#1CENTRAL BANK OF ARMENIA ANNUAL REPORT 20 19#2CENTRAL BANK OF ARMENIA According to the law on the Central Bank of Armenia, the annual report refers to the provisions of governance of the Central Bank of Armenia. The report includes the summary data on the Central Bank's annual activities and main functions described in its strategy and financial accounts which have passed international audit and received the audit opinion. However, to get a complete picture of the Central Bank's activities, one should also consider to look at the strategies as well as the Inflation Report and the Financial Stability Report which, accordingly, are steered to the implementation of the two main objectives of the Central Bank. They contain in-depth professional analysis and estimations of the economic growth and financial market developments in both Armenia and the world. These assessments are, by subject, referred to in this report.#3CENTRAL BANK OF ARMENIA ANNUAL REPORT YEREVAN 2020 2019#4CONTENT CENTRAL BANK OF ARMENIA GOVERNOR ADDRESS 7 03 OTHER OBJECTIVES OF THE BANK 01 CENTRAL BANK OF THE REPUBLIC OF ARMENIA 15 About the Central Bank 16 Executive summary on strategic directions of the Central Bank 18 02 MAIN OBJECTIVES 26 Maintaining price stability 27 Maintaining financial stability 34 38 Regulation and supervision of financial system 39 Securities market regulation 41 Payment and settlement system regulation 41 Developing training and research capacities 45 Consumer protection in the financial system and financial education 54 Currency issuance and organizing money circulation ANNUAL REPORT 58 International reserves management 61 Organizing and regulating a framework to combat money laundering and terrorism financing 63#504 05 INSTITUTIONAL DEVELOPMENT 68 Central Bank security and business continuity 69 Knowledge and human resources 70 Communication and accountability 74 COOPERATION WITH INTERNATIONAL ORGANIZATIONS 82 06 CENTRAL BANK OF THE REPUBLIC OF ARMENIA INTERNATIONAL FINANCIAL REPORTING STANDARDS CONSOLIDATED FINANCIAL STATEMENTS 88 ANNUAL REPORT 2019#6וס 6 Arthur JAVADYAN Governor of the Central Bank ANNUAL REPORT 2019#7CENTRAL BANK OF ARMENIA Governor address Dear reader, This is the annual report of the Central Bank of the Republic of Armenia for 2019. In 2019 the Central Bank ensured the main goals of price and financial stability, further contributing to the macroeconomic stability. Maintaining price stability strengthened, during the year. Inflation remained low, at 0.7 percent at the end of the year. Low inflation has contributed to anchoring of inflation expectations and more confidence in the national currency, and steady decline in the level of dollarization points to that. In 2019, in order to fulfil the inflation target in the medium term, the Central Bank has twice cut the policy rate, keeping the monetary stance expansionary. This has transmitted to other interest rates of the financial market, and no risks to financial stability have emerged thanks to the effective macroprudential policy. Moreover, the stability of the financial system continued strengthening. The participants of the system are sufficiently liquid, capitalized and able to meet the economy's demand. The financial system participants summed up the year with positive results and growth of the main indicators. The financial intermediation in the economy kept on expanding. The financial system assets-to-GDP ratio has increased to 106.5%. The accessibility to financial services continued growing over the year. Further involved in household financial education programs, the Central Bank continued initiating events aimed at increasing public awareness. The Central Bank carried out its activities in line with the adopted values and strategy. All the achievements are the result of the joint efforts by the Central Bank staff. ANNUAL REPORT 2019 7 2019#8THE BOARD OF THE CENTRAL BANK OF ARMENIA Arthur JAVADYAN Nerses YERITSYAN Vakhtang ABRAHAMYAN Governor Deputy Governor Deputy Governor 80 ANNUAL REPORT 2019#9Hasmik GHAHRAMANYAN Oleg AGHASYAN CENTRAL BANK OF ARMENIA Armenak DARBINYAN Board Member Board Member, Board Member Arthur STEPANYAN Board Member Martin GALSTYAN Board Member ANNUAL REPORT 2019 9#1010 CENTRAL BANK OF ARMENIA STAGES OF THE CENTRAL BANK'S DEVELOPMENT 1993 Introduction of the national currency 1994 Formulation of the monetary policy 1996 Adoption of core legislation on the Central Bank and banking 1996-2001 2002-2004 2005 2006 2007 2007- to date Development of a non-bank sector 2012- to date Institutional reforms and infrastructure developments 2018- to date Constitutional Reforms: Financial stability as a second main objective Creation and implementation of the national payment and settlement system Development of a regulatory framework for financial market participants and setting-up of infrastructures The Central Bank as a megaregulator and an institution responsible for financial stability Inflation targeting Protection of consumer rights and awareness of financial services ANNUAL REPORT 2019 2019#11THE CENTRAL BANK ORGANIZATIONAL STRUCTURE FINANCIAL MONITORING CENTER BOARD INTERNAL AUDIT GOVERNOR DEPUTY GOVERNORS FINANCIAL MARKETS DIRECTORATE GENERAL SECRETARIAT MACROECONOMIC DIRECTORATE Financial Operations Department Governor Office Monetary Policy Department Risks Management Department Human resources Management Department Statistics Department Operations Department Internal Services Department Economic Research Department Cash Management Department Public Relations Service Financial Planning and Accounting Department Visitor Center International Cooperation and Protocol Service Currency Issue Coordination Center Dilijan Training and Research Center Legal Department Internal Security Department DEPARTMENT FINANCIAL SUPERVISION AND LICENSING DIRECTORATE FINANCIAL STABILITY DIRECTORATE Financial Supervision Department Financial System Stability and Development Department Licensing and Corporate Finance Department Financial System Regulation Department Information and Telecommunication Technologies Department Consumer Protection and Financial Education Center Information and Technical Facilities Security Department ANNUAL REPORT 2019 11#12POLICY MONETARY CURRENCY CIRCULATION CENTRAL BANK OF THE REPUBLIC OF ARMENIA www.cba.am THE 12-MONTH INFLATION RATE 0.7% THE REFINANCING RATE 5.5% VALUE OF BANKNOTES IN CIRCULATION 584,705,481.57→ 12 ANNUAL REPORT 2019 FINANCIAL SYSTEM ASSETS 6 TN 979 BLN 84 FINANCIAL SYSTEM ASSETS-TO-GDP FINANCIAL STABILITY MLN 106.5% BANKING SYSTEM ASSETS 5 TN 828 BLN 363 MLN BANKING SYSTEM ASSETS-TO-GDP 89.0% BANKING SYSTEM'S TOTAL CAPITAL ADEQUACY RATIO 17.6% BANKING SYSTEM'S TOTAL LIQUIDITY RATIO 27.1% BANKING SYSTEM'S CURRENT LIQUIDITY RATIO 111.7% NUMBER OF INQUIRIES RECEIVED DURING THE YEAR 6 147 CALLS 878 REQUESTS IN WRITING PERSONNEL NUMBER OF EMPLOYEES 778 uur ԱՐԴ RESERVES PROTECTION CONSUMER INTEREST PUBLIC RELATIONS ARMENIA'S INTERNATIONAL RESERVES $2 850 MLN DECISIONS (NORMATIVE) 49 DECISIONS (INDIVIDUAL) 181 NUMBER OF VISITORS TO THE VISITOR CENTER 11 634 EMPLOYEES HOLDING INTERNATIONAL CERTIFICATES 64+17 ARE STILL TAKING EXAMS 8 CFA FULL MEMBER 9 ACCA FULL MEMBER STUDENTS FROM FOREIGN UNIVERSITIES HAVING PASSED INTERNSHIP AT THE DILIJAN TRC 12 ANNUAL REPORT 2019 13#1314 ANNUAL REPOR T#1401 CENTRAL BANK Of THE REPUBLIC OF ARMENIA About the Central Bank Executive summary on strategic directions of the Central Bank ANNUAL REPORT CENTRAL BANK OF ARMENIA 2019 15#1516 Values ABOUT THE CENTRAL BANK Values, vision, mission Vision Values: independence, professionalism, transparency Vision: be a trustworthy, stable and progress-oriented institution Mission: maintain price stability and financial stability VALUES Independence: The Central Bank is independent in implementing its activities in the context of decision-making process and deciding on the tools to achieve its goal. Professionalism: The Bank's ability to respond to challenges in a timely and high-quality manner through professional staff. Transparency: Providing stakeholders with all relevant information on its activity in an open, clear and timely manner. VISION To be trusted by its stakeholders, stable in its policy-making and remaining a progress-oriented and developing institution at the same time. MISSION Maintain price stability and financial stability. ANNUAL REPORT 2019 Mission CENTRAL BANK OF ARMENIA#16Other objectives of the Central Bank:* Main objectives of the Central Bank: maintain price stability and financial stability in the Republic of Armenia Ensure stability, liquidity, solvency, and conditions necessary for the normal activity of the financial system of the Republic of Armenia ■collect, summarize and publish monetary and financial sector, balance of payment, international investment position and external debt statistics, create and develop an efficient payment and settlement system, issue the currency of the Republic of Armenia and organize and regulate the currency circulation, organize and regulate a framework for combating money laundering and financing of terrorism, create conditions for protecting interest of investors in securities, providing a framework for fair pricing of securities in the market and making sure a regulated, sound, open and trusted securities market is in place for normal operation and development, provide essential conditions for protection of rights and lawful interests of consumers of financial services. make sure economic competition in the financial system is free and fair. See details in RA Law on Central Bank (https://www.arlis.am/DocumentView.aspx?DocID=121585) 608 ANNUAL REPORT 2019 17#1718 Executive summary On strategic directions of the Central Bank CENTRAL BANK OF ARMENIA T he 2018-2020 strategy¹ establishes the strategic areas of the Central Bank and describes in which direction they develop (Picture 1). It focuses on the further development of the Central Bank's achievements in the previous years and setting up of new trends driven by challenges today. The Central Bank follows international best practice and criteria while implementing its strategy. 1. See details at https://www.cba.am ANNUAL REPORT 2019#18PROCESS AND TECHNOLOGY MANAGEMENT INTERNATIONAL RESERVE MANAGEMENT COMMUNICATION AND ACCOUNTABILITY Picture 1: FIGHT AGAINST ML/TF CURRENCY ISSUANCE AND CASH CIRCULATION Strategic priorities of the Central Bank of Armenia REGULATION AND SUPERVISION OF THE FINANCIAL ☑ FINANCIAL STABILITY PRICE STABILITY G SECURITIES MARKET CONSUMER PROTECTION AND FINANCIAL EDUCATION DEVELOPMENT OF THE RESEARCH AND DEVELOPMENT CENTER 骨 SECURITY AND BUSINESS CONTINUITY PAYMENT AND SETTLEMENT SYSTEM KNOWLEDGE AND HUMAN RESOURCES Institutional development areas Strategic directions for 2018-2020 CBA policies framework ANNUAL REPORT 2019 19 2019#1920 CENTRAL BANK OF ARMENIA MAIN OBJECTIVES OF THE CENTRAL BANK Maintaining price stability: The monetary policy carried out by the Central Bank in 2019 under the inflation targeting strategy was steered to helping inflation recover gradually and bringing it to the confidence band as low inflationary environment persisted. Main factors that determined low inflation during the year included more-than-predicted contractionary fiscal policy implementation, deflationary pressures transmitted from the external sector, and some structural factors, such as increased competition in the commodity market and the shift in demand from the market of non-durable goods to that of durable goods. In such a situation, the Central Bank continued carrying out expansionary monetary policy in 2019 and, as part of that policy, it eased monetary conditions twice in fulfilment of its main objective in the medium run. Maintaining financial stability: In 2019 the Central Bank continued its efforts to strengthen financial stability in line with the financial stability strategy by taking measures to improve the regulatory framework and increase the effectiveness of supervisory activities. In the reporting year, capital conservation buffer, countercyclical capital buffers and surcharge for systemically important banks were introduced, work was done to implement the Basel 3 liquidity standards, internationally practiced macroprudential tools, such as the loan to value ratio, the debt to income ratio, and the Solvency 2. The stable macroeconomic situation and high economic growth in Armenia have created a favorable environment for sustainable development of the financial system. The capital adequacy and liquidity standards of the banking system run above the required thresholds. The banking system operated with profit while ensuring growth in key indicators. Other participants of the financial system also worked with profit and ensured growth of key indicators. In the reporting year, financial intermediation in the economy continued to grow: the financial system's assets-to-GDP ratio and lending-to-GDP ratio have grown by 8.9 pp and 4.8 pp to 106.5% and 58.7%, respectively. ANNUAL REPORT 2019#20OTHER OBJECTIVES OF THE CENTRAL BANK MAIN CENTRAL BANK OF OBJECTIVES THE REPUBLIC OF ARMENIA Financial system regulation and supervision: A number of legislative amendments were initiated during the year in the context of improvement of the financial system's regulatory framework. Moreover, in 2019 the Central Bank continued its supervisory functions to ensure the stability of the financial system, measure the financial organizations' risk exposure, compliance with the legal framework, combatting money laundering and terrorism financing, protection of consumer rights and interests in the financial system and other relevant aspects. Violations revealed as a result of supervision were eliminated and measures were taken to prevent such violations in the future. Securities market regulation: As part of pursuing improvement in the securities market, the Central Bank started working on a capital market development project. Aimed at creating new tools, the project will facilitate investment of the country's savings into the real sector of economy, while enabling the population to participate in investment projects in the country and generate income from such participation. Payment and settlement system regulation: In 2019 the Central Bank continued activities for ensuring further development and reliability of payment and settlement systems, expanding the volume of non-cash payments and improving the payment and settlement systems regulatory framework. In 2019 a memorandum of understanding on transparency in the money transfer market and directives on consumer protection was signed under the Eurasian Council of Central Banks. This will enhance cooperation of the countries that signed the memorandum in the field of money transfers without opening a bank account, and will increase the transparency of this market. Developing training and research capacities: In 2019 the Dilijan Training and Research Center continued its activity in three main areas: research, international cooperation and social responsibility. More research on Armenian and global economy was carried out and published as well as international seminars were held at the Dilijan TRC during the year. The aim of the events is to enhance ANNUAL REPORT 2019 21 COOPERATION WITH I NTERNATIONAL ORGANIZATIONS INSTITUTIONAL DEVELOPMENT OTHER OBJECTIVES OF THE BANK#21CENTRAL BANK OF ARMENIA 22 the Central Bank personnel's research capacities and boost the TRC's profile as a platform where representatives of central banks, financial and international organizations in the region and Eastern Europe can meet and do research together. Consumer protection in the financial system, and financial education: The Central Bank carried on consumer protection in the financial system by making sure financial service providers practice a fair business conduct and that an appropriate institutional environment and a financial education framework are in place. In 2019, extra requirements to improved transparency in sub-legislative acts on communication and information disclosure by financial institutions took force effective August 2019 and were designed to improve information disclosed and provided to consumers on mortgage and agricultural loans, verbally and/or remotely disclosed information to consumers in the cases of early repayment, etc. The Central Bank continued trainings of teachers in cooperation with RA Ministry of Education, Science, Culture and Sport; as part of the program "Financial Education at the School" a total of 2419 teachers from 339 schools instructing subjects "Me and the Surrounding World", "Mathematics", "Algebra", and "Social Science", have passed trainings. Issuance of currency and organizing money circulation: In 2019 the volume of currency outside the Central Bank increased by 7.1%, with the supply of coins having grown by 11.8%. The third series banknotes of the 2018 issuance were gradually put into circulation during the year, and they circulate in parallel with the banknotes of previous issuances. To publicize national, historical, cultural, spiritual values of Armenia and to satisfy the numismatic demand of collectors, in 2019 too, the Central Bank issued commemorative coins of precious metals, which are dedicated to the anniversaries of renowned Armenians and landmark events. Management of international reserves: In 2019, the international reserves of the Republic of Armenia provided coverage for about four months of imports, and about six years of service for current liabilities. The Central Bank continued its strategy of managing ANNUAL REPORT 2019#22international reserves of Armenia by taking a least-risk approach to ensure the safety, liquidity and effectiveness of management of the reserves. Organizing and regulating a framework to combat money laundering and terrorism financing: Seminars- discussions organized in the period under review for all groups of reporting persons with the participation of about 300 employees addressed the developments in the field of AML/CFT as well as the existing risks. In 2019 a seminar-discussion was organized jointly with the RA State Revenue Committee for the representatives of non- commercial organizations. It should be noted that during the reporting period the risk to terrorism financing persisted at a very low level in Armenia. ANNUAL REPORT 2019 23 COOPERATION WITH I NTERNATIONAL ORGANIZATIONS INSTITUTIONAL DEVELOPMENT OTHER OBJECTIVES OF MAIN CENTRAL BANK OF THE BANK OBJECTIVES THE REPUBLIC OF ARMENIA#2324 INSTITUTIONAL DEVELOPMENT CENTRAL BANK OF ARMENIA Central Bank security and business continuity: In light of the global trends in information security, in 2019 the Central Bank emphasized the need to maintain a framework for developed and effective cybersecurity in the financial system in Armenia. In order to neutralize cyber threats in this direction, work was done to establish a connection center with the MISP (Malware Information Sharing Platform) system, and required human, technical and financial resources were allocated. In 2019 further work was done to create a response center to incidents of cybersecurity in the financial sector. Knowledge and human resources: To encourage personnel's lifelong education and development, in 2019 the Central Bank offered its employees opportunities for their professional development, including by way of sharing in-house knowledge and experience with co-workers/colleagues. As of 2019, there were 64 employees who earned international qualification in financial, accounting, auditing, insurance, information technology areas. By the end of the year, the Central Bank's employees numbered 778 of whom 425 women and 353 men, with an average age of 41. During the year, 62 employees left the Bank. Communication and accountability: As part of ensuring transparency in fulfilling the primary objectives, the Central Bank communicated its actions, programs and initiatives in the field of implementing monetary policy, financial supervision and maintaining financial stability to the financial market participants and the public. Discussions were held on various issues of interest. Special attention was paid to advising people to use caution about organizations that operate illegally and/or about such activities that contain elements of essential risk. The documentary "Dramapatum" (narrative of the Armenian. currency) presenting the history of money circulation in Armenia was made and televised in 2019. ANNUAL REPORT 2019#24In 2019 the Central Bank's Visitor Center hosted 11 673 visitors, which is an 8% increase compared to the previous year's figure (10 804 visitors). Cooperation with international institutions: In 2019 the Bank sustained its cooperation with partner central banks, internationally reputable financial and educational establishments. During the year, agreements, accords, memoranda of understanding continued to be signed with other central banks in