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Struggling With Budget Financing, Armenia Seeks To Restructure Exter

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  • Struggling With Budget Financing, Armenia Seeks To Restructure Exter

    STRUGGLING WITH BUDGET FINANCING, ARMENIA SEEKS TO RESTRUCTURE EXTERNAL LOANS
    Venla Sipila

    World Markets Research Centre
    Global Insight
    November 2, 2009

    The Armenian government wants to revise the terms of its external
    loans with international financial institutions. According to
    Interfax quoting Finance Minister Tigran Daytyan, talks are currently
    being held with the International Monetary Fund (IMF) and the World
    Bank. In particular, the authorities are hoping to loosen the terms
    of the second tranche of the current IMF arrangement, consisting of
    $150US million to be used for financing the 2010 budget. The IMF in
    June approved an increase in the current stand-by loan, lifting the
    sum to some $823US million from the previously agreed $540US million
    (seeArmenia: 24 June 2009:). In addition, a staff-level agreement has
    been reached on the second review of Armenia's current IMF programme
    (seeArmenia: 17 September 2009:). The government hopes to extend
    the term of the loan from its current maturity of five years with a
    three-year grace period. The interest rate of the first instalment
    of $270US million is 1.56%, while the following payment of $135US
    million is at 2.56% and the remainder of the credit at 3.56%. In
    addition, it was reported that negotiations are also under way with
    the World Bank over the conditions of an already approved loan of
    $545US million in the framework of a Country Partnership Strategy for
    2009-2012 (seeArmenia: 17 June 2009:). Daytyan estimates that Armenia's
    external debt to GDP ratio is expected to rise from 28.5% to peak at
    48%, growth in this ratio necessitating an achievable repayment plan.

    According to ARKA News, Daytyan also expressed hopes that next year's
    economic growth may exceed the rate of 1.2% projected in the 2010
    budget draft.

    Significance:The loan restructuring talks comes as the Armenian
    government seeks to contain its budget deficit. In particular,
    it is hoping to find savings on capital expenditures and spending
    on government management. Around half of the budget deficit relies
    on external sources for funding. The global economic downturn has
    had a strong negative impact on remittance and investment inflows,
    highlighting the crucial importance of concessional lending from
    international financial institutions (seeArmenia: 30 September 2009:).

    The lenient terms of these loans have been critical in securing
    Armenia's ability to meet its external financing needs. When concluding
    its recent visit to Armenia, the IMF commended the policy response
    of the authorities to the current economic challenges, and thus,
    revision the loan terms may be possible. However, the IMF has also
    reiterated that continued progress in improving tax administration will
    be critical, in order to secure fiscal sustainability (see Armenia:
    14 October 2009: ).
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