Furthermore, unemployment declined significantly during 2002. The higher level of tax collection during the year and the authorities decision to proceed swiftly with privatization and reform in the energy , water and irrigation sectors, combined to indicate a firm commitment to sustainable economic growth.

Nevertheless, real GDP growth is expected to slow from 9.6% in 2001 to an annual average of 6.2% in 2002-2003. The Central Bank is committed to a monetary policy of adhering to a reserve money corridor and to the pursuit of a flexible exchange-rate policy. The 3 to 4% target for 2003-2004, as regards the average nominal depreciation of the national currency, appears likely to be met.

A significant development planned for Armenia's economy during 2003 will be the privatization of low-voltage power grids. This should constitute a positive factor, as regards the continuation of IMF financing aimed at consolidating the country's infrastructure. However, despite recent strong economic growth and number of positive developments. Armenia remains short of significant volumes of foreign direct investment and is dependent upon assistance from international financial institutions. In December 2002, Armenia secured a US $20 million loan from the World Bank, and arrived at an agreement with the latter, regarding further financing in 2003. As part of this agreement, Armenia has agreed to privatize its power utilities.

Armenia's output is expected to continue growing in 2003, as the current reform program continues to transform the economy. Successful implementation of the program should improve Armenia's climate and generate a significant increase in the volumes of much needed foreign direct investment inflows. The program is also expected to remove the remaining constraints on external trade, while reducing transport and energy costs and enhancing access to external financing. Over the foreseeable future, GDP growth is expected to stem primarily from rapid private sector development and from increased capacity utilization. Such growth is expected to be led by demand in the CIS markets and by increasing penetration into those of Middle East and Europe. The expected recovery in the domestic diamonds and semiprecious stones processing industries during the course of 2003, should enhance export revenues, while the recent surge in oil prices should also contribute towards increasing Armenia's foreign currency revenues.

Prospects for the Armenian economy appear favorable, although several challenges remain. To sustain the high rates of growth experienced in recent years and to further reduce unemployment and all its associated negative consequences, Armenia needs to significantly improve fiscal revenue collection, while increasing spending on basic infrastructure and on the social sectors, reforming its energy, water and irrigation sectors and at the same time, strengthening its banking system. Private sector growth in Armenia will hinge on enhanced financial intermediation, further bank consolidation and increased ability of banks to collect collateral.