the framework of bilateral arrangements and intergovernmental committees. ANNUAL REPORT 2019 25 COOPERATION WITH I NTERNATIONAL ORGANIZATIONS INSTITUTIONAL DEVELOPMENT OTHER OBJECTIVES OF MAIN CENTRAL BANK OF THE BANK OBJECTIVES THE REPUBLIC OF ARMENIA#2526 02 MAIN OBJECTIVES Maintaining price stability Maintaining financial stability ANNUAL REPORT CENTRAL BANK OF ARMENIA 2019#26MAINTAINING PRICE STABILITY Monetary policy 'or ensuring price stability, the Central Bank is mandated to F set a medium-term inflation target and opts for such a target in order to anchor public expectations and secure a path to streamlined macroeconomic stability. In the Republic of Armenia, the inflation target is outlined in the monetary policy programs of the Central Bank, medium-term expenditures frameworks of the Armenian Government, the Republic of Armenia laws on state budget as well as sustainable development projects. The Central Bank is entitled with operational independence, so it independently decides on the monetary policy strategy it carries out, the interim and operational objectives and monetary instruments. In the context of inflation targeting strategy, a projected path to bringing inflation to the target serves an intermediate target and short-term interest rate an operational target for the Central Bank. Target level of the short-term interest rate is the refinancing rate which the Board of the Bank sets, normally, eight times in a year according to a pre-announced timetable and which serves a benchmark for the Bank's operations in the financial market. The 7-day repo agreement is the main instrument of monetary policy and is used by the Bank to manage the liquidity in the financial system. ANNUAL REPORT 2019 27#2728 CENTRAL BANK OF ARMENIA Under the inflation targeting strategy, the Central Bank communicating to the public is crucial, and the main way of doing it is through publishing quarterly inflation reports². First part of the inflation report contains the monetary policy program for that quarter and the second part provides status report on implementation of the monetary policy program for the past one-year horizon. Fulfilling price stability objective A ccording to the Q1, 2019 Monetary Policy Program, the inflation environment would remain low at the beginning of 2019 and the Central Bank would continue implementing an expansionary monetary policy. In view of the latter and expected macroeconomic developments, the 12-month inflation rate would still be persisting at a low level in the near future, since the Central Bank favored a gradually recovering inflation, estimating that low inflation at that time was to contribute to anchoring long-term inflation expectations and enhancing public confidence in the monetary policy conducted by the Central Bank, and that it would stabilize around the 4% target in the medium run. It was also predicted that, if macroeconomic developments unfolded according to the baseline scenario, the Central Bank would keep monetary conditions expansionary for as long a period as needed in order to fulfil the inflation target in the medium run. Low inflation observed in the course of 2019 was attributable mainly to contractionary fiscal policy implementation during the year and to the inflation environment in the world's commodity markets weakened amid continued slowing of global economic growth. At the same time, some supply-side factors containing inflation, noticeable during the year, included increasingly competitive commodity markets, which has changed firms' approach to pricing and reduced their markups, and shifted demand from the market of non-durable consumer goods to that of durable goods. 2. See in detail the "Inflation Report" of the Central Bank: (www.cba.am). ANNUAL REPORT 2019#283.0 Figure 1: In 2019 low inflation environment persisted 2.5 2.0 1.5 1.0 0.5 0.0- T T 12 1 2 3 5 6 7 9 10 11 12 2019 12-month inflation rate 12-month core inflation rate In view of the aforementioned developments and inflation environment keeping low, the Central Bank has slightly added to stimulative monetary conditions by cutting the refinancing rate twice - in the first and third quarters - by 0.25 pp each time. At the same time, the Central Bank continued to signal to the financial market that in view of predicted macroeconomic developments, the monetary stance will remain expansionary for as long as required, in order to achieve the inflation target in the medium run. ANNUAL REPORT 2019 29 COOPERATION WITH I INSTITUTIONAL NTERNATIONAL ORGANIZATIONS DEVELOPMENT OTHER OBJECTIVES OF THE BANK MAIN CENTRAL BANK OF OBJECTIVES THE REPUBLIC OF ARMENIA#29CENTRAL BANK OF ARMENIA Monetary policy implementation: improvement and advancement T ▪he developed and refined Forecast and Policy Analysis System (FPAS) of the Bank secures improvement in the quantitative and qualitative components of the forecasts and policy analysis. The system helps the Board of the Bank to have a clear understanding of the macroeconomic situation and make more informed decisions about the directions of the monetary policy. Improving the FPAS is continuous and in a longer-term perspective it has two aspects: Inclusion of specificities of the Armenian economy into the current system and advancing it technically, Improvement of the current system through transition to the Dynamic Stochastic General Equilibrium (DSGE) model framework. The following activities were carried out in the framework of the first aspect in 2019: 1. 2. 3. The main Quarterly Forecasting Model expanded to include the fiscal stimulus, which allows to simultaneously measure the impact of fiscal policy on the economy and vice versa. It allows to clearly decompose fiscal policy from other factors among the demand influencing factors. Historical data available in the QFM were decomposed according to individual and grouped shocks, for example, supply and demand shocks, domestic and external policy and economy shocks, etc. The reporting model of the balance of payments was built and implemented. The latter is connected to the overall system, which ensures that the balance of payments yields in line with general forecasts. ANNUAL REPORT 2019 30#30CENTRAL BANK OF OBJECTIVES THE REPUBLIC OF ARMENIA 4. 5. 6. The economic model of the Russian Federation was re- evaluated in the external-world-model framework. This allows us to assess, predict and analyze the economy of the Russian Federation more accurately. An integrated database of short-term forecasts was created to store inputted data into short-term forecast models. Existing short-term forecast models were adapted to the new database criteria, making it easy to use them to predict any variable in the database. A new short-term forecast methodology the Dynamic Factor Model was introduced, which is used in almost all advanced central banks, making it possible to work with a large number of explanatory variables. The second aspect includes the following activities: 1. 2. The Real Business Cycle and Dynamic Stochastic General Equilibrium (DSGE) models for the Armenian economy were built for a structural assessment of GDP potential. The models are developed on the assumption of a path to balanced growth, which allows input of time series of the Republic of Armenia without additional intervention, leaving all the information in the series intact. The models were experimentally used in forecasts and have shown better results than statistical models used for forecasts. The DSGE model of the Armenian economy was built in consideration of the firms' markups that change over time, the state subsidies, which allows us to assess the impact of structural reforms in the economy and changes in market structure on inflation and other macroeconomic variables. The model is non-linear, which makes it possible to estimate the economy's new equilibrium shaped as a result of various structural policies. 3. The real estate market was included in the DSGE model for the Armenian economy, so assessing the cycle of investment demand for real estate has become possible. The model is developed on the assumption of a path to balanced growth, which allows using the results of the main model to predict the possible developments in the real estate market in the forecast horizon. ANNUAL REPORT 2019 31 COOPERATION WITH I NTERNATIONAL ORGANIZATIONS INSTITUTIONAL DEVELOPMENT OTHER OBJECTIVES OF THE BANK MAIN#3132 CENTRAL BANK OF ARMENIA 4. Preliminary work was done to build a structural model to assess trends, which will allow using a single tool to evaluate trends of the main variables of the Armenian economy and to learn their correlations and dimensions. Statistics In 2019 the Central Bank continued delivering timely and accurate statistical information to the public³. Work was further done to broaden the scope of and accessibility to statistical data, improve the methodology for data collection and alignment with international criteria. New data collection and other developments in statistics In 2019 the Central Bank worked on improving, technically and methodologically, the collection of micro-data, their quality control. and data processing procedures, while increasing the quality of statistical indicators calculated using such data. Colleting statistical information on non-public investment funds in the Republic of Armenia has improved as well. The schedule for servicing foreign loans to non-financial organizations was evaluated for the first time with the aim to measure sustainability of foreign debt. In addition, revaluations of external liabilities of non-financial organizations were carried out using alternative sources. 3. The Central Bank publishes the statistical data in section "Statistics" of its homepage (www.cba.am). ANNUAL REPORT 2019#32MAINTAINING FINANCIAL STABILITY view of maintaining financial stability in Armenia, efforts were spent in 2019 to implement the recommendations under the Financial Sector Assessment Program, FSAP, jointly carried out by the International Monetary Fund and the World Bank in 2018. Specifically, the capital conservation buffer, countercyclical capital buffers and surcharge for systemically important banks were introduced, work was done to implement the Basel 3 liquidity standards, internationally practiced macroprudential tools, such as the loan to value ratio, the debt to income ratio, and the Solvency 2. In particular, the required information was collected and analytical calculations were made for the smooth implementation of the capital requirement under Solvency 2. Analytical work on risk detection and evaluation was carried out. In 2019, trends of sustainable development were observable in the financial system of Armenia, ensuring a significant increase in the main balance sheet items. Relative to the previous period under review, the financial system's assets- to-GDP ratio and lending-to-GDP ratio have grown by 8.9 pp and 4.8 pp to 106.5% and 58.7%, respectively. ANNUAL REPORT 2019 33 COOPERATION WITH I NTERNATIONAL ORGANIZATIONS INSTITUTIONAL DEVELOPMENT CENTRAL BANK OF OBJECTIVES THE REPUBLIC OF ARMENIA OTHER OBJECTIVES OF THE BANK MAIN#3334 CENTRAL BANK OF ARMENIA The banking sector remains the largest participant of the financial system; it accounts for 83.5% of the system's assets (see Figure 2). The share of other participants of the system (credit organizations, insurance companies, investment firms, etc.) is small and the impact of their activity on the stability of the financial system is not significant yet. Figure 2: Assets of the financial system 31.12.2018 31.12.2019 85.1% Banks ■9.5% Credit organizations ■ 0.9% ■ 0.9% Insurance companies Investment firms Net assets of mandatory pension funds 2.7% ■ 0.9% Other financial institutions 83.5% Banks 10.1% Credit organizations Insurance companies ■ 1.0% ■ 0.9% ■3.6% 0.9% Investment firms Net assets of mandatory pension funds Other financial institutions In 2019, the assets of the banking system increased by 16.9%, loans to the economy, by 16.4%, total capital, by 10.0%, and liabilities, by 18.1%. The growth rates of mortgage loans and consumer loans proved faster in total loan portfolio (40.6% and 30.6%, respectively), and the Central Bank worked on designing and introducing some macroprudential tools, as a result. These tools include the loan to value ratio as well as the client debt to income ratio. According to supervision reports submitted to the Central Bank, the banking system operated with profit. The return on assets and return on equity ratios amounted to 1.2% and 7.9%, respectively (0.8% and 5.3% in 2018). ANNUAL REPORT 2019#3420% 18% 16% 14% 12% 10% 8% 6% Figure 3: 2017 - IV 2018 - I 2018 - II 2018 - III 2018- IV 2019 - I 2019 - II 2019 - III 2019 - IV Foreign currency loans Local currency loans The interest rates of loans provided by the banking system followed mostly a downward trend during the year. Interest rate of loans to legal entities 20% 18% 16% 14% 12% 10% 8% 6% 2017 - IV 2018 - I 2018 - II 2018 - III 2018 - IV Foreign currency loans Local currency loans Figure 4: Interest rate of loans to individuals 2019 - I 2019 - II 2019 - III 2019 - IV The capital adequacy and liquidity ratios that describe the banking system stability continued running above the established thresholds. Specifically, the total capital adequacy ratio amounted to 17.6% (minimum threshold: 12.0%). On the back of expanding loan portfolio, the banking system liquidity persisted at the level almost twice as high as minimum thresholds, pointing to the sufficient liquidity in the banking system. As of the end of 2019, commercial banks' total and current liquidity ratios were 27.1% and 111.7% (minimum thresholds: 15.0% and 60.0%), respectively. The banking system assets-to-GDP and economy lending-to-GDP ratios have grown by 5.9 pp and 3.2 pp to 89.0% and 52.1%, respectively (see Figure 5). ANNUAL REPORT 2019 35 COOPERATION WITH I NTERNATIONAL ORGANIZATIONS INSTITUTIONAL DEVELOPMENT OTHER OBJECTIVES OF THE BANK MAIN CENTRAL BANK OF OBJECTIVES THE REPUBLIC OF ARMENIA#35CENTRAL BANK OF ARMENIA The share of non-performing loans and receivables ("watched", "non-standard” and “doubtful” risk categories) amounted to 5.1% in total loans and receivables. Figure 5: Financial intermediation in the banking system 100 % 90 % 80% 70% 60% 50% 40 % 30% 20% 10% 36 0% 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2109 Loans/GDP Deposits/GDP Assets/GDP Key indicators of other financial system participants have grown as well. In particular: Credit organizations' equity has grown by 11.2%, liabilities by 46.5%, assets by 27.9%; Insurance companies' equity has grown by 9.8%, liabilities by 41.1%, assets by 29.5%; Investment firms' total equity has grown by 23.0%, liabilities by 9.7%, assets by 12.2%. Net assets of mandatory pension funds managed by asset managers have grown by 59.8% to AMD 251 billion. At the end of the year, the net assets-to-GDP ratio of pension funds reached 3.8%. ANNUAL REPORT 2019#36billion AMD 250 300 Figure 6: Value of net assets of pension funds 200 150 100 50 0 oul 3,0% 2,5% 2,0% 1,5% 1,0% 0,5% 0.0% 2014 2015 2016 2017 2018 2019 Net asset value (NAV) ANNUAL REPORT 2019 37 Net assets-to-GDP (right-hand scale) COOPERATION WITH I NTERNATIONAL ORGANIZATIONS INSTITUTIONAL DEVELOPMENT OTHER OBJECTIVES OF THE BANK 4,0% 3,5% CENTRAL BANK OF OBJECTIVES THE REPUBLIC OF ARMENIA MAIN#3738 03 OTHER OBJECTIVES OF THE BANK Regulation and supervision of financial system Securities market regulation Payment and settlement system regulation Developing training and research capacities Consumer protection in the financial system, and financial education Currency issuance and organizing money circulation International reserves management Organizing and regulating a framework to combat money laundering and terrorism financing ANNUAL REPORT CENTRAL BANK OF ARMENIA 2019#38REGULATION AND SUPERVISION OF FINANCIAL SYSTEM the field of financial system regulation, a number of changes were introduced. In particular: More thresholds set to be above the capital adequacy ratio included the capital conservation, countercyclical capital buffers and surcharge for systemically important banks; changes were made to the reserve requirement ratio for banks; measures taken to improve risk management system of banks involved further requirements to stress-testing and bank rehabilitation programs. Changes and amendments were made to the Armenian laws on "Insurance and Insurance Activities”, on “Payment and Settlement Systems and Payment and Settlement Organizations”, on “Pawnshops and Pawnshop Activities", on "Currency Regulation and Currency Control". The capital adequacy ratio of insurance companies was aligned with the requirements under Solvency 2. These changes have been made with the aim to: Contribute to maintaining the stability of the banking system and its ability to withstand shocks in various economic situations, increase the efficiency of the use of macroprudential instruments by the Central Bank, and align the capital requirement to international standards. Provide preconditions for the creation of foreign currency liquidity buffers. ANNUAL REPORT 2019 39#3940 CENTRAL BANK OF ARMENIA Improve the effectiveness of internal control and risk management systems in banks and the ability to respond quickly in emergencies. Provide for legislative arrangements preventing the entry of criminals in the financial institutions the activities of which are governed by the above-mentioned laws, in accordance with FATF recommendations. Provide for capital requirement to insurance companies, in accordance with international best practices. The law on "Non-Cash Transactions" drafted during the reporting period provides for limits in order to reduce the volume of cash transactions. The draft to the law is aimed to shortens the shadow economy, promote financial intermediation in the banking system. This, in turn, will add to the development of the entire financial system, including the expanding of infrastructure and services provided for payment services, thus ensuring fast, reliable and secure payment. through the use of non-cash instruments. In 2019 the Central Bank continued taking on its supervisory functions to maintain the stability of the financial system, measure the financial organizations' risk exposure, compliance with the legal framework, while making sure an effective framework to combat money laundering and terrorism financing is in place and interests of consumers in the financial market are duly protected. The Central Bank monitors the activities of financial institutions, carries out analyses on their financial position, identifies and evaluates risks, measures the compliance of their activity with the legal framework and exercises other aspects of oversight under the law. In 2019 supervisory inspections at financial institutions for risk disclosure, business conduct, reliability of published information and other aspects continued. During the year, the Central Bank conducted 162 inspections at commercial banks (6), credit organizations (1), insurance companies (8), investment firms (2) and other financial market participants: exchange offices, pawnshops, payment and settlement organizations (145). Infringements revealed through supervision were remedied and measures were taken to prevent the ones in the future. ANNUAL REPORT 2019#40SECURITIES MARKET REGULATION In pursuit of boosting up the domestic securities market, the Central Bank started working on a capital market development project. This will consist of key measures and actions for the development of the capital market, implementation schedules and parties responsible. Aimed at creating new tools, the project will facilitate investment of the country's savings into the real sector of economy, while enabling the population to participate in investment plans in the country and benefit such participation through income generation. PAYMENT AND SETTLEMENT SYSTEM REGULATION In 2019 activities of the Central Bank were further steered to the development and reliability of payment and settlement systems, expanding of the volume of non-cash and improving the payment and settlement systems regulatory framework. Electronic payment system In the reporting period, the value of money transfers via the electronic payment system has grown by 30.3% as compared to the previous year, amounting to AMD 20008 billion and the number has increased by 6.6% to 3741589 transfers. ANNUAL REPORT 2019 41 COOPERATION WITH I NTERNATIONAL ORGANIZATIONS INSTITUTIONAL DEVELOPMENT OTHER OBJECTIVES OF THE BANK MAIN CENTRAL BANK OF OBJECTIVES THE REPUBLIC OF ARMENIA#41thousand of CENTRAL BANK OF ARMENIA Payment instruments and payment and settlement organizations In 2019 the Central Bank issued activity license to two payment and settlement organizations. According to the decision of the Central Bank, the "UnionPay International” system has