rural areas and among socially vulnerable groups.

Structural reforms

Armenia made rapid progress in a number of structural reform areas, including price and trade liberalisation as well as privatisation. The country joined the World Trade Organisation (WTO) in 2003 and maintains a floating exchange rate regime with full currency convertibility. The privatisation process in Armenia is nearing completion, but post-privatisation restructuring and improvement of corporate governance, inter alia through raising accounting standards and protecting minority shareholders, remain top priorities. While the government has made some progress in the reform of the financial sector, it is still relatively underdeveloped. Bank intermediation is low by CIS standards, and the role of the capital market is marginal. FDI increased in 2004-05, partially spurred by the renewed interest by the Armenian Diaspora in setting up businesses, but other FDI remains relatively low, deterred by the small size of the domestic market, the population’s low purchasing power and the country’s partial isolation in the region.

Transition challenges

Against this background, Armenia’s main transition challenges are: (i) to improve the business environment inter alia by reducing corruption and arbitrariness, and emphasising the rule of law; (ii) to continue strengthening the financial sector by raising the level of financial intermediation through institutional development and increased competition, developing mechanisms for revitalising the securities markets, and introducing regulatory prerequisites for development of non-banking intermediaries and of the primary mortgage market; (iii) to accelerate post-privatisation restructuring and to improve transparency and corporate governance in the enterprise sector; (iv) to promote commercialisation of public infrastructure and utilities, with an emphasis on transparency and governance, (v) to establish competition in the market, and (vi) to improve tax and customs administration and ensure debt sustainability.

As of 30 September 2005, the EBRD had a modest current portfolio of EUR39.3 million, spread among 24 projects, of which the majority (60 per cent) was in the private sector. During the previous Strategy period, there has been a steady growth in the EBRD’s activities; the Bank committed EUR10.4 million in new business for 9 private projects, and provided EUR340 thousand in technical assistance funds.

While cognizant of the challenges of the local business environment, the Bank is committed to supporting the transition process in Armenia, and will continue to deepen and expand the scope of its activities in the country. Armenia’s participation in the Early Transition Countries Initiative (ETCI) is core to the Bank’s strategy in Armenia and some concrete results are starting to show. The Bank will target primarily the development of the local private sector, i.e. small and medium-sized enterprises (MSEs and SMEs) and the banking sector.

Operational objectives

The main operational objectives will be:

Enterprise Sector

The EBRD will continue to focus on expanding SME and micro-enterprise financing, primarily through credit lines to local partner banks, but also directly through the Bank’s Direct Lending Facility (DLF) and Direct Investment Facility (DIF), as well as through co-financing and risk sharing with local banks under the Bank’s Medium-Sized Co-financing Facility (MCFF). The Bank will seek to expand microfinance lending through cooperation with non-bank microfinance intermediaries, as they become regulated by the Central Bank. Continuing emphasis will be provided to expanding the Bank’s TAM/BAS advisory services.

Financial Sector

The Bank will continue to promote strengthening of financial intermediation in Armenia through provision of debt and equity financing to Armenian financial institutions. The Bank will increase its support for the local banks’ SME lending and trade financing activities and will aim to broaden the scope of its collaboration with Armenian banks through co-financing and risk-sharing under MCFF, as well as through support of new products, such as mortgages. To reinforce the local banks’ capacity for meeting the private sector’s growing financing needs and accelerate transition, the Bank will pursue equity and quasi-equity participation in Armenia’s best banks. To that end, the Bank will expand the scale and the scope of the Armenian Multibank Framework Facility (MBFF) to include equity and subordinated debt, as well as mortgages, which should enhance the Bank’s ability to promptly react to the client banks’ needs. The Bank will also seek to enhance its involvement with the Armenian financial sector through provision of debt and equity financing to insurance, leasing and regulated micro credit companies.

Infrastructure

The EBRD will support creditworthy renewable energy and energy efficiency projects, and will consider non-sovereign/commercial financing of private operators in the transport sector, as well as of operators and concessionaires of public utilities and transport infrastructure companies. In exceptional cases, the EBRD would pursue sovereign backed projects, but only with a significant component of grant co-financing.

Environmental procedures

The Bank will continue to ensure that all EBRD operations in Armenia are subject to the Bank’s Environmental Procedures and incorporate, where appropriate, Environmental Action Plans. The Bank will co-operate with other IFIs specifically in the context of the implementation of the PRSP and through co-financing, complimentary projects and policy dialogue. The Bank will seek to mobilize increased donor grant financing from the Early Transition Countries Fund, but also from other multilateral and bilateral donors, to support the preparation, implementation and grant co-financing of selected investment projects.