A Second Wave of the Crisis in Armenia is Not Likely
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 (www.imf.org/yerevan). 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 (www.imf.org/yerevan). 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. -0-