been included in the list of assessed foreign payment systems, making it possible to service the cards of the Chinese "UnionPay" system in the territory of the Republic of Armenia. As of the end of 2019, a total of 16 commercial banks in Armenia have issued payment cards to and provided card servicing of their customers. The number of cards in circulation has increased by 18.1% and amounted to 2.4 million (see Figure 7). Figure 7: The number of payment cards in circulation, 2007-2019 1000 800 600 400 200 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 ArCa ANNUAL REPORT 2019 42 VISA MASTER CARD Other international cards#42billion AMD 2.500 2.000 1.600 1.400 1.200 1.000 800 600 In 2019 the value of card operations in Armenia amounted to AMD 2 trillion 312 billion. The value of non-cash payments by cards increased by 52% to AMD 604 billion. In total non-cash operations, the value of transactions in the Internet reached AMD 447.6 billion (including e-commerce: AMD 179.8 billion, card-to-card transfers: AMD 80.7 billion). As a result, relative to year 2018, the share of non- cash payments in card transactions has grown by 4.7 pp to 26.1% in 2019 (see Figure 8). Figure 8: Operations by payment card in Armenia 518 397 400 300 200 197 17 28 31 40 0 2007 2008 2009 675 2010 2011 2012 ■ Non-cash transactions 1,002 908 1,466 1,271 1,212 1,198 1,174 63 91 106 140 160 208 284 2013 2014 2015 2016 396 604 2017 2018 Cash transactions ANNUAL REPORT 2019 43 2019 1,709 COOPERATION WITH I INSTITUTIONAL OTHER OBJECTIVES OF NTERNATIONAL ORGANIZATIONS DEVELOPMENT THE BANK CENTRAL BANK OF OBJECTIVES THE REPUBLIC OF ARMENIA MAIN#43CENTRAL BANK OF ARMENIA International cooperation and standards The Central Bank's cooperation on payment and settlement systems with central banks of the Eurasian Economic Union countries continued in the field of implementing national payment card systems and the ISO 20022 Standard, transmitting financial messages, making settlements and fast payments, and developing financial technologies and cybersecurity. In 2019 a memorandum of understanding on transparency in the money transfer market and directives on consumer protection was signed under the Eurasian Council of Central Banks. This will enhance cooperation of the countries that signed the memorandum in the field of money transfers without opening a bank account, and will increase the transparency of this market. ANNUAL REPORT 2019 44#44DEVELOPING TRAINING AND RESEARCH CAPACITIES In 2019, the Dilijan Training and Research Center as a regional research and academic community continued its activity in e following areas: research, international cooperation and corporate social responsibility. The Center strives to create a scientific environment that will be ideal for doing research, examining the modern world's challenges to economics and studying international experience in how these can be tackled, conducting quality research on emerging economies and operative fulfillment of the goals of the Central Bank. In 2019 too, the Dilijan TRC boasted to be an effective platform for international scientific, educational and research activities for both Armenia and countries in the region, other central banks and international financial institutions of the world. DILIJAN TRAINING AND RESEARCH CENTER STAFF •Residents of Dilijan and of neighborhoods ⚫Residents of Yerevan 63 ધીમી ધીમી • • • • • * • 에에에에에에 에에에에에에 116 157 18572/113 193 80113 19380/113 209 84 નવ શું ૦ ૦ ૦ ૦ ૦ થ થ થી 125 151 34/117 2013 2014 2015 2016 2017 2018 2019 ANNUAL REPORT 2019 45 INSTITUTIONAL DEVELOPMENT OTHER OBJECTIVES OF MAIN CENTRAL BANK OF THE BANK OBJECTIVES THE REPUBLIC OF ARMENIA COOPERATION WITHI NTERNATIONAL ORGANIZATIONS#4546 CENTRAL BANK OF ARMENIA The research and analytical work, planned previously, continued in 2019; the Center remains a venue for conducting research on new subjects. In-depth professional courses conducted by renowned specialists from the best universities of the world and international organizations were organized during the year. Messrs. Mattias Polborn, a professor of economics at the Vanderbilt University, Aram Grigoryan, a lecturer at the University of Illinois, Lawrence Christiano, a professor of economics at Northwestern University USA, Douglas Laxton, a well- known international expert, and Bruce Boghosian, a professor of the Tufts University, visited the Dilijan TRC for sharing advice and giving lectures. The Central Bank's staff conducted joint research with: International expert Douglas Laxton, on "Analysis on Issues for Anchoring Long-Term Inflation Expectations for Inflation-Targeting Central Banks". University of Zurich lecturer Vardges Levonyan, on "The Impact of Supply Factors in the Mortgage Market on Consumer Decisions". Northwestern University lecturer, professor of economics, IMF expert and industry leader Lawrence Christiano, on "Financial Dollarization", which has been presented at a number of conferences, including the Federal Reserve Bank of Chicago. The Central Bank's staff carried out an analysis in collaboration with Stanford University postgraduates on how exchange rate shocks are linked to financial dollarization. In the framework of joint programs with the IMF, an analysis on multivariate filter estimation of potential output for the United States was conducted and published as an IMF working paper. There was also a research work on the level of financial involvement and financial literacy. During the year, research was done and communicated with the representatives of the Republic of Armenia Government on: Economic growth strategy, Armenia's public debt and public investments, ANNUAL REPORT 2019#46ANNUAL REPORT 2019 47 Alternatives to community development, financial involvement and funding. In 2019 the Central Bank carried out analyses on setting up a database on tax revenue and rates of taxation, on anchoring long- term inflation expectations for inflation-targeting central banks, and conducted research on the potential for tax revenues, elasticity and Laffer curve. The methodology for evaluating the "Financial Education at Schools" program was developed. The following working papers were published in 2019: “Do Remittances Worsen Export Diversification?” as a discussion paper, in Economics - ejournal. “Multivariate Filter Estimation of Potential Output for the United States: An Extension with Labor Market Hysteresis" as a working paper of the IMF. "Mind the Gaps! Work on Financial-Cycle Output Gaps and Monetary Policy-Relevant Output Gaps" as a working paper from the London School of Economics and Political Science, Institute for Global Affairs. "Yield Curve Estimation and Forecasting in Armenia", published in the Armenian Journal of Economics. "Nowcasting Real GDP Growth: Comparison between New and Old EU Countries" will soon be published in the Eastern European Economics. COOPERATION WITH I NTERNATIONAL ORGANIZATIONS INSTITUTIONAL DEVELOPMENT CENTRAL BANK OF OBJECTIVES THE REPUBLIC OF ARMENIA OTHER OBJECTIVES OF THE BANK MAIN#4748 International CENTRAL BANK OF ARMENIA In 2019, a number of symposiums, conferences, workshops, trainings, forums, at both regional and international level, were organized in the Dilijan TRC. Specifically: The third year's two rounds of the "Central Bank and Commercial Bank Employee Certification” program took place. It is organized by the joint efforts and funding by the Dilijan Training and Research Center, the Netherlands Development Financial Organization, FMO, and De Nederlandsche Bank. In December, the Dilijan TRC hosted the next round of the said program the participants benefited lectures delivered by professor Florencio Lopez-de- Silanes (SKEMA Business School and National Bureau of Economic Research), professor Joseph Mc Cahery (Tilburg University), professor Wolf Wagner (Rotterdam University School of Management). The 2019 program included a new course on leadership, led by professor Erik de Haan (VU University and Ashridge Business School). The Certification Program was attended by employees of central banks and commercial banks of Armenia, Georgia, Moldova, Croatia, Bosnia and Herzegovina, and other countries. The 22nd Annual Central Bank Macromodeling Conference on "Expanding Boundaries of Monetary Policy" was organized and held from September 11 to 13, 2019, which was attended by more than 110 participants from around 30 countries. The keynote speakers were Professor Maurice Obstfeld (University of California, former IMF Chief Economist), Assaf Razin (Tel Aviv University lecturer), Douglas Laxton (international expert, formerly chief of IMF Economic Modeling Division) and Tomn Holub (Board member of the Czech National Bank). The Summit of Minds, held annually in Chamonix, France, took place this year in Armenia, at the Dilijan TRC. Armenia is the first country to host this event outside of Chamonix. The event was attended by more than a hundred prominent Armenian and foreign public figures, scientists and analysts, businessmen and entrepreneurs. An international conference on financial stability indicators was held in June at the Dilijan Research Center. At the conference, the IMF expert presented the latest international developments related to the calculation and use of the financial stability indicators (FSI) as well as the challenges and ways to improve FSI. About 30 specialists from 7 countries talked about how to calculate and use FSI and touched upon relevant methodological problems and possible solutions. ANNUAL REPORT 2019#48ANNUAL REPORT 2019 49 A number of familiarization visits and events, attended by representatives from different countries, were organized during the year. The Armenian-Georgian Business Forum one such event, which was organized jointly with the RA Government proved to be an important venue for discussing the possibilities of further cooperation between the two countries. Highlighting the importance of collaborating with educational establishments, the Dilijan TRC continued to host and deliver lectures for students from different universities in Armenia and Artsakh. During the year, students from Yerevan State University, Armenian State University of Economics, French University of Armenia, Artsakh State University, Armenian National Agrarian University visited the Dilijan TRC for lectures organized by the Center, made tours in the Money Museum to get to know the history of money. Regular visits of students from the Armenian State University of Economics, Yerevan State University, as well as Ijevan Branch of YSU aim to present the Central Bank's activities to students for sharing knowledge with new generation. In 2019 the Dilijan TRC hosted 12 research fellows from various colleges and universities (Harvard, Notre Dame, Tufts, Boston, Warwick, Royal College of London, Tbilisi State University). COOPERATION WITH I NTERNATIONAL ORGANIZATIONS INSTITUTIONAL DEVELOPMENT OTHER OBJECTIVES OF THE BANK MAIN CENTRAL BANK OF OBJECTIVES THE REPUBLIC OF ARMENIA#4950 RESEARCH FELLOWSHIP INTERNS 12 MENTAT VE RI TAS HARVARD HARWARD UNIVERSITY BOSTON UNIVERSITY UNIVERSITY OF NOTRE DAME XXXXXXX UNIVERSITY OF WARWICK ISET INTERNATIONAL SCHOOL OF ECONOMICS AT TBILISI STATE UNIVERSITY Tufts Imperial College UNIVERSITY London BOSTON UNIVERSITY TUFTS UNIVERSITY IMPERIAL COLLEGE LONDON CENTRAL BANK OF ARMENIA In 2019, cooperation with the American University of Armenia in the framework of the Master of Economics continued, hosting 33 students. Corporate social responsibility The Central Bank pays great attention to corporate social responsibility, and the development of a region is key component. of it. DILIJAN TRAINING AND RESEARCH CENTER CORPORATE SOCIAL RESPONSIBILITY DILIJAN CENTRAL SCHOOL (AYB) 139 9049 KINDERGARTEN 401030 ANNUAL REPORT 2019 Residents of Dilijan and of neighborhoods Children of the Bank's employees#501. Money Museum 2. Tumo The Dilijan Central School, the FabLab, the Tumo Center for Creative Technologies, the Knowledge for Development with its library, the Money Museum continued their activities as part of the Central Bank's corporate social responsibility. A variety of educational programs carried out by the Center are aimed to facilitate comprehensive development of children. In 2019 too, the "Knowledge for Development" Center encouraged children from Dilijan and rural communities in the vicinity to use the library's rich literature, visit the Money Museum, learn the history of money, share a common platform for interaction and debate, take part in open classes and go to events. During the year, the Money Museum received 2944 visitors, which is 61% higher than the previous year's figure. The range of the Money Museum beneficiaries is wide and varied. Active involvement of schoolchildren and students is crucial. Their participation rate numbers around 1700. The Center has organized more than 160 excursions and trainings. The "Citizen On-the-Go" initiative continued the series of meetups in 2019; Nikolay Grigoryan, Advisor to the Governor of Tavush region, took part in such meetups and introduced the participants to the rules of correct behavior during disasters. 2013 2014 2015 2016 2017 2018 2019 Total 1053 1243 1574 2005 1830 2944 10649 1160 CENTRAL BANK OF OBJECTIVES THE REPUBLIC OF ARMENIA COOPERATION WITH I NTERNATIONAL ORGANIZATIONS INSTITUTIONAL DEVELOPMENT OTHER OBJECTIVES OF THE BANK MAIN In 2019 the team of Dilijan FabLab took part in FabAcademy, an educational program, the WCIT conference, the Fab 15 meeting, and held the Fab Day events. As part of its mission, the Dilijan FabLab pays great attention to the educational component. The schoolchildren and adults benefited training courses, including those for 3D Modeling, Fundamentals of Electronics, Arduino Platform programming, AutoCad program, and the students of YSU Ijevan branch, the schoolchildren of ljevan, Kalavan, Dilijan (a total of 60 participants) took part in them. ANNUAL REPORT 2019 51#51CENTRAL BANK OF ARMENIA Participants Schoolchildren 38 Students 10 Adults 12 FabAcademy - https://fabacademy.org/ The FabAcademia is a 6-month educational program for FabLab staff, students. After having participated in this program, 3 students from Armenia successfully graduated and became trainers of Dilijan FabLab. During the study, the students implemented various current and final projects. As a result, a system for tracking the Sun, a wireless charging table, and a system for automated jalousie window were created. Since November 2019, the Dilijan FabLab has become the only Armenian node of the FabAcademia, and Armenia has acquired the right to implement that educational program. Events The FabLab and FabAcademia-relevant presentations were organized at the events, such as Pechakucha Night Yerevan, WEClub Dilijan/Yerevan, Empowering Regions through High Tech-Forum. At the invitation of the RA Ministry of Education, Science, Culture and Sport, the FabLab participated in WCIT-19. There were four more events attended by about 170 participants, aged 12-50, from Tavush, Lori and Yerevan. ANNUAL REPORT 2019 52#52ANNUAL REPORT 2019 53 Cooperation The FabLab is actively cooperating with the Dilijan Central School, the UWC, in the framework of which the Dilijan "Talking Map" project was launched, together with the participants. The map is intended to find its place in the central part of Dilijan as a tourist guide. The Dilijan Central School, run by the AYB Educational Foundation, has 139 students, about 70 percent of whom are from the region; some of the teachers are residents of the region who have been re-trained under the AYB educational program. In 2019 the Tumo Center for Creative Technologies hosted 340 children, 34% of whom are from Dilijan and 66% from the Tavush region neighborhoods and Gegharqunik region. The program is designed for those aged 12-18. In June 2019, the Tumo Center temporarily closed its operations in Dilijan for upgrade and it reopened in December. This upgrade will significantly increase the number of participants and expand the scope of the program. COOPERATION WITH I NTERNATIONAL ORGANIZATIONS INSTITUTIONAL DEVELOPMENT OTHER OBJECTIVES OF THE BANK MAIN CENTRAL BANK OF OBJECTIVES THE REPUBLIC OF ARMENIA#5354 CENTRAL BANK OF ARMENIA CONSUMER PROTECTION AND FINANCIAL EDUCATION I saw T he Central Bank pursues protection of consumer rights and lawful interests by making sure that financial service providers' business conduct is fair and that appropriate institutional environment and financial education framework are in place. Regulatory framework development In 2019 changes were made to extra requirements to improved transparency in sub-legislative acts on communication and information disclosure by financial institutions; effective from August 2019, these are designed to improve information disclosed and provided to consumers on mortgage and agricultural loans, verbally and/or remotely disclosed information to consumers in the cases of early repayment, additional information on financial services provided remotely, information containing special warning in advertising. materials and websites. Financial institutions will also provide clear, complete and affordable extracts to information on mortgage and agricultural loans, as well as individual sheets (in new a format) of essential terms of consumer, agricultural and mortgage loans. The supplemented text of the sub-legislative act on communication with guarantors by banks and credit organizations took effect from December 6, 2019, according to which the provisions on the communication now apply to a wider range of contracts. Guarantors will have the opportunity to electronically agree to accept the guarantee and understand the consequences arising therefrom. From now on, the guarantors will receive the reminder about the obligations in the most convenient way. ANNUAL REPORT 2019#54The methodology for calculating actual annual interest rate has been revised. According to new change, the actual annual interest rates on credit lines, mortgage and agricultural loans will be calculated on the same principles, and the cost of credit will be more accurately reflected. The actual annual interest rates on foreign currency credit lines, mortgage and agricultural loans calculated by financial organizations will be comparable, so that consumers will be able to make the most suitable choice of the loans. The FinInfo.am, an information system, as well as the rules and guides related to regulatory arrangement of the system were developed and improved. The Central Bank is reviewing and reconsidering the policy of applications submitted to the Bank; the format of the annual internal report on the applications received from consumers has been revised. Oversight of business conduct In 2019 the on-site and off-site surveillance of financial organizations continued. The on-site surveillance of some financial organizations has provided for studies which measured the adequacy of delivery of services, complaint and dispute resolutions, information disclosure policies and how they were applied, consumer exposures to risk and legal compliance. The off-site examinations involved inspecting websites of 40 financial organizations, 182 TV commercials and 278 radio commercials and revealing about 200 violations. Financial organizations' radio advertising together with their TV commercials continued to be monitored on a monthly basis. The legislative changes on the one hand and the increasingly active mortgage market on the other require a special approach to reviewing mortgage loans. In particular, we have examined 22 banks and credit organizations and looked at internal policies and procedures establishing the templates to mortgage loan agreements of 35 financial organizations, the templates to contracts and actually signed contracts. About 150 violations were identified. ANNUAL REPORT 2019 55 COOPERATION WITH I NTERNATIONAL ORGANIZATIONS INSTITUTIONAL DEVELOPMENT CENTRAL BANK OF OBJECTIVES THE REPUBLIC OF ARMENIA OTHER OBJECTIVES OF THE BANK MAIN#5556 APPEALS -10.96% 6147 HOTLINE CALLS +7.34% 878 REQUESTS RECEIVED CENTRAL BANK OF ARMENIA In 2019 the CPFEC continued responding to consumer complaints received in writing and via a hotline service. During the year a total of 6147 calls were received via a hotline service, 5699 of them were satisfied, 302 asked to apply in writing, 133 asked to apply elsewhere, 13 were not satisfied. The number of calls has dropped by 10.96%. In 2019 the CPFEC received 878 complaints, up by 7.34% (116 more complaints) relative to the previous year. Increasing the level of financial literacy of consumers in Armenia In 2019, as part of the program "Financial Education at the School" and in collaboration with the RA Ministry of Education, Science, Culture and Sport, the Central Bank continued trainings of teachers who instruct subjects "Me and the Surrounding World", "Mathematics", "Algebra" and "Social Science", so that