Both in Armenia and the former Soviet Republics the financial and particularly banking systems were the last areas where reforms were introduced. The Soviet Union collapsed, the new independent Republics were developing and pursuing their own independent economic policies, though they all were still in the rouble zone. This had an adverse impact on financial and banking system development. In April 1993, banking legislation was ratified by the Parliament of the Republic of Armenia, enabling implementation of independent monetary policy. Later, faced with the breakdown of the old rouble zone, Armenia assumed monetary independence and introduced its own national currency, the 'dram', late in November 1993. Early in 1994 the Central Bank of Armenia (CBA) was established. It was the most difficult period from the following standpoints: both the Government and economy, stiffened external pressure and inflation at 500 per cent in the second month following the introduction of the dram. The decline in the exchange rate was more or less the same and the budget deficit exceeded the total national income. Under these circumstances the key principles of economic policy were formulated:

• macroeconomic stability;
• implementation of appropriate monetary and fiscal policies that would foster non-inflationary economic growth;
• institutional changes that would foster stability in the financial markets;
• modern payment system development;
• development of a strong banking system;
• creation of a legal framework that would foster investment.

In formulating the programme on macroeconomic stability the special emphasis was put on accelerating the pace of reform. Although within a short period of time (1991-1992) we succeeded in privatising agricultural land (the first out of the former Soviet Union Republics), the pace of structural reforms has slowed down in recent years due to a number of factors. In 1994 a large-scale privatisation programme was adopted which envisaged the privatisation of small, medium and large enterprises from various sectors of the economy. In fact this was the starting point for structural reform implementation.

During this programme period the CBA adopted a monetary programme that was considered by many to be a rather strict monetary policy. The CBA's primary policy objective, however, was to reduce inflation.

In the second quarter of 1994 inflation was reduced to less than ten per cent a month, and virtually resulted in economic growth thanks to the results from 1994, and a tendency of the exchange rate to stabilise was observed.

During l994 appropriate market-based institutions were also established such as Stock and Commodity Exchanges, and the prerequisites for credit and securities markets were provided. During that year serious attention was also given to developing a modern payments system, improving inter-bank settlements and reducing the time required for settlement transactions. CBA helped to develop an intra-region payments system between the largest commercial banks and their branches. This was the first step in creating an electronic payment system that has reduced the time for intra-regional payments to five days for transfers that had previously taken over two weeks.

In 1995 the situation was drastically changed. The MF requirements under STF and Stand By credit programmes were fully met and this allowed us to pass into a new long-term programme (ESAF). This programme was designed to maintain the stability already achieved and promote economic growth as well as to create conditions conducive for private sector developments.

In this context, 1996 was the year of logical continuation of stabilisation and economic reform policy. An economic growth of six per cent was realised based on the results of the year. The main achievement of macroeconomic stabilisation was the low level of inflation which equalled 5.7 per cent during all of 1996 or about 0.45 per cent per month.

During these years the regulation of the banking system was also an important issue for the CBA. It should be mentioned that early in 1994, when the Board of the CBA was established according to existing banking legislation, there were no prudential regulatory economic standards. Under these circumstances, a strong evolutionary process was begun towards establishing a sound banking system. The first priority was given to the creation of banking legislation and a number of laws to regulate banking activities were adopted, such as laws on the 'Central Bank', 'Banks and Banking', 'Bank Secrecy' as well as the 'Collateral Law'.

The following problems were identified and prioritised:

• stabilisation and trustworthiness of the banking system;
• efficient banking system able to respond to the needs of economy;
• integration of the banking system to the global financial markets;
• and improvement of banking regulation and supervision.

Progress made by the CBA in establishing a sound banking system created a conducive environment for investors which resulted in an increase in our money supply of 34 per cent during 1996, and provided the following conditions:

• growth of total capital by 48 per cent;
• growth of assets by 66.4 per cent (including the growth of credit investments by 54 per cent); and
• 121.4 per cent increase of attracted deposits.

Changes in prudential economic standards, improvements in bank reporting and monitoring, better assessment and classification of assets, the introduction of CAMEL and UBPR monitoring systems (as well as new approaches to on-site supervision) have all moved the Armenian banking industry closer to international standards.

Arising from the CBA's progress in bank supervision a conference was held in Yerevan last October under the auspices of the Basle Committee on Bank Supervision to establish the Central Asia and Transcaucasia Group of the Basle Committee. The new regional group was successfully established and the CBA was appointed the Group's chairman for the first two years.

All this supportive activity is designed to consolidate the banking system and increase its role in the economic activity of Armenia. The CBA is determined to create a banking system that channels domestic and foreign savings efficiently to investment, that provides an improved range and quality of services and has the confidence of the population. The reforms and liberalising measures we have taken will help.

So will competition. We have recently welcomed to Armenia the Midland Armenia Bank, which is a subsidiary of Midland Bank UK, and Melat Bank which is a subsidiary of Melat Bank, Iran. They will introduce new banking services and ideas to our banking industry, and we look forward to welcoming other banks in the near future.

Notably, in fact, 49.9 per cent of total bank capital is from foreign sources.

The Central Bank of Armenia wishes to create an environment conducive to investment. This environment should be a liberal environment, as free from controls and interference as possible. It should be an environment in which investors, entrepreneurs and foreign businesses wish to be represented.

Since 1 September, 1996 the Board of the Central Bank of Armenia is the highest management body, and comprises:

1. Chairman - Dr Bagrat A. Asatrian
2. Deputy Chairman - Dr Armen A. Darbinian and the five members are appointed with the following terms by the President of the Republic of Armenia:
3. Dr Rouben L. Valesyan (five years)
4. Levon M Farrnanian (four years)
5. Valery G Beglaryan (three years)
6. Nerses G Yeritsian (two years)
7. Hrant R Suvaryan (one year)

Ownership -100 per cent State Ownership
Exchange Rate Regime - Floating exchange rate
Currency - Dram Number of Employees - 320