Crisis management: IMF commends government action, warns against shoring up national currency

A leading international lending institution positively assesses the “anti-crisis” action of the Armenian government, but points out that different wrong steps and approaches had made possible a drastic decline of the economy in 2009.

Talking to media on Thursday International Monetary Fund (IMF) resident representative in Yerevan Nienke Oomes presented the fund’s forecasts for the region for 2010 and said that they expect Armenia to end 2009 with a 15.5 percent economic decline.

The Armenian economy contracted by 18.3 percent in the first nine months of this year.

Yet, Oomes evaluates as effective the anti-crisis action of the Armenian government.

“The IMF finds reasonable the action of the government in crisis conditions, since in crisis conditions the government should borrow and stimulate the economy and not cut social spending,” she said.

One of those borrowings of the Armenian government is the IMF loan. And although IMF loans given to Armenia as a rule are directed at the replenishment of foreign exchange reserves at the Central Bank of Armenia (CBA), considering the crisis, the international structure made an exception step by assigning $150 million of the approved $480 million loan for this year (the IMF will lend a total of $820 million to Armenia in the next few years) directly to the state budget.

It was also due to IMF recommendations and financial assistance that the government has not cut budgetary expenditures and despite a fall in tax revenues has actually managed to increase them.

However, the IMF representative also stressed that the government should have started diversifying the economy a few years ago so that investments made into construction could also be shifted into other sectors of the economy.

Meanwhile, said Oomes, the construction sector was either not taxed, or it was easy to evade taxes, due to which large capitals had been directed there. As a result of this, she added, in the crisis conditions the fall in that sphere largely affected the whole economy.

The budget deficit in 2009, $230 million, makes 7.5 percent of Armenia’s Gross Domestic Product (GDP), meanwhile the deficit in 2008 made only 1.6 percent of the country’s GDP. According to Oomes, the shortfall of the budget drafted by the government for 2010 (5.8 percent of the GDP) is realistic and this showing will decrease from year to year.

The IMF also forecasts economic growth in Armenia for the next few years – 1.2 percent in 2010; 3 percent in 2011; 3.5 percent in 2012; 4 percent in 2013; and 4.5 percent in 2014.

At the same time, Oomes described as ambitious the 16.6 percent taxes/GDP ratio that the government chose in the 2009 budget.

“One should set the ratio that is doable. If the government sets a high level of the taxes/GDP ratio, the tax bodies start doing everything for those taxes to be collected. And they go not to people from whom it is difficult to collect taxes, but to those who always pay and from whom it is easy to collect,” she said.

This, according to the IMF representative, shows that shadow economy still looms large in Armenia.

The IMF representative also forecast inflation in Armenia in the next two months conditioned by the depreciation of the national currency and a rise in prices for certain types of goods on the international market.

Simultaneously, Oomes warned the CBA to adhere to its declared policy of floating currency exchange rates that it once again enforced in March.

“I think that the CBA had gone to great lengths in trying to manage the dram exchange rate at the start of this year. We recommend to some countries to have a floating rate, however keeping the exchange rate in check for an extremely long period is a bad idea,” said Oomes.

The IMF official told journalists that from January 2009 she, on a daily basis, advised the CBA chairman to drop the fixed rate policy, which cost Armenia the loss of $700 million from the CBA currency reserves.

Despite tendencies on the international market, the dram continued to remain stable against the US dollar for several months in late 2008, early 2009. The CBA went back to its declared “floating” exchange rate policy only on March 3, called by many “Black Tuesday”, when long queues originated at currency exchange offices and panic buying started as people tried to get rid of drams.

According to Oomes, the IMF acknowledges the reasons of the Armenian banking sphere regulator that sharp fluctuations of exchange rates are not good either for importers or exporters who are in constant fear because of uncertainty and prefer long-term predictability. However, as Oomes said, one shouldn’t resist financial tendencies.

She said that although the IMF has so far helped Armenia in the matter of replenishing its currency reserves, there is still “a target limit” that should not be exceeded.

“During the past several weeks the Central Bank again intervened in the market to ensure exchange rate stability (spending $180 million). So far they are still on track to meet the target. But if they continue like in the last two weeks, they may be in trouble,” said Oomes.

Today, the dollar exchange rate set by the CBA is 388 drams, which has already exceeded the “corridor of fluctuation” of 360-380 drams set by the regulator in March. By the way, Oomes said that the IMF was against defining a corridor for rate fluctuation. “One should let the currency rate be floating,” she said.