they could conduct lessons integrated with financial education. In 2019, a total of 2419 teachers from 339 schools were trained. The implementation of the "Financial Education in Rural areas" program continued during the year. In December, as a result of ANNUAL REPORT 2019#56cooperation with the RA Ministry of Territorial Administration and Infrastructure, training courses on effective management of personal finances were conducted in 96 communities of 9 regions of Armenia. As much as 1535 rural community residents have participated in these courses. The "My finance month-2019" program was carried out this year too. The goal of the program is sharing knowledge and relevant skills on personal finance with people in a clear and affordable way. In 2019, with the support of the Savings Banks Foundation for International Cooperation (SBFIC), a research work "Financial Education for Migrants: mapping and assessment of needs" was done, and a respective financial education program will be developed based on the results of the research. During the year, with the support of the SBFIC, a survey "Barometer of Financial Capabilities" was carried out. The results of the survey are expected to be used to develop the National Strategy for Financial Education 2020-2024 action plan. The educational projects "Workshops for the Military", "Citizenship" and "Mediator's Camp" and the TV project "The Smartest" were carried out in addition to other programs during the reporting year, and more than 150 e-articles addressing educational issues were published. Various online financial awareness campaigns were implemented, in particular through social platforms (Facebook, YouTube, Twitter pages) of the website abcfinance.am. The CPFEC sustained its cooperation with international institutions supporting consumer protection and financial education, such as the International Financial Education Network (INFE), the Alliance for Financial Inclusion (AFI), and the Eurasian Economic Partnership. ANNUAL REPORT 2019 57 COOPERATION WITH I NTERNATIONAL ORGANIZATIONS INSTITUTIONAL DEVELOPMENT OTHER OBJECTIVES OF THE BANK MAIN CENTRAL BANK OF OBJECTIVES THE REPUBLIC OF ARMENIA#57CENTRAL BANK OF ARMENIA ISSUANCE OF CURRENCY AND ORGANIZING MONEY CIRCULATION To ensure circulation of the national currency, the Central Bank organizes, regulates and oversees circulation of the Armenian Dram while adhering to the principles of convenience, efficiency, continuity and reliability. During the year, the Central Bank completely secured the demand for cash in the economy in the required volume, nominal value, quality and timing. The Central Bank delivered cash services to its customers in regions of Armenia and the Republic of Artsakh through Yerevan- based cash center and regional cash centers (RCC) of Dilijan, Sisian and Syuniq. In 2019 cash circulation of the Central Bank increased by 17.8% compared to the previous year. Regional cash centers provided 16.2% of total cash circulation of the Bank. Like in previous years, most RCC transactions were for cash withdrawal, constituting 82% of their total turnover. Figure 9: Cash circulation of the Bank in 2019 ANNUAL REPORT 2019 58 83.8% Yerevan Cash Center ■9.9% Dilijan Cash Center 2.3% Syuniq Cash Center ■4.1% Sisian Cash Center#58500 d 200 d In the year under review, the amount of cash outside the Central Bank has increased by 7.1%, with supply of coins having grown by 11.8%. Gradually, the third series banknotes of the 2018 issuance were put into circulation, and these are circulating in parallel with the other banknotes issued previously. The shares of banknotes with nominal value 10.000 and 50.000 dram have grown since the beginning of the year by 3.8% and 1%, respectively, in circulation. During the year, demand for banknotes with nominal value 2000 drams also increased, with its share reaching 0.48% of the supply of banknotes. Figure 10: Type structure of currency outside the Central Bank as of 31.12.2019 Coins 100 000 d 50 000 d 20 000 d 100 d 10 000 d 50 d 5 000 d 20 d 10 d 0.0% 0.5% 1.0% 1.5% 2.0% 2000 d 1000 d Notes 0% 10% 20% 30% 40% 50% 60% As part of the framework to combat money laundering, the Central Bank continued collaborating with law enforcement authorities. Efforts on detecting counterfeit money and taking it to the expertise continued and relevant information on fraudulent methods and how these apply communicated to law enforcement authorities. Year 2019 was outstanding for a number of historic events and anniversary celebrations of prominent Armenians, which were ANNUAL REPORT 2019 59 OTHER OBJECTIVES OF MAIN CENTRAL BANK OF DEVELOPMENT THE BANK OBJECTIVES THE REPUBLIC OF ARMENIA COOPERATION WITH I NTERNATIONAL ORGANIZATIONS INSTITUTIONAL#59CENTRAL BANK OF ARMENIA featured in the Central Bank's issues. There were new issues of commemorative coins marking the 150th anniversary of two great Armenians: Hovhannes Tumanyan and Komitas. At the turn of the 19th and 20th centuries these figures had their unique imprint on the history of Armenian culture thanks to their achievements and accomplishments in the field of literature and music, respectively. The jubilee issues included commemorative coins dedicated to the 150th anniversaries of philanthropist Galust Gyulbenkyan and painter Vardan Makhokhyan and to the 125th anniversary of Admiral Isakov, showing their efforts to developing the motherland economically and culturally and their contribution to peace and prosperity. On the occasion of the 5th anniversary of the Eurasian Economic Union, the Central Bank, like other central banks of the EEU member states, issued a commemorative coin, marking the achievements of member states over 5 years in expanding economic ties and strengthening a common economic policy. The landmark events celebrated in 2019 included the 100th anniversaries of the National Museum of History of Armenia and the Yerevan State University - institutions of national educational and cultural significance, on which occasion the Central Bank issued commemorative coins. The commemorative coin "The Year of the Caucasian Leopard" was among the issues this year, which marked the return of this rare animal to the Khosrov Forest Reserve of the Republic of Armenia. At the 13th International Contest of Currency Constellation held in Russia in 2019, the Central Bank of Armenia earned an honorary award for its silver commemorative coin "Yerevan-2800" in the nomination Commemorative Coin of the Year. This award speaks, once again, of the high quality of the artistry and production of the currency of the Republic of Armenia. ANNUAL REPORT 2019 60 60#603,000 2,500 2,252 2,000 1,500 1,000 500 MANAGEMENT OF INTERNATIONAL RESERVES In 2019 gross international reserves of the Republic of Armenia increased by around USD 590.3 million to nearly USD 2,850 million at the end of the year (see Figure 11). Figure 11: International reserves of Armenia (million US dollar) 2,314 2,259 2,204 1,775 1,490 2013 2014 2015 2016 2017 2018 2019 2,850 COOPERATION WITH I NTERNATIONAL ORGANIZATIONS INSTITUTIONAL DEVELOPMENT OTHER OBJECTIVES OF THE BANK The increase in reserves owed mainly to the loans and borrowings equivalent to nearly USD 651 million received during the year, and because about USD 566 million worth of foreign currency was purchased in the domestic market, and commercial banks' correspondent accounts with the Central Bank have grown by about USD 268 million. At the same time, about USD 829 million-equivalent principal and interest payments on public debt were made during the year. International reserves of the Republic of Armenia continued to comply with main requirements to foreign currency reserves, ANNUAL REPORT 2019 61 MAIN CENTRAL BANK OF OBJECTIVES THE REPUBLIC OF ARMENIA#61CENTRAL BANK OF ARMENIA particularly, in terms of its economy's ability to absorb possible external shocks. In 2019 Armenia's international reserves secured about four months of import coverage and nearly six years of servicing of current liabilities. The Central Bank continued its strategy of managing international reserves of Armenia by taking a least-risk-involvement approach, which is aimed at increasing the safety, liquidity and effective management of the reserves. ANNUAL REPORT 2019 62#62ORGANIZING AND REGULATING THE FRAMEWORK TO COMBAT MONEY LAUNDERING AND TERRORISM FINANCING T he 2019 activities for combatting money laundering and terrorism financing (ML/TF) included conducting analyses in accordance with national risks, taking preventive measures to deal with potential suspicious transaction indicators, implementing a regulatory framework and strengthening national and international cooperation in compliance with international best practice. Operational analyses COOPERATION WITH I NTERNATIONAL ORGANIZATIONS INSTITUTIONAL DEVELOPMENT OTHER OBJECTIVES OF THE BANK The purpose of conducting operational analyses by the Financial Monitoring Center (FMC) is to detect possible cases of ML/TF, take, if needed, preventive action, and repot any grounded suspicion of ML/TF activity to law enforcement authorities. The FMC has received and analyzed suspicious transaction reports from reporting entities. These STR referred to money laundering and suspicion of predicate offences. Some of the most common fraud schemes indicated in the analyses were: attempts to legalize proceeds of crimes committed through the use of various mass marketing schemes, financial transactions containing elements typical of pyramid schemes (financial pyramids), ANNUAL REPORT 2019 63 MAIN CENTRAL BANK OF OBJECTIVES THE REPUBLIC OF ARMENIA#6364 CENTRAL BANK OF ARMENIA financial transactions with involvement of former political influencers, transit flow of funds through the Armenian banking system, other cases with similarities to the schemes described in the typologies published by the Central Bank. Preventive measures Preventive measures involve providing instructions (notifications) to the reporting entities for suppressing the ML/TF risks identified as a result of strategic and operational analyses, placing on the FMC website public notices of change in international listings for immediate use of targeted financial sanctions, training for reporting entities and so on. The instructions (notifications) cascaded to reporting entities during 2019 were mainly intended to taking preventive measures in connection with possible involvement of persons in fraudulent schemes. Moreover, the reporting entities were provided with feedback with the aim to inform them on the progress and results of the analyses. It is worth mentioning that, in the period under review, carrying out high-risk involving transactions by participants of the banking system has been rejected or their business relationships with the customer terminated, in a number of cases. In order to effectively mitigate TF risks on the back of an increasing international threat of terrorism, continuous efforts were invested in the reporting period to implement the restrictive measures imposed by international organizations and to report to the parties concerned. In particular, the following information was published on the FMC website and notified to reporting entities: Updates in the lists published by or in accordance with the UN Security Council resolutions that stipulate for the freezing of assets of persons under, inter alia, UNSCR ANNUAL REPORT 2019#64ANNUAL REPORT 2019 65 1267/1989/2253 designations on ISIL (DA'ESH) and Al- Qaeda, UNSCR 1988 designations on the Taliban, and UNSCR 1718 designations on North Korea; The FATF statements on countries with strategic deficiencies in their AML/CFT systems, as well as on countries with such strategic deficiencies monitored by the FATF under its on- going global AML/CFT compliance process. Entities reporting in compliance with international initiatives aimed at restricting risk to terrorist financing have also been instructed to take preventive measures against those included in the list of terrorists in the CIS framework. It is worth mentioning that the Republic of Armenia continues to have a very low level of TF risk. As regards training for reporting entities, workshops/discussions on the developments in the fight against ML/TF were organized for all groups of reporting entities; about 300 employees attended these workshops. In 2019, a workshop was organized together with the RA State Revenue Committee for representatives of non-commercial organizations. COOPERATION WITH I NTERNATIONAL ORGANIZATIONS INSTITUTIONAL DEVELOPMENT OTHER OBJECTIVES OF THE BANK MAIN CENTRAL BANK OF OBJECTIVES THE REPUBLIC OF ARMENIA#6566 CENTRAL BANK OF ARMENIA Legislative arrangements One of the key elements of an effective AML/CFT framework is the legislation that best reflects international standards and restricts the AML/CFT risks. In the period under review, the AML/CFT regulatory framework continued improving. In particular, a procedure on reporting. transaction or suspicious transaction and business relations subject to mandatory notification by banks was drafted, which is determined by the introduction of an online reporting system. At the same time, in order to comply with the FATF recommendations, legislative changes were drafted to expand the circle of people with political influence by including high-ranking officials of domestic and international organizations. Moreover, additional regulatory arrangements in connection with requirement to identify real beneficiaries were envisaged. The Board of the Central Bank has adopted a decision, which provides for stipulation of relying on payment cards issued by Armenian commercial banks when conducting a proper customer examination using payment cards. Such arrangement will increase the effectiveness in enforcing the provisions on acquisition, storage and disclosure of customer identification information. A working group set up under the RA Prime Minister's decree of March 1, 2019 is to implement the concept "Seizure of the criminally obtained property, without indictment", which was approved by the the Interagency Commission on Anti-Money Laundering, Combating Terrorism Financing and Distribution of Weapons of Mass Destruction back on November 30, 2018. The Central Bank, as a member of the working group, has been actively involved in studying both. international experience and drafting the law. Activities, in particular, included studying legal acts and court decisions of the countries that have introduced the institute of judgments of the European Court of Human Rights, reviewing the procedures for obtaining banking secret, the model for implementing the institute, and presenting list of crimes. ANNUAL REPORT 2019#66ANNUAL REPORT 2019 67 COOPERATION WITH I NTERNATIONAL ORGANIZATIONS Collaboration with law enforcement authorities In view of detecting, preventing and thwarting ML/TF incident, exchange of information and arranging meet-ups between the FMC and law enforcement authorities as well as trainings is important. In the period under review, the FMC and law enforcement agencies continued actively cooperating in the field of preventing and detecting predicate offences. At the same time, at the initiative of the FMC, roundtable discussions were organized between the FMC and the law enforcement agencies to increase efficiency in various areas of cooperation. INSTITUTIONAL DEVELOPMENT OTHER OBJECTIVES OF THE BANK MAIN CENTRAL BANK OF OBJECTIVES THE REPUBLIC OF ARMENIA#6768 04 INSTITUTIONAL DEVELOPMENT Central Bank security and business continuity Knowledge and human resources Communication and accountability ANNUAL REPORT CENTRAL BANK OF ARMENIA 2019#68SECURITY AND BUSINESS CONTINUITY In 2019, strengthening the previous years' results of work in the sphere of security, the Central Bank placed a clear emphasis on expanding and ensuring cyber security in the financial and banking system. In particular, cyber threats to the banking sector of the Republic. of Armenia were studied with the involvement of well-known specialists in this field. In order to neutralize cyber threats in this direction, work was done to establish a connection center with the MISP (Malware Information Sharing Platform) system, and required human, technical and financial resources were allocated. Effective cooperation between information security departments of commercial banks and of the Central Bank continued. Based on the concept developed last year, work was done to establish a Computer Incident Responding Center. ANNUAL REPORT 2019 69#6970 KNOWLEDGE AND HUMAN RESOURCES CENTRAL BANK OF ARMENIA the end of December 2019, the Central Bank had 778 employees (425 women and 353 men), their Caverage age being 41. During the year, 62 employees left the Bank (51 in the year before). The process of staff recruitment proved active during 2019, and 104 people selected through various recruitment procedures were hired for employment at the Central Bank. In the reporting period, structural changes were made to make the decision-making more efficient. During the year, 57 employees. earned promotion (8 for a managerial position) for taking up a function of increased complexity. As much as 30 applicants participated in the Isahak Isahakyan Stipend Eligibility Contest announced by the Central Bank in 2019. The best of them two from Armenian State University of Economics, one from Yerevan State University and one from Artsakh State University were awarded the Isahak Isahakyan Stipend. In 2019, a total of 96 students from colleges and universities in Armenia took their research internship at the Central Bank. During the year, 42 employees of the Central Bank lectured at a number of universities and other educational establishments, including 5 in Yerevan State University, 7 in YSU Ijevan branch, 5 in Armenian State University of Economics (2 of them in Gyumri branch), 5 in American University of Armenia, 6 in French University Armenia, sharing their experience and knowledge with the future-day specialists. ANNUAL REPORT 2019#70EMPLOYEES CENTRAL BANK OF ARMENIA NUMBER OF EMPLOYEES 778 343 MEN EMPLOYEES DISMISSED 89 62 51 THE ISAHAK ISAHAKYAN STIPEND AVERAGE AGE 41 71 ANNUAL REPORT 32 2016 2017 2018 2019 30 applicants 2019 425 WOMEN EMPLOYEES DISMISSED Winners Armenian State University of Economics Yerevan State University Artsakh State University Introduced in 2003, the Isahak Isahakyan Stipend has been granted so 2 1 1 far to 101 best students with economic background. The number of students from tertiary enrollment in Armenia having taken their research internship at the Bank 96 The number of employees who delivered lectures 42 62 PERSONS EMPLOYED 104 During the year, 57 employees earned promotion, out of which 8 INTERNATIONAL CERTIFICATION FOR QUALIFICATION for a managerial position, for taking up a function of increased complexity. CERTIFICATION THE NUMBER OF THOSE STILL TAKING EXAMS 17 THE NUMBER OF HOLDERS OF QUALIFICATION CERTIFICATE 8 64 9 CFA 7 ACCA VE RI TAS HARVARD The employees having conducted research on the Central Bank-related issues at Harvard Davis Center 2 JOB ROTATION TRAININGS COURSES ARRANGED BY DRAWING ON INTERNAL RESOURCES • • . • • Employees who took online training courses on financial supervision offered by the Financial Stability Institute 12 EMPLOYEES Employees who benefited job rotation to make sure a reserve of managerial staff is in place and both experienced professionals and young specialists are given a chance to broaden their knowledge 24 ANNUAL REPORT 2019 72 .. 