Summary:KEY ISSUES Context, outlook, and risks. Armenia’s economic environment has become more complex, particularly due to adverse external developments. Growth is expected to slow to 2.6 percent of GDP in 2014 and accelerate gradually over the medium term. Key risks include geopolitical developments in the region (Russia, Ukraine, Nagorno-Karabakh). Fiscal policy. Fiscal policy is sustainable. However, continued capital budget underexecution is a concern. The draft 2015 budget envisages increased capital spending to help support growth. Fiscal reforms are advancing, but further revenue gains are needed to address pressing social and investment needs. Monetary and financial sector. Monetary policy has turned accommodative in response to weakening demand and lower inflation, but will need to remain vigilant in light of rising global rates and excess liquidity in the banking system. The banking sector remains robust and well capitalized, but a recent increase in NPLs warrants monitoring. The authorities are strengthening financial sector regulation and resilience. External stability. While consolidation has continued, the current account deficit is expected to remain high over the medium term. International reserves are adequate. Staff estimates suggest that an adjustment of the real exchange rate over the medium term, together with structural reforms, would facilitate further external adjustment. Structural reforms. More forceful reforms would improve Armenia’s capacity to grow, create jobs, and reduce poverty. The authorities should move faster to bolster the flagship pension reform to ensure its long-run success. They should leverage Eurasian Economic Union (EEU) membership to increase exports, improve standards, enhance domestic competition, and invest in infrastructure, while pursuing greater trade integration beyond the EEU. Program. The program is broadly on track. All PCs and most ITs were met. There were some delays in meeting structural benchmarks, mainly due to the government change in mid-2014 rather than a change in policy direction. The authorities are requesting that the equivalent of SDR 11.74 million become available with completion of the review. Article IV. Discussions focused on reducing vulnerabilities and boosting potential growth via: (i) overcoming fiscal underspending; (ii) more exchange rate flexibility to facilitate external adjustment; (iii) additional dedollarization measures; and (iv) more ambitious structural reforms to improve competitiveness and inclusiveness.
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