26 TRAININGS 304 EMPLOYEES#71Staff training and professional qualification Highlighting the importance of continued professional growth of its employees, the Central Bank carried out activities aimed at enhancing professional qualification of the staff in 2019 too. In 2019, to obtain up-to-date knowledge and experience and to develop new skills, the employees of the Central Bank passed training at banks, other financial institutions and training centers abroad and educational centers, including Dilijan Training and Research Center, in Armenia, and benefited from attending courses led by lecturers of well-known international universities. All the above- mentioned measures were intended to offer effective solution to operational tasks defined by the strategy of the Central Bank of Armenia (for example, issue new quality banknotes, introduce and improve risk-based supervision system, integrate financial education component with schools). In pursuit of sharing knowledge and expertise accumulated over the years and further commitment to a teamwork, the Central Bank has organized, by drawing on internal resources, 26 seminars for as much as 304 employees to communicate its current issues and functions and to help them develop important skills for professional activities. During the year 12 employees took online training courses on financial supervision offered by the Financial Stability Institute. In 2019, 4 employees of the Central Bank benefited job rotation, another tool for professional development, to make sure a reserve of managerial staff is in place and both experienced professionals and young specialists are given a chance to broaden their knowledge. During the year, employees of the Central Bank passed. international certification and qualification exams in the field of finance, accounting, audit, insurance, information technologies, among others. As of 2019, 64 employees have international certificates of qualification and 17 are still taking exams. Eight employees of the Central Bank are full members of CFA and nine are full members of ACCA. Two employees of the Central Bank conducted research on current issues on the central bank at Harvard Davis Center during 2019. ANNUAL REPORT 2019 73 COOPERATION WITH I NTERNATIONAL ORGANIZATIONS INSTITUTIONAL DEVELOPMENT OTHER OBJECTIVES OF THE BANK MAIN CENTRAL BANK OF OBJECTIVES THE REPUBLIC OF ARMENIA#72CENTRAL BANK OF ARMENIA COMMUNICATION AND ACCOUNTABILITY Central Bank accountability In fulfilling its objectives, the Central Bank is independent from state authorities of the Republic of Armenia. The Bank maintains its accountability pursuant to the terms and procedure determined by the legislation of the Republic of Armenia the Central Bank strategy and internal rules and policies. The Central Bank reports to the National Assembly of Armenia about its activities (Inflation Report approved in the first quarter of the year). First part of the inflation report contains the monetary policy program and the second part provides status report on implementation of the monetary policy program for the past one-year horizon. The monetary policy program published by the Central Bank is a lead guide. The monetary policy programs cover inflation forecasts, monetary policy directions and other aspects of relevance as defined by the Board of the Central Bank for fulfillment of the goals set out in the law. In the framework of accountability of monetary policy implementation, the Central Bank publishes 8 decisions of the Board on the refinancing rate during the year. On the same day the decision is adopted, a press release briefly stating why the decision had to be made becomes available for public disclosure. The minutes on interest rate presenting in more detail the discussions and reasoning underlying the making of decision is released within 10 days after the decision is adopted. The Central Bank publishes the Inflation Report four times a year4. This quarterly paper provides a detailed account of actual macroeconomic and monetary environments of reported periods, provides a factor analysis of fulfilment of the inflation target, and presents the main directions of the monetary policy to be implemented by the Bank and the projected path to inflation in fulfilment of the inflation target in the forecast horizon. 4. The inflation report for the first quarter is the report submitted annually to the National Assembly. 74 ANNUAL REPORT 2019#73The Central Bank publishes financial stability reports on a semi- annual basis; these reports contain the results of financial stability reviews. The financial stability reports are designed to describe risks that may potentially threaten the country's financial stability in the short- term, in the context of both past and expected developments in real and financial sectors. In general, the report provides the Central Bank's assessment of financial stability for a certain period of time, existing risks and measures to prevent or neutralize them. The report is presented at a press conference, then a regular semi-annual periodical and relevant press release are to be posted on the Central Bank website. Publishing of the report helps to increase the awareness of financial institutions, companies, economic agents, households and general public and it adds to the transparency of the Central Bank's activity while enhancing the public trust towards the Central Bank. The Bank provides its "Annual Report of the Central Bank" for public disclosure. The annual report incorporates the Bank's annual financial accounts, and an internationally recognized audit firm is appointed to verify every year their compliance to international standards. "The Commemorative Coins of the Republic of Armenia", an annual journal, contains information on the commemorative coins of the Republic of Armenia issued in the given year, the results of the contests with participation of commemorative coins of the Republic of Armenia, other materials related to these coins. "The Central Bank Bulletin" is a monthly of normative and individual decisions of the Board of the Central Bank, the decisions of Governor of the Central Bank, other legal acts, as well as the statistical survey. The annual report of the Financial Monitoring Center presents activities in the field of combating ML/TF. The abovementioned documents aim to disseminate, most comprehensively and clearly, information on the implementation of the main goals of the Central Bank, thus raising the level of public confidence in the Bank. ANNUAL REPORT 2019 75 COOPERATION WITH I NTERNATIONAL ORGANIZATIONS INSTITUTIONAL DEVELOPMENT OTHER OBJECTIVES OF THE BANK MAIN CENTRAL BANK OF OBJECTIVES THE REPUBLIC OF ARMENIA#74Public relations CENTRAL BANK OF ARMENIA In 2019 further work was done by the Central Bank to communicate the events in the financial market, the activities of financial companies and its activities to the general public. As part of ensuring transparency in fulfilling the primary objectives, the Central Bank communicated its actions, programs and initiatives in the field of implementing monetary policy, financial supervision and maintaining financial stability to the financial market participants and the public. Discussions were held on various issues of interest. Special attention was paid to advising people to use caution about organizations that operate illegally and/or about such activities that contain elements of essential risk. During the year, 8 decisions of the Board on interest rates on repo (refinancing) operations were published. The brief press release was published immediately, and the Interest rate minutes were published within 10 days after the Board decision. Four interest rate minutes were published in the Inflation Report. A number of meet-ups were arranged for mass media managers and representatives of the Central Bank management to discuss issues of relevance. 76 ANNUAL REPORT 2019#75PUBLIC RELATIONS 31 QUERIES IN WRITING EVENTS ORGANIZED BY PRESS SERVICE OF THE BANK 4 INTERVIEWS 20 275 ANSWERS TO ONLINE INQUIRIES FROM INDIVIDUALS AND ORGANIZATIONS 223 THE NUMBER OF PRESS RELEASES Social networks remain an important platform for the Central Bank to publish news, messages and other materials featuring its activities, and to respond to queries. During the year, 4 events with the participation of mass media and 20 interviews were arranged; the Press Service received 31 queries in writing to which it responded through an established procedure under law; numerous verbal inquiries were responded efficiently and timely. Full answers were provided to 275 online inquiries from individuals and organizations. A total of 223 press releases broadly featured the Central Bank's activities. ANNUAL REPORT 2019 77 COOPERATION WITH I NTERNATIONAL ORGANIZATIONS INSTITUTIONAL DEVELOPMENT OTHER OBJECTIVES OF THE BANK MAIN CENTRAL BANK OF OBJECTIVES THE REPUBLIC OF ARMENIA#7678 CENTRAL BANK OF ARMENIA CENTRAL BANK COMPLIANCE FUNCTION U Inderlining the importance of compliance of its operations with domestic requirements and the best international experience and standards, the Central Bank developed and comprehensively regulated the process of centralized implementation of the compliance function5 in 2019. In particular, the working group set up during the reporting period carried out extensive studies of the international experience on the introduction of the compliance function in central banks. The following statutes governing the field have been developed and approved as a result of the study. The compliance policy The guide for internal procedures on implementing compliance The compliance service's charter. According to these statutes, the Central Bank's Compliance Service (the Compliance Service) is responsible for enforcing the compliance as a separate and independent function from other subdivisions. The Compliance Service includes the Compliance Officer and the Central Bank's relevant compliance staff. The purpose of the Compliance Service is to ensure that the Central Bank operations comply with both domestic and international requirements for combating ML/TF, identify and assess reputation, fraud, corruption and such other risks that result from non-compliance with these requirements, and take action to suppress or reduce them. The competencies of the Compliance Service include the following Central Bank operations: 5. Until 2019, the compliance function was carried out by the Central Bank's departments concerned, each doing its part of job. 6. The experience of De Nederlandsche Bank, the US Federal Reserve Bank, the Central Bank of Lebanon, and the principles of the Basel Committee on Banking Supervision on the implementation of the Compliance Function, as well as the Wolfsberg Group documents, were studied. 7. In 2019 appointments were made for replenishment of the staff of the Compliance Service. ANNUAL REPORT 2019#77Opening and managing correspondent accounts in foreign financial institutions Opening and maintaining customer correspondent accounts and other accounts. Implementation of other operations, including supplies for the needs of the Central Bank, sale of monetary values, exchange of banknotes. The above aspects require that the Compliance Service examine the Central Bank customers, international partners, suppliers, confirm high-risk transactions and business relations, conduct analysis of suspicious transactions and business relations, and then make decisions on rejection, termination, suspension of transactions/ business relations, and/or decisions on freezing the property of persons connected with terrorism. In addition to the above, the Compliance Service also: reviews and assesses the risks associated with compliance with the Central Bank operations, and takes measures to prevent identified risks represents the Central Bank in relations with foreign financial organizations and international organizations provides advice on compliance issues to the Central Bank's management and departments concerned undertakes educational and awareness-raising activities for making compliance policy a well-established culture in the Central Bank. When performing its functions, the Compliance Service is directly reportable to the Governor of the Central Bank, which aims to ensure the highest degree of independence and impartiality in decision- making. ANNUAL REPORT 2019 79 COOPERATION WITH I NTERNATIONAL ORGANIZATIONS INSTITUTIONAL DEVELOPMENT OTHER OBJECTIVES OF THE BANK MAIN CENTRAL BANK OF OBJECTIVES THE REPUBLIC OF ARMENIA#7880 Visitor Center CENTRAL BANK OF ARMENIA In 2019 the Visitor Center of the Bank hosted 11 673 visitors, which is an 8% increase compared to the figure (10 804 visitors) reported in the previous year. In 2019 the Center continued its educational project "One Day at the Central Bank" for the servicemen and alumni of educational institutions of the Armenian Ministry of Defense. During the year, the Center received 325 (274 in the year before) servicemen/alumni and teaching staff. Educational events were organized for 45 teachers of general schools in Shirak, Lori, Aragatsotn, Armavir regions. In May 2019, the Visitor Center participated in the international program "Museums Night", and hosted 1468 visitors in the framework of that event. In 2019, the Central Bank and the Dilijan Training and Research Center benefited an integrated modern electronic library software designed for accessing to the library fund, keeping records and using a common reader service. This allows each Central Bank employee to follow the updates of professional literature, journals, magazines, electronic and printed, available in the library fund (with a brief description of the professional literature), to have an individual e-book, to order literature from the Central Bank's library online. In 2019, with the participation of well-known specialists in the field of numismatics, the documentary "Dramapatum" (narrative of the Armenian currency) was filmed, which talks about the creation of money, the stages money circulation in Armenia. The film is targeted for various segments of population. In 2019, to host schoolchildren from regions of Armenia, the Visitor Center cooperated with such organizations as Junior Achievements of Armenia (JAA), Jinishian Memorial Foundation (JMF), Armenian PR Research and Information Association, World Vision Armenia Development Charity, Gyumri Youth Palace, Neurohab Business Academy, the School of Ethics, and the Office of Financial System Mediator. 8. See details on www.visitorcentre.cba.am, www.museum.cba.am, www.cba.am. ANNUAL REPORT 2019#79ANNUAL REPORT 2019 81 COOPERATION WITH I NTERNATIONAL ORGANIZATIONS INSTITUTIONAL DEVELOPMENT In the Visitor Center in 2019, the exhibition of historical, cultural and numismatic values of the State Treasury of the RA Ministry of Finance continued. OTHER OBJECTIVES OF THE BANK MAIN OBJECTIVES CENTRAL BANK OF THE REPUBLIC OF ARMENIA#8082 05 COOPERATION WITH INTERNATIONAL ORGANIZATIONS ANNUAL REPORT CENTRAL BANK OF ARMENIA 2019#81In the year under review, the Central Bank sustained its ties with international partner institutions at multilateral and bilateral level by way of organizing a variety of workshops, symposiums, courses, and mutual visits. A number of visits by representatives of partner organizations are noteworthy in this context. In 2019 the Central Bank received Richard Dornbusch, Deputy Executive Director of the International Monetary Fund, and Jihad Azour, Director of the Middle East and Central Asia Department. Issues related to bilateral cooperation, current economic situation in Armenia, fiscal and monetary policy, strengthening the external reserve position, reducing the public debt, maintaining the financial system stability were discussed during the visits. In 2019 the International Monetary Fund (IMF) made a regular visit to Armenia. Following an effective work with the Central Bank and the Government of the Republic of Armenia, the IMF Board approved a new program with Armenia in 2019. In the framework of the program approved by the IMF, the Central Bank has closely cooperated with the IMF Armenia mission, and the management of relevant department and the IMF/WB (Dutch-Belgian Subgroup) Constituency, ensuring the implementation of measures related to the monetary and financial sectors. In April, the Central Bank received a delegation led by Christoph Tiskens, Chairman of the Board of Directors of the European Foundation for Southeast Europe (EFSE). The prospects of bilateral cooperation was the subject of discussion during the visit, followed by a roundtable on "SME Sustainable Finance" organized together with Finance in Motion. In October, the Central Bank received a delegation led by KfW Bank Board Member Bernd Loewen. The outcome of the projects implemented by KfW, projects underway, as well as further programs aimed at renewable energy and SME lending were discussed. As a ANNUAL REPORT 2019 83#8284 CENTRAL BANK OF ARMENIA result of effective cooperation between the Central Bank and KfW Bank, 3 new loan agreements worth EUR 60 million were signed in December 2019. The loan resources are intended to be channeled to agriculture, housing and renewable energy sectors. During the year, cooperation with Black Sea Trade and Development Bank, European Bank for Reconstruction and Development and other international partner organizations continued; mutual visits were part of the cooperation. In 2019 representatives of Moody's and Fitch Ratings, international rating agencies, arrived in Armenia on a regular visit. The visit was coordinated by the Central Bank. As a result, Moody's has raised Armenia's sovereign rating from B 1 to Ba 3, while changing the outlook for the country from 'stable' to 'positive'. The Central Bank continued collaboration with international organizations and institutions in developing international standards in the field of AML/CFT and evaluating the implementation of those. standards, including cooperation with the Council of Europe's MONEYVAL Committee, the Egmont Group, the Parties to the Warsaw Convention, the Eurasian Group, and the Board of Directors of CIS Financial Intelligence Units. In 2019, as part of cooperation with foreign financial intelligence units, most requests were sent to the FIUs of the United States, Latvia, Austria, Estonia, Switzerland, Russia, the Czech Republic, the United Kingdom, the Virgin Islands and received from the FIUS of Russia, Latvia, France, Malta, Czech Republic, Netherlands, Liechtenstein. In the context of strengthening international cooperation, in 2019 the Central Bank hosted dozens of regional and international symposiums, conferences, seminars, workshops, forums, etc. in its Yerevan Head Office and Dilijan Training and Research Center. In particular: The Dilijan TRC, together with the Office of the President of the Republic of Armenia, hosted high-ranking guests to the "Armenian Summit of Minds" in Dilijan. The Dilijan TRC, together with the RA Ministry of Economy, hosted participants of the Armenian-Georgian intergovernmental commission and business forum on banking and economic issues in Dilijan. ANNUAL REPORT 2019#83CENTRAL BANK OF OBJECTIVES THE REPUBLIC OF ARMENIA The 22nd Annual Central Bank Macromodeling Conference on "Expanding Boundaries of Monetary Policy" was organized. The 4th meeting of the Working Group on Money Market was organized in the framework of cooperation with the European Bank for Reconstruction and Development, which was followed by a seminar-discussion on delivering legal opinion for the Republic of Armenia by the Libor Rate, as well as the International Swaps and Derivatives Association. In 2019 the Central Bank also hosted the 2nd meeting of the Advisory Committee on financial markets of EEC, the meeting of the working group of specialists of national/central banks of the EEU member states in the field of developing national payment and settlement systems on the subject "Implementing the ISO 20022 standard", as well as a number of other events in the framework of its membership in international and regional institutions. Agreements, contracts and memoranda of understanding signed between foreign central banks at a bilateral level and in the framework of intergovernmental commissions in 2019 included: 1. A memorandum of understanding signed between the Central Bank of Armenia and Abu Dhabi Global Market at the meeting of the Armenia - Emirates Committee in Yerevan on May 2nd 2. 3. 4. An agreement on cooperation between the Central Bank of Armenia and the Central Bank of Russia in the field of financial market supervision, including the exchange of confidential information, signed in the framework of International Financial Congress in St. Petersburg on July 4th. A memorandum of understanding between the Central Bank of Armenia and the Astana International Center on Financial Services Regulation signed in the framework of the regular meeting of the Advisory Committee on financial markets of EEC in Yerevan on October 2nd The Central Bank actively participated in developing the concept paper on Common Financial Market in EEU and has, together with partner central/national banks, finalized ANNUAL REPORT 2019 85 COOPERATION WITH I NTERNATIONAL ORGANIZATIONS INSTITUTIONAL DEVELOPMENT OTHER OBJECTIVES OF THE BANK MAIN#8486 CENTRAL BANK OF ARMENIA the concept paper, which was signed by the leaders of the EEU countries at the October 1st summit in Yerevan. In 2019 employees of the Bank attended a variety of training courses, workshops, consultations, symposiums conferences and roundtables, as well as made visits for sharing of experience, both in Armenia and abroad. During the year, the Central Bank received 11 delegations from central/national banks of the Eurasian Economic Union and the CIS Member-States as part of cooperation for sharing professional experience and information exchange, which has become a tradition. In the framework of cooperation of central/national banks of the EEU and CIS member states, the Dilijan TRC hosted 11 training courses attended by 59 representatives of banks from EEU and other countries. The Central Bank also organized tailor-made workshops and work visits for sharing experience; 72 employees of the Central Bank presented the Bank's best experience. Overall, 31 training courses and visits for sharing experience, attended by 1058 participants, were organized in cooperation with international partner institutions and European central/national banks. In 2019 the staff of the Central Bank's Economic Research Department benefited 7 courses delivered by lecturers from the world's leading educational establishments. During the year, the Central Bank's experts, together with representatives of international institutions, organized a number of events (trainings, workshops, consultations, discussions) on matters of interest, involving 580 experts from respective government departments of the Republic of Armenia, commercial banks and other interested organizations. During the year, a total of 252 employees of the Central Bank took part in various educational programs arranged by specialized organizations operating in the Republic of Armenia. ANNUAL REPORT 2019#85ANNUAL REPORT 2019 87#8688 06 CENTRAL BANK OF THE REPUBLIC OF ARMENIA IFRS CONSOLIDATED FINANCIAL STATEMENTS for the year ended 31 December 2019 together with independent auditor's report ANNUAL REPORT CENTRAL BANK OF ARMENIA 2019#87Central Bank of the Republic of Armenia International Financial Reporting Standards Consolidated financial statements for the year ended 31 December 2019 together with independent auditor's report#88Central Bank of the Republic of Armenia Contents Independent auditor's report Consolidated financial statements Consolidated statement of comprehensive income Consolidated statement of financial position. Consolidated statement of changes in equity. Consolidated statement of cash flows.... Notes to the consolidated financial statements 1. Principal activities Consolidated financial statements 1 2 3 4 123456 2. Summary of significant accounting policies. 3. New accounting pronouncements. Interest income... 5. Interest expense. 6. Net foreign exchange loss. 5 5 19 21 .21 21 7. Net (loss)/gain on derivatives 8. 9. Net gain on financial instruments at fair value through profit or loss Other income... 21 10. Cost of production of banknotes, coins and numismatics.. 11. Other expenses. 12. Placements and investments with banks and other financial institutions.. 13. Financial instruments at fair value through profit or loss 14. Derivative financial instruments 15. Investment securities 16. Operations with the International Monetary Fund 17. Property and equipment... 18. Intangible assets.... 19. Other assets in domestic currency... 20. 21. 22. 23. 24. 25. Deposits and accounts of financial and other institutions Other borrowed funds Other liabilities in domestic currency.. Due to the Government of the Republic of Armenia. Debt securities issued. Management of capital. 26. Commitments. 27. Related party transactions.. 28. Cash and cash equivalents. 29. Fair value of financial instruments.. 30. Risk management... 31. 32. Maturity analysis.. Changes in liabilities arising from financing activities. 33. Events after the reporting period........ 22 22 22 22 23 .26 27 28 30 32 32 33 34 34 35 35 35 10 10 10 10 10 10 082233 42 52 53 53 35 36 36#89EY Ernst & Young CJSC 1 Northern Ave., office 27 Yerevan, 0001, Armenia «Էրնսթ ընդ Յանգ» ՓԲԸ ՀՀ, ք. Երևան 0001 Հյուսիսային պող. 1, գրասենյակ 27 Հեռ. Tel: Կառուցելով բարեկեցիկ աշխարհ Fax: +374 (10) 500 790 +374 (10) 500 705 +374 (10) 500 706 +374 (10) 500 790 +374 (10) 500 705 Ֆաքս. +374 (10) 500 706 www.ey.com/am Independent auditor's report To the Board of the Central Bank of the Republic of Armenia Opinion We have audited the consolidated financial statements of the Central Bank of the Republic of Armenia and its subsidiaries (hereinafter, the "Group"), which comprise the consolidated statement of financial position as at 31 December 2019, and the consolidated statement of comprehensive income, consolidated statement of changes in equity and consolidated statement of cash flows for the year then ended, and notes to the consolidated financial statements, including a summary of significant accounting policies. our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Group as at 31 December 2019 and its consolidated financial performance and its consolidated cash flows for the year then ended in accordance with International Financial Reporting Standards (IFRSS). Basis for opinion We conducted our audit in accordance with International Standards on Auditing (ISAs). Our responsibilities under those standards are further described in the Auditor's responsibilities for the audit of the consolidated financial statements section of our report. We are independent of the Group in accordance with the International Ethics Standards Board for Accountants' Code of Ethics for Professional Accountants (including International Independence Standards) (IESBA Code), and we have fulfilled our other ethical responsibilities in accordance with the IESBA Code. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Responsibilities of management and the Board of the Central Bank of Armenia for the consolidated financial statements Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with IFRSs, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. In preparing the consolidated financial statements, management is responsible for assessing the Group's ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Group or to cease operations, or has no realistic alternative but to do so. The Board of the Central Bank of Armenia is responsible for overseeing the Group's financial reporting process.#90EY Կառուցելով բարեկեցիկ աշխարհ Auditor's responsibilities for the audit of the consolidated financial statements Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor's report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements. As part of an audit in accordance with ISAs, we exercise professional judgment and maintain professional skepticism throughout the audit. We also: Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control; Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of Group's internal control; Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management; Conclude on the appropriateness of management's use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on Group's ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor's report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor's report. However, future events or conditions may cause the Group to cease to continue as a going concern; Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation; Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion.#91EY Կառուցելով բարեկեցիկ աշխարհ We communicate with the Board of the Central Bank of Armenia regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. Ernst & Young CJ SC Yerevan, Armenia Assurance partner лебоя Marchello Gelashvili General Director 31 March 2020 Sushion Eric Hayrapetyan#92Central Bank of the Republic of Armenia Consolidated statement of comprehensive income For the year ended 31 December 2019 Consolidated financial statements In thousands of Armenian Drams Interest income Interest expense Note 2019 2018 45 Net interest income 35,271,838 (21,092,209) 14,179,629 27,985,211 (16,477,039) 11,508,172 Reversal of allowance for credit losses / (credit loss expense) 12, 15, 19 Net interest income after credit loss allowance Fee and commission income 608,934 Fee and commission expense (1,304,349) Net foreign exchange loss 6 (1,455,792) Net (loss)/gain on derivatives 7 (477,632) Net gain on financial instruments at fair value through profit or loss Other income 8 14,501,951 9 4,226,258 198,529 14,378,158 (93,852) 11,414,320 334,616 (896,176) (2,986,567) 468,802 11,938,436 3,736,415 Cost of production of banknotes, coins and numismatics 10 (828,921) (5,023,216) Other expenses 11 (17,895,318) (19,384,341) Profit/(loss) before tax 11,753,289 (397,711) Income tax expense Profit/(loss) for the year Profit/(loss) is attributable to: Owners of the Bank (1,993,458) (1,945,595) 9,759,831 (2,343,306) Non-controlling interest 9,693,618 (2,373,281) 66,213 29,975 Other comprehensive income/(loss) Items that may be reclassified subsequently to profit or loss Net unrealised gain from changes in fair value of debt financial assets measured through other comprehensive income Changes in allowance for expected credit losses of debt financial assets at fair value through other comprehensive income Net other comprehensive income to be reclassified to profit or loss in subsequent periods 573,139 290,656 30,870 (5,717) 604,009 284,939 Other comprehensive income/(loss) not to be reclassified to profit or loss in subsequent periods Net gain/(loss) on equity instruments at fair value through other comprehensive income 7,977 (406,716) Total other comprehensive income/(loss) not to be reclassified to profit or loss in subsequent periods 7,977 (406,716) Other comprehensive income/(loss) for the year 611,986 (121,777) Total comprehensive income/(loss) for the year 10,371,817 (2,465,083) Total comprehensive income/(loss) is attributable to: Owners of the Bank 10,277,020 94,797 (2,504,709) 39,626 Non-controlling interest These consolidated financial statements were approved by the Board of the Central Bank of the Republic of Armenia on 31 March 2020 and were signed by: Arthur Javadyan Chairman of the Central Bank of the Republic of Armenia Marianna Amirbekyan Chief Financial Officer of the Central Bank of the Republic of Armenia The accompanying notes from 1 to 33 are an integral part of these consolidated financial statements. 1#93Central Bank of the Republic of Armenia Consolidated statement of financial position As at 31 December 2019 In thousands of Armenian Drams Assets Foreign currency assets Cash Placements with banks and other financial institutions Financial instruments at fair value through profit or loss Derivative financial assets Financial assets measured at fair value through other comprehensive income Placements with the IMF Consolidated financial statements Note 31 December 2019 31 December 2018 39,603,848 12 13 14 234 559,991,988 773,358,342 42,238,172 348,066,857 704,860,473 43,849 15 56 2,702,167 88,398,230 171,875 1,464,226,450 160,687 1,187,904,399 2,985,864 89,548,497 Other assets Total foreign currency assets Domestic currency assets Placements and investments with banks and other financial institutions 12 433,882,868 443,648,161 Financial assets measured at fair value through other comprehensive income 15 Property and equipment 17 Intangible assets 18 Other assets 19 578 9 87,872,142 88,280,524 65,679,935 68,740,919 3,020,744 2,790,723 Total domestic currency assets 12,239,109 602,694,798 14,795,146 618,255,473 2,066,921,248 1,806,159,872 Total assets Liabilities Foreign currency liabilities Deposits and accounts of financial and other institutions Due to the Government of the Republic of Armenia Derivative financial liabilities Due to the IMF Other borrowed funds Other liabilities 222 20 23 14 16 21 376,281,455 1,248,593 81,100 240,948,903 142,742,121 945,056 762,247,228 247,315,663 5,822,025 97,040 266,323,100 151,710,752 767,226 672,035,806 Total foreign currency liabilities Domestic currency liabilities Notes and coins in circulation 607,209,301 566,706,467 Deposits and accounts of financial and other institutions Due to the Government of the Republic of Armenia Debt securities issued 2222 20 347,119,824 367,193,187 23 326,045,767 184,926,978 24 6,626,428 7,838,688 4,408,557 4,503,420 1,291,409,877 1,131,168,740 2,053,657,105 1,803,204,546 Other liabilities Total domestic currency liabilities Total liabilities Equity Issued capital General reserve Promissory Note issued by the Government Revaluation reserve for financial assets measured at fair value through other comprehensive income Accumulated deficit Net assets attributable to owners of the Bank Non-controlling interest Total equity Total liabilities and equity 25 12 12 12 25 25 100,000 25,480,248 73,810,843 2,422,299 (89,478,707) 12,334,683 929,460 13,264,143 100,000 25,480,248 73,810,843 1,838,897 (99,172,325) 2,057,663 897,663 2,955,326 2,066,921,248 1,806,159,872 The accompanying notes from 1 to 33 are an integral part of these consolidated financial statements. 2#94Central Bank of the Republic of Armenia Consolidated statement of changes in equity For the year ended 31 December 2019 Attributable to owners of the Bank Revaluation Promissory note issued by the Government reserve for financial assets measured at fair value through other comprehensive income Consolidated financial statements Issued In thousands of Armenian Drams capital General reserve Accumulated deficit Total Non-controlling interest Total equity Balance at 1 January 2018 100,000 25,480,248 73,810,843 Impact of adopting IFRS 9. 1,903,879 66,446 Restated opening balance under IFRS 9 100,000 25,480,248 73,810,843 1,970,325 (93,984,117) (2,814,927) (96,799,044) 7,310,853 (2,748,481) 958,037 8,268,890 (2,748,481) 4,562,372 958,037 5,520,409 Increase of share in a subsidiary (100,000) Loss for the year (2,373,281) Other comprehensive loss (131,428) (2,373,281) (131,428) 29,975 9,651 (100,000) (2,343,306) (121,777) Total comprehensive loss for the year (131,428) Balance at 31 December 2018 100,000 25,480,248 73,810,843 1,838,897 (2,373,281) (99,172,325) (2,504,709) 2,057,663 39,626 897,663 (2,465,083) 2,955,326 Increase of share in a subsidiary (63,000) Profit for the year 9,693,618 9,693,618 66,213 (63,000) 9,759,831 Other comprehensive income Total comprehensive income for the year Balance at 31 December 2019 583,402 583,402 28,584 611,986 100,000 25,480,248 73,810,843 583,402 2,422,299 9,693,618 (89,478,707) 10,277,020 12,334,683 94,797 10,371,817 929,460 13,264,143 The accompanying notes from 1 to 33 are an integral part of these consolidated financial statements. 3#95Central Bank of the Republic of Armenia Consolidated statement of cash flows For the year ended 31 December 2019 In thousands of Armenian Drams Consolidated financial statements Note 2019 2018 Cash flows from operating activities Profit/(loss) before tax 11,753,289 (397,711) Adjustments to reconcile profit/(loss) for the year to net cash flows Depreciation and amortisation 11 4,231,048 4,649,127 (Gain)/loss from disposal of property and equipment (11,458) Change in interests receivable (972,116) 1,429 (58,784) Change in interests payable 408,405 Net loss from foreign exchange translation 6 1,982,331 331,968 3,335,741 Net gain from re-measurement of financial instruments at fair value Reversal of allowance for credit losses / (credit loss expense) (2,273,133) (939,807) 12, 15, 19 Income tax paid (198,529) (2,096,085) 93,852 (1,905,678) Cash flows from operating activities before changes in operating assets and liabilities 12,823,752 5,110,137 Net (increase)/decrease in operating assets Placements with banks and other financial institutions in foreign currency 11,774,996 12,920,447 Financial instruments at fair value through profit or loss and derivative financial instruments (72,633,468) 29,051,403 Placements and investments with banks and financial other institutions in domestic currency 9,880,361 (139,221,508) Other assets 1,856,851 543,410 Net increase/(decrease) in operating liabilities Notes and coins in circulation 40,502,834 50,611,986 Deposits and accounts of financial and other institutions 112,422,725 52,122,131 Due to the Government of the Republic of Armenia Proceeds from issuance of debt securities 136,197,289 28,565,401 3,512,226 3,013,273 Repayment of debt securities issued (4,710,600) Other liabilities 849,946 Net cash flows from operating activities 252,476,912 102,171 42,818,851 Cash flows from investing activities Purchase of property, equipment and intangible assets Proceeds from sale of property and equipment (890,980) 41,512 (1,066,933) 987,991 Proceeds from sale and redemption of financial assets measured at fair value through other comprehensive income 1,308,092 2,814,866 Increase of share in a subsidiary (100,000) Net cash flows from investing activities 458,624 2,635,924 Cash flows from financing activities Loans received 6,346,555 9,419,398 Loans redeemed (34,421,137) (29,292,741) Lease payments (82,489) Net cash flows used in financing activities (28,157,071) (19,873,343) Effect of exchange rate changes on cash and cash equivalents Net increase in cash and cash equivalents (3,586,638) (5,876,406) 221,191,827 19,705,026 Cash and cash equivalents at the beginning of the year 28 355,967,550 336,262,524 Cash and cash equivalents at the end of the year 28 577,159,377 355,967,550 Supplementary information Interest received Interest paid 34,299,722 (20,683,804) 27,926,427 (16,145,071) The accompanying notes from 1 to 33 are an integral part of these consolidated financial statements.#96Central Bank of the Republic of Armenia 1. Principal activities Notes to the 2019 consolidated financial statements These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards ("IFRS") as at 31 December 2019 and for the year then ended for the Central Bank of the Republic of Armenia (the "Bank" or the "Central Bank") and its subsidiaries (together referred to as the "Group"). The Bank is a legal entity the sole founder of which is the Republic of Armenia. The Bank operates in accordance with the Constitution of the Republic of Armenia, Law on the Central Bank of the Republic of Armenia (the "Law") and other laws of the Republic of Armenia. The registered address of the Bank is 6 Vazgen Sargsyan street, Yerevan 0010, Republic of Armenia. The number of employees of the Bank as of 31 December 2019 was 778 (2018: 736). The Bank does not aim to earn profits. The financial results of the Bank's activities, as well as the structure of its assets, liabilities and equity are defined by the functions of the Bank. In accordance with the Law the prime objective of the Bank is ensuring price stability and financial stability in the Republic of Armenia. In order to ensure price stability the Central Bank develops, approves and implements monetary policy programs. In addition to its prime objective, other objectives include: Ensure the stability, liquidity, solvency and other necessary conditions for sound operation of the financial system in the Republic of Armenia; Create and develop of an effective payment and settlement system; Issue the national currency of the Republic of Armenia and regulate its circulation; Organise and regulate anti-money laundering and anti-terrorism financing activities; Secure the conditions necessary for protecting the rights and lawful interests of consumers in the financial system; Ensure free and fair economic competition in the financial system and etc. To accomplish its objectives the Central Bank: ► Acts as financial agent and advisor of the Government of the Republic of Armenia (the "Government"); Licenses commercial banks and, in cases envisaged by the legislation, other entities, supervises and regulates their activities; Uses and manages international reserves of the Republic of Armenia and etc. The Bank's largest subsidiaries as of 31 December 2019 are listed below: Name Country of incorporation Principal activity Controlled, % 2019 2018 Date of establishment "Armenian Card" CJSC Republic of Armenia Payment and settlement services 56.25 56.25 March 2000 "Hayincassatsia" CJSC Republic of Armenia Transportation/ delivery of cash 100.00 100.00 April 1998 "National Mortgage Republic of Armenia Mortgage refinancing Company" RCO CJSC 100.00 100.00 June 2009 "Home for Youth" RCO CJSC Republic of Armenia "Small and Medium Business Republic of Armenia Mortgage refinancing 100.00 100.00 February 2010 Lending support Credit Support" CJSC 100.00 100.00 December 2010 "Vehicle Single Window" Republic of Armenia Insurance CJSC infrastructure support 100.00 100.00 December 2013 "Stak Processing" CJSC Republic of Armenia Payment and settlement services 100.00 100.00 December 2017 "Stak Money Transfer" CJSC Republic of Armenia Payment and settlement services 100.00 82.64 December 2017 Summary of significant accounting policies 2. (a) Statement of compliance These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards ("IFRS") as of and for the year then ended 31 December 2019 for the Bank and its subsidiaries. 5#972. Central Bank of the Republic of Armenia Notes to the 2019 consolidated financial statements Summary of significant accounting policies (continued) (b) Basis of measurement The consolidated financial statements have been prepared under the historical cost convention as modified by the initial recognition of financial instruments based on fair value, and by the revaluation of financial assets at fair value through other comprehensive income, and financial instruments categorised at fair value through profit or loss, including derivative financial instruments. The principal accounting policies applied in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all the periods presented, unless otherwise stated. (c) Form of presentation of the financial statements In exceptional circumstances detailed disclosure of the information about the operations which occur in the respective reporting period may lead to a loss of confidence spreading through the financial system of the Republic of Armenia as a whole. Accordingly, although the financial effects of such operations will be included into the consolidated financial statements of the Group, the Group may provide only limited disclosure in respect of such types of operations. (d) Functional and presentation currency The national currency of the Republic of Armenia is the Armenian Dram ("AMD"), which is the Group's functional currency and the currency in which these consolidated financial statements are presented. All financial information presented in AMD has been rounded to the nearest thousand unless otherwise indicated. (e) Use of estimates and judgments In the process of applying the Group's accounting policies, management has used its judgments and made estimates in determining the amounts recognised in the consolidated financial statements. The most significant use of judgments and estimates are as follows: Fair value Where the fair values of financial assets and financial liabilities recorded in the consolidated statement of financial position cannot be derived from active markets, they are determined using a variety of valuation techniques that include the use of mathematical models. The input to these models is taken from observable markets where possible, but where this is not feasible, a degree of judgment is required in establishing fair values. Assessment of impairment The measurement of impairment losses across all categories of financial assets requires judgement, in particular, the estimation of the amount and timing of future cash flows and collateral values when determining impairment losses and the assessment of a significant increase in credit risk. These estimates are driven by a number of factors, changes in which can result in different levels of allowances. The Group's expected credit losses ("ECL") calculations are outputs of complex models with a number of underlying assumptions regarding the choice of variable inputs and their interdependencies. Elements of the ECL models that are considered accounting judgements and estimates include: The Group's internal credit grading model, which assigns PDs to the individual grades; The Group's criteria for assessing if there has been a significant increase in credit risk and so allowances for financial assets should be measured on a lifetime ECL ("LTECL") basis and the qualitative assessment; Development of ECL models, including the various formulae and the choice of inputs; Determination of associations between macroeconomic scenarios and, economic inputs, such as unemployment levels and collateral values, and the effect on probability of defaults ("PD"), exposure at defaults ("EAD") and loss given defaults (LGD); Selection of forward-looking macroeconomic scenarios and their probability weightings, to derive the economic inputs into the ECL models. Transactions with related parties In the normal course of business the Group enters into transactions with its related parties. IFRS 9 requires initial recognition of financial instruments based on their fair values. Judgement is applied in determining if transactions are priced at market or non-market interest rates, where there is no active market for such transactions. The basis for judgment is pricing for similar types of transactions with unrelated parties and effective interest rate analysis. Terms and conditions of related party balances are disclosed in Note 27. 6#982. Central Bank of the Republic of Armenia Notes to the 2019 consolidated financial statements Summary of significant accounting policies (continued) (e) Use of estimates and judgments (continued) Accounting for operations with the International Monetary Fund (the "IMF") In accordance with the "Financial Organisation and Operations of the IMF" Pamphlet, each member of the IMF designates a fiscal agency (ministry of finance, central bank, or similar entity) to conduct financial transactions with the IMF and a depository (central bank or similar agency) to maintain the accounts of the IMF (the IMF No. 1 and No. 2 Accounts and the Securities Account). In accordance with the Law of the Republic of Armenia on Membership of the Republic of Armenia in the International Monetary Fund, International Bank for Reconstruction and Development, International Finance Corporation, International Development Association, European Bank for Reconstruction and Development, Multilateral Investment Guarantee Agency and International Center for Settlement of Investment Disputes, the Bank acts as the fiscal agent of the Republic of Armenia in accordance with clause 1, article 5 of the IMF articles of agreement. The Bank also is considered to be a depository of the Republic of Armenia. In the case when central bank performs fiscal agent function, the amounts of assets and liabilities and results of transactions with the IMF are recorded in the statement of financial position and profit or loss of the central bank. When the central bank performs depositary function in operations with the IMF, all transactions are made through correspondent accounts of central bank, however balances outstanding as a result of these transactions and respective profit or loss are not reflected in the central bank's statement of financial position and profit or loss. Leases estimating the incremental borrowing rate The Group cannot readily determine the interest rate implicit in the lease, therefore, it uses its incremental borrowing rate (IBR) to measure lease liabilities. The IBR is the rate of interest that the Group would have to pay to borrow over a similar term, and with a similar security, the funds necessary to obtain an asset of a similar value to the right-of-use asset in a similar economic environment. The IBR therefore reflects what the Group 'would have to pay', which requires estimation when no observable rates are available (such as for subsidiaries that do not enter into financing transactions) or when they need to be adjusted to reflect the terms and conditions of the lease (for example, when leases are not in the subsidiary's functional currency). The Group estimates the IBR using observable inputs (such as market interest rates) when available and is required to make certain entity-specific estimates (such as the subsidiary's stand-alone credit rating). (f) Adoption of new or revised standards and Interpretations The Group applied for the first time certain amendments to the standards, which are effective for annual periods beginning on or after 1 January 2019. The Group has not early adopted any standards, interpretations or amendments that have been issued but are not yet effective. The nature and the impact of each amendment is described below: IFRS 16 Leases - IFRS 16 supersedes IAS 17 Leases, IFRIC 4 Determining whether an Arrangement Contains a Lease, SIC 15 Operating Leases Incentives and SIC-27 Evaluating the Substance of Transactions Involving the Legal Form of a Lease. The standard sets out the principles for the recognition, measurement, presentation and disclosure of leases and requires lessees to account for most leases under a single on-balance sheet model. Lessor accounting under IFRS 16 is substantially unchanged from IAS 17. Lessors will continue to classify leases as either operating or finance leases using similar principles as in IAS 17. The Group adopted IFRS 16 using the modified retrospective method of adoption with the date of initial application of 1 January 2019, without restatement of comparatives. Under this method, the standard is applied retrospectively with the cumulative effect of initially applying the standard recognised at the date of initial application. The Group elected to use the transition practical expedient allowing the standard to be applied only to contracts that were previously identified as leases applying IAS 17 and IFRIC 4 at the date of initial application. The Group also elected to use the recognition exemptions for lease contracts that, at the commencement date, have a lease term of 12 months or less and do not contain a purchase option ('short-term leases'), and lease contracts for which the underlying asset is of low value ('low-value assets'). 7#99Central Bank of the Republic of Armenia Notes to the 2019 consolidated financial statements 2. Summary of significant accounting policies (continued) (f) Adoption of new or revised standards and Interpretations (continued) The effect of adoption IFRS 16 as at 1 January 2019 is as follows: In thousands of Armenian Drams Assets Property and equipment Total assets Liabilities Other liabilities Total liabilities (a) Nature of the effect of adoption of IFRS 16 482,988 482,988 482,988 482,988 The Group has lease contracts for various items of property and equipment. Before the adoption of IFRS 16, Group classified each of its leases (as lessee) at the inception date as an operating lease. In an operating lease, the leased property was not capitalised and the lease payments were recognised as rent expense in profit or loss on a straight-line basis over the lease term. Any prepaid rent and accrued rent were recognised under Other assets and Other liabilities, respectively. Upon adoption of IFRS 16, the Group applied a single recognition and measurement approach for all leases, except for short-term leases and leases of low-value assets. The standard provides specific transition requirements and practical expedients, which has been applied by the Group. Leases previously accounted for as operating leases The Group recognised right-of-use assets and lease liabilities for those leases previously classified as operating leases, except for short-term leases and leases of low-value assets. The right-of-use assets were recognised based on the amount equal to the lease liabilities as at 1 January 2019, adjusted for any related prepaid and accrued lease payments previously recognised. Lease liabilities were recognised based on the present value of the remaining lease payments, discounted using the incremental borrowing rate at the date of initial application. The Group also applied the available practical expedients wherein it: Used a single discount rate to a portfolio of leases with reasonably similar characteristics; Applied the short-term leases exemptions to leases with lease term that ends within 12 months at the date of initial application; Excluded the initial direct costs from the measurement of the right-of-use asset at the date of initial application; Used hindsight in determining the lease term where the contract contains options to extend or terminate the lease. Based on the foregoing, as at 1 January 2019: Right-of-use assets of AMD 482,988 thousands were recognised and included in Property and equipment; Additional lease liabilities of AMD 482,988 thousands (included in Other liabilities) were recognised. The lease liabilities as at 1 January 2019 can be reconciled to the operating lease commitments as of 31 December 2018 as follows: In thousands of Armenian Drams Operating lease commitments as at 31 December 2018 Weighted average incremental borrowing rate as at 1 January 2019 Discounted operating lease commitments at 1 January 2019 Lease liabilities as at 1 January 2019 637,469 10.8% 482,988 482,988 8#1002. Central Bank of the Republic of Armenia Notes to the 2019 consolidated financial statements Summary of significant accounting policies (continued) (f) Adoption of new or revised standards and Interpretations (continued) (b) Summary of new accounting policies Set out below are the new accounting policies of the Group upon adoption of IFRS 16, which have been applied from the date of initial application: į. Group as a lessee The Group applies a single recognition and measurement approach for all leases, except for short-term leases and leases of low-value assets. The Group recognises lease liabilities to make lease payments and right-of-use assets representing the right to use the underlying assets. Right-of-use assets The Group recognises right-of-use assets at the commencement date of the lease (i.e., the date the underlying asset is available for use). Right-of-use assets are measured at cost, less any accumulated depreciation and impairment losses, and adjusted for any remeasurement of lease liabilities. The cost of right-of-use assets includes the amount of lease liabilities recognised, initial direct costs incurred, and lease payments made at or before the commencement date less any lease incentives received. Unless the Group is reasonably certain to obtain ownership of the leased asset at the end of the lease term, the recognised right-of-use assets are depreciated on a straight-line basis over the shorter of its estimated useful life and the lease term. Right-of-use assets are subject to impairment. Lease liabilities At the commencement date of the lease, the Group recognises lease liabilities measured at the present value of lease payments to be made over the lease term. The lease payments include fixed payments (including in-substance fixed payments) less any lease incentives receivable, variable lease payments that depend on an index or a rate, and amounts expected to be paid under residual value guarantees. The lease payments also include the exercise price of a purchase option reasonably certain to be exercised by the Group and payments of penalties for terminating a lease, if the lease term reflects the Group exercising the option to terminate. The variable lease payments that do not depend on an index or a rate are recognised as expense in the period on which the event or condition that triggers the payment occurs. In calculating the present value of lease payments, the Group uses the incremental borrowing rate at the lease commencement date if the interest rate implicit in the lease is not readily determinable. After the commencement date, the amount of lease liabilities is increased to reflect the accretion of interest and reduced for the lease payments made. In addition, the carrying amount of lease liabilities is remeasured if there is a modification, a change in the lease term, a change in the in-substance fixed lease payments or a change in the assessment to purchase the underlying asset. Short-term leases and leases of low-value assets The Group applies the short-term lease recognition exemption to its short-term leases (i.e., those leases that have a lease term of 12 months or less from the commencement date and do not contain a purchase option). It also applies the lease of low-value assets recognition exemption to leases of office equipment that are considered of low value. Lease payments on short-term leases and leases of low-value assets are recognised as expense on a straight-line basis over the lease term. Significant judgement in determining the lease term of contracts with renewal options The Group determines the lease term as the non-cancellable term of the lease, together with any periods covered by an option to extend the lease if it is reasonably certain to be exercised, or any periods covered by an option to terminate the lease, if it is reasonably certain not to be exercised. The Group has the option, under some of its leases to lease the assets for additional term. The Group applies judgement in evaluating whether it is reasonably certain to exercise the option to renew. That is, it considers all relevant factors that create an economic incentive for it to exercise the renewal. After the commencement date, the Group reassesses the lease term if there is a significant event or change in circumstances that is within its control and affects its ability to exercise (or not to exercise) the option to renew (e.g., a change in business strategy). 9#1012. Central Bank of the Republic of Armenia Notes to the 2019 consolidated financial statements Summary of significant accounting policies (continued) (f) Adoption of new or revised standards and Interpretations (continued) Amounts recognised in the consolidated statement of financial position and consolidated income statement Set out below, are the carrying amounts of the Group's right-of-use assets and lease liabilities and the movements during the period: In thousands of Armenian Drams As at 1 January 2019 Additions Depreciation expense Interest expense Payments As at 31 December 2019 ii. - Operating Group as a lessor Right-of-use assets Buildings Total Lease liabilities 482,988 482,988 482,988 25,346 (102,501) 25,346 25,346 (102,501) 49,499 (131,988) 405,833 405,833 425,845 Leases in which the Group does not transfer substantially all the risks and rewards incidental to ownership of an asset are classified as operating leases. Rental income arising is accounted for on a straight-line basis over the lease terms and is included in revenue in the statement of profit or loss due to its operating nature. Initial direct costs incurred in negotiating and arranging an operating lease are added to the carrying amount of the leased asset and recognised over the lease term on the same basis as rental income. Contingent rents are recognised as revenue in the period in which they are earned. Amendments to IFRS 9: Prepayment Features with Negative Compensation Under IFRS 9, a debt instrument can be measured at amortised cost or at fair value through other comprehensive income, provided that the contractual cash flows are 'solely payments of principal and interest on the principal amount outstanding' (the SPPI criterion) and the instrument is held within the appropriate business model for that classification. The amendments to IFRS 9 clarify that a financial asset passes the SPPI criterion regardless of the event or circumstance that causes the early termination of the contract and irrespective of which party pays or receives reasonable compensation for the early termination of the contract. These amendments had no impact on the consolidated financial statements of the Group. Amendments to IAS 28: Long-term Interests in Associates and Joint Ventures The amendments clarify that an entity applies IFRS 9 to long-term interests in an associate or joint venture to which the equity method is not applied but that, in substance, form part of the net investment in the associate or joint venture (long-term interests). This clarification is relevant because it implies that the expected credit loss model in IFRS 9 applies to such long-term interests. The amendments also clarified that, in applying IFRS 9, an entity does not take account of any losses of the associate or joint venture, or any impairment losses on the net investment, recognised as adjustments to the net investment in the associate or joint venture that arise from applying IAS 28 Investments in Associates and Joint Ventures. These amendments had no impact on the consolidated financial statements as the Group does not have long-term interests in its associate and joint venture. Annual improvements 2015-2017 cycle IFRS 3 Business Combinations The amendments clarify that, when an entity obtains control of a business that is a joint operation, it applies the requirements for a business combination achieved in stages, including remeasuring previously held interests in the assets and liabilities of the joint operation at fair value. In doing so, the acquirer remeasures its entire previously held interest in the joint operation. An entity applies those amendments to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after 1 January 2019, with early application permitted. These amendments had no impact on the consolidated financial statements of the Group as there is no transaction where joint control is obtained. 10 10#1022. Central Bank of the Republic of Armenia Notes to the 2019 consolidated financial statements Summary of significant accounting policies (continued) (f) Adoption of new or revised standards and Interpretations (continued) IFRS 11 Joint Arrangements A party that participates in, but does not have joint control of, a joint operation might obtain joint control of the joint operation in which the activity of the joint operation constitutes a business as defined in IFRS 3. The amendments clarify that the previously held interests in that joint operation are not remeasured. An entity applies those amendments to transactions in which it obtains joint control on or after the beginning of the first annual reporting period beginning on or after 1 January 2019, with early application permitted. These amendments had no impact on the consolidated financial statements of the Group as there is no transaction where a joint control is obtained. IAS 12 Income Taxes The amendments clarify that the income tax consequences of dividends are linked more directly to past transactions or events that generated distributable profits than to distributions to owners. Therefore, an entity recognises the income tax consequences of dividends in profit or loss, other comprehensive income or equity according to where the entity originally recognised those past transactions or events. An entity applies those amendments for annual reporting periods beginning on or after 1 January 2019, with early application is permitted. When an entity first applies those amendments, it applies them to the income tax consequences of dividends recognised on or after the beginning of the earliest comparative period. Since the Group's current practice is in line with these amendments, they had no impact on the consolidated financial statements of the Group. (g) Basis of consolidation The consolidated financial statements comprise the financial statements of the Bank and its subsidiaries as at 31 December 2019. Subsidiaries are those investees that the Group controls. Control is achieved when the Group is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. Specifically, the Group controls an investee if and only if the Group has: Power to direct relevant activities of the investees that significantly affect their returns; Exposure, or rights, to variable returns from its involvement with the investees; and The ability to use its power over the investees to affect the amount of investor's returns. When the Group has less than a majority of the voting or similar rights of an investee, the Group considers all relevant facts and circumstances in assessing whether it has power over an investee, including: The contractual arrangement with the other vote holders of the investee; Rights arising from other contractual arrangements; ► The Group's voting rights and potential voting rights. The Group re-assesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of the three elements of control. Consolidation of a subsidiary begins when the Group obtains control over the subsidiary and ceases when the Group loses control of the subsidiary. Intercompany transactions, balances and unrealised gains on transactions between group companies are eliminated; unrealised losses are also eliminated unless the cost cannot be recovered. The Bank and all of its subsidiaries use uniform accounting policies consistent with the Group's policies. A change in the ownership interest of a subsidiary, without a change of control, is accounted for as an equity transaction. Losses are attributed to the non-controlling interests even if that results in a deficit balance. Non-controlling interest is that part of the net results and of the equity of a subsidiary attributable to interests which are not owned, directly or indirectly, by the Group. Non-controlling interest forms a separate component of the Group's equity. The Group measures non-controlling interest that represents present ownership interest and entitles the holder to a proportionate share of net assets in the event of liquidation on a transaction by transaction basis, either at the non- controlling interest's proportionate share of net assets of the acquiree or fair value. 11#1032. Central Bank of the Republic of Armenia Notes to the 2019 consolidated financial statements Summary of significant accounting policies (continued) (g) Basis of consolidation (continued) Associates Associates are entities over which the Group has significant influence (directly or indirectly), but not control, generally accompanying a shareholding of between 20 and 50 percent of the voting rights. Investments in associates are accounted for using the equity method of accounting, and are initially recognised at cost. The carrying amount of associates includes goodwill identified on acquisition less accumulated impairment losses, if any. Dividends received from associates reduce the carrying value of the investment in associates. Other post-acquisition changes in Group's share of net assets of an associate are recognised as follows: (i) the Group's share of profits or losses of associates is recorded in the consolidated profit or loss for the year as share of result of associates, (ii) the Group's share of other comprehensive income is recognised in other comprehensive income and presented separately, (iii) all other changes in the Group's share of the carrying value of net assets of associates are recognised in profit or loss within the share of result of associates. However, when the Group's share of losses in an associate equals or exceeds its interest in the associate, including any other unsecured receivables, the Group does not recognise further losses, unless it has incurred obligations or made payments on behalf of the associate. (h) Foreign currency translation and presentation of foreign currency items Transactions in foreign currencies are initially recognised in the functional currency, converted at the exchange rate published by the Bank at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the reporting date are recalculated at the exchange rate published by the Bank at the reporting date. Gains and losses resulting from the translation of foreign currency transactions are recognised in profit or loss as net foreign exchange gain/(loss). Translation at year-end rates does not apply to non-monetary items that are measured at historical cost. Non-monetary items measured at fair value in a foreign currency, including equity investments, are translated using the exchange rates at the date when the fair value was determined. Differences between the contractual exchange rate of a transaction in a foreign currency and the exchange rate published by the Bank at the date of the transaction are included in the consolidated statement of comprehensive income. As at 31 December 2019 and 31 December 2018, the exchange rates used for translating foreign currency balances were as follows: AMD / 1 US dollar AMD 1 Euro AMD / 1 GBP AMD 1 SDR (Special Drawing Rights) AMD 1 JPY AMD / 1 RUB (i) Cash and cash equivalents 31 December 2019 31 December 2018 479.70 483.75 537.26 553.65 629.13 611.61 663.34 672.79 4.40 7.77 4.38 6.97 For cash flows statement perspective cash and cash equivalents are items which are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. The Group considers cash, nostro accounts with banks and SDR holdings in the IMF to be cash and cash equivalents. Funds restricted for a period of more than three months on origination are excluded from cash and cash equivalents. Cash and cash equivalents are carried at amortised cost. (j) Financial instruments - key measurement terms The Group measures financial instruments, such as, financial instruments at fair value through profit or loss, financial assets measured at fair value through other comprehensive income and derivatives at fair value at each reporting date. Also, fair values of financial instruments measured at amortised cost are disclosed in Note 29. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The best evidence of fair value is price in an active market. An active market is one in which transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis. 12#104Central Bank of the Republic of Armenia Notes to the 2019 consolidated financial statements 2. Summary of significant accounting policies (continued) (j) Financial instruments - key measurement terms (continued) Fair value of financial instruments traded in an active market is measured as the product of the quoted price for the individual asset or liability and the quantity held by the Group. This is the case even if a market's normal daily trading volume is not sufficient to absorb the quantity held and placing orders to sell the position in a single transaction might affect the quoted price. Valuation techniques such as discounted cash flow models or models based on recent arm's length transactions or consideration of financial data of the investees are used to measure fair value of certain financial instruments for which external market pricing information is not available. Fair value measurements are analysed by level in the fair value hierarchy as follows: (i) level one are measurements at quoted prices (unadjusted) in active markets for identical assets or liabilities, (ii) level two measurements are valuation techniques with all material inputs observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices), and (iii) level three measurements are valuations not based on solely observable market data (that is, the measurement requires significant unobservable inputs). Transaction costs are incremental costs that are directly attributable to the acquisition, issue or disposal of a financial instrument. An incremental cost is one that would not have been incurred if the transaction had not taken place. Transaction costs include fees and commissions paid to agents (including employees acting as selling agents), advisors, brokers and dealers, levies by regulatory agencies and securities exchanges, and transfer taxes and duties. Transaction costs do not include debt premiums or discounts, financing costs or internal administrative or holding costs. Amortised cost is the amount at which the financial instrument was recognised at initial recognition less any principal repayments, plus accrued interest, and for financial assets less any write-down for incurred impairment losses. Accrued interest includes amortisation of transaction costs deferred at initial recognition and of any premium or discount to maturity amount using the effective interest method. Accrued interest income and accrued interest expense, including both accrued coupon and amortised discount or premium (including fees deferred at origination, if any), are not presented separately and are included in the carrying values of related items in the consolidated statement of financial position. The effective interest method is a method of allocating interest income or interest expense over the relevant period, so as to achieve a constant periodic rate of interest (effective interest rate) on the carrying amount. The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts (excluding future credit losses) through the expected life of the financial instrument or a shorter period, if appropriate, to the net carrying amount of the financial instrument. The effective interest rate discounts cash flows of variable interest instruments to the next interest repricing date, except for the premium or discount which reflects the credit spread over the floating rate specified in the instrument, or other variables that are not reset to market rates. Such premiums or discounts are amortised over the whole expected life of the instrument. The present value calculation includes all fees paid or received between parties to the contract that are an integral part of the effective interest rate. Initial measurement The classification of financial instruments at initial recognition depends on their contractual terms and the business model for managing the instruments. Financial instruments are initially measured at their fair value and, except in the case of financial assets and financial liabilities recorded at FVPL, transaction costs are added to, or subtracted from, this amount. The Group classifies all of its financial assets based on the business model for managing the assets and the asset's contractual terms, measured at either: Amortised cost; FVOCI; FVPL. The Group classifies and measures its derivative and trading portfolio at FVPL. The Group may designate financial instruments at FVPL, if so doing eliminates or significantly reduces measurement or recognition inconsistencies. Date of recognition All regular way purchases and sales of financial assets are recognised on the settlement date. Regular way purchases or sales are purchases or sales of financial assets that require delivery of assets within the period generally established by regulation or convention in the marketplace. 13#105Central Bank of the Republic of Armenia Notes to the 2019 consolidated financial statements 2. Summary of significant accounting policies (continued) (j) Financial instruments - key measurement terms (continued) Financial assets at fair value through profit or loss Financial instruments classified as held for trading are included in the category "Financial instruments at fair value through profit or loss". Financial assets are classified as held for trading if they are acquired for the purpose of selling in the near term. Derivatives are also classified as held for trading unless they are designated and effective hedging instruments. Gains or losses on financial assets held for trading, including interest income on trading debt securities are recognised in profit or loss as net gain/(loss) on financial instruments at fair value through profit and loss. In the normal course of business, the Group enters into various derivative financial instruments including futures, forwards and swaps in the foreign exchange and capital markets. Such financial instruments are held for trading and are recorded at fair value. The fair values are estimated based on quoted market prices or pricing models that take into account the current market and contractual prices of the underlying instruments and other factors. Under IAS 39, derivatives embedded in financial assets, liabilities and non-financial host contacts, were treated as separate derivatives and recorded at fair value if they met the definition of a derivative (as defined above), their economic characteristics and risks were not closely related to those of the host contract, and the host contract was not itself held for trading or designated at FVPL. The embedded derivatives separated from the host were carried at fair value in the trading portfolio with changes in fair value recognised in the consolidated statement of profit or loss. From 1 January 2018, with the introduction of IFRS 9, the Group accounts in this way for derivatives embedded in financial liabilities and non-financial host contracts. Financial assets are classified based on the business model and SPPI assessments. Amounts due from credit institutions, loans to customers, investments securities at amortised cost The Group only measures amounts due from credit institutions, loans to customers and other financial investments at amortised cost if both of the following conditions are met: The financial asset is held within a business model with the objective to hold financial assets in order to collect contractual cash flows; The contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding (SPPI). The details of these conditions are outlined below. Business model assessment The Group determines its business model at the level that best reflects how it manages groups of financial assets to achieve its business objective. The Group's business model is not assessed on an instrument-by-instrument basis, but at a higher level of aggregated portfolios and is based on observable factors such as: How the performance of the business model and the financial assets held within that business model are evaluated and reported to the entity's key management personnel; The risks that affect the performance of the business model (and the financial assets held within that business model) and, in particular, the way those risks are managed; The expected frequency, value and timing of sales are also important aspects of the Group's assessment. The business model assessment is based on reasonably expected scenarios without taking 'worst case' or 'stress case' scenarios into account. If cash flows after initial recognition are realised in a way that is different from the Group's original expectations, the Group does not change the classification of the remaining financial assets held in that business model, but incorporates such information when assessing newly originated or newly purchased financial assets going forward. The SPPI test As a second step of its classification process the Group assesses the contractual terms of financial asset to identify whether they meet the SPPI test. 'Principal' for the purpose of this test is defined as the fair value of the financial asset at initial recognition and may change over the life of the financial asset (for example, if there are repayments of principal or amortisation of the premium/discount). 14#106Central Bank of the Republic of Armenia Notes to the 2019 consolidated financial statements 2. Summary of significant accounting policies (continued) (j) Financial instruments - key measurement terms (continued) The most significant elements of interest within a lending arrangement are typically the consideration for the time value of money and credit risk. To make the SPPI assessment, the Group applies judgement and considers relevant factors such as the currency in which the financial asset is denominated, and the period for which the interest rate is set. In contrast, contractual terms that introduce a more than de minimis exposure to risks or volatility in the contractual cash flows that are unrelated to a basic lending arrangement do not give rise to contractual cash flows that are solely payments of principal and interest on the amount outstanding. In such cases, the financial asset is required to be measured at FVPL. Debt instruments at FVOCI The Group measures debt instruments at FVOCI when both of the following conditions are met: The instrument is held within a business model, the objective of which is achieved by both collecting contractual cash flows and selling financial assets; The contractual terms of the financial asset meet the SPPI test. FVOCI debt instruments are subsequently measured at fair value with gains and losses arising due to changes in fair value recognised in OCI. Interest revenue and foreign exchange gains and losses are recognised in profit or loss in the same manner as for financial assets measured at amortised cost. On derecognition, cumulative gains or losses previously recognised in OCI are reclassified from OCI to profit or loss. The ECLs for debt instruments measured at FVOCI do not reduce the carrying amount of these financial assets in the statement of financial position, which remains at fair value. Instead, an amount equal to the allowance that would arise if the assets were measured at amortised cost is recognised in OCI as an accumulated impairment amount, with a corresponding charge to profit or loss. The accumulated loss recognised in OCI is recycled to the profit and loss upon derecognition of the asset. Equity instruments at FVOCI Upon initial recognition, the Group occasionally elects to classify irrevocably some of its equity investments as equity instruments at FVOCI when they meet the definition of equity under IAS 32 Financial Instruments: Presentation and are not held for trading. Such classification is determined on an instrument-by-instrument basis. Gains and losses on these equity instruments are never recycled to profit or loss. Dividends are recognised in profit or loss as other income when the right of the payment has been established, except when the Group benefits from such proceeds as a recovery of part of the cost of the instrument, in which case, such gains are recorded in OCI. Equity instruments at FVOCI are not subject to an impairment assessment. Upon disposal of these instruments, the accumulated revaluation reserve is transferred to retained earnings. Reclassification of financial assets The Group does not reclassify its financial assets subsequent to their initial recognition, apart from the exceptional circumstances in which the Group changes the business model for managing financial assets. Financial liabilities are never reclassified. Borrowings Issued financial instruments or their components are classified as liabilities, where the substance of the contractual arrangement results in the Group having an obligation either to deliver cash or another financial asset to the holder, or to satisfy the obligation other than by the exchange of a fixed amount of cash or another financial asset for a fixed number of own equity instruments. Such instruments include deposits and accounts of financial and other institutions, amounts due to the Government and the IMF, other borrowed funds and debt securities issued. After initial recognition, borrowings are subsequently measured at amortised cost using the effective interest method. Gains and losses are recognised in profit or loss when the borrowings are derecognised as well as through the amortisation process. Accounting for zero interest rate loans The benefit of the funds which are obtained by the Group from the international financial institutions at zero rate of interest is treated and accounted for as a government grant. The benefit of zero rate of interest is measured as the difference between the fair value of the funds obtained and the proceeds received and recognised as deferred income as at the date of the funds initial recognition. The amount of deferred income is recognised in the profit or loss over the period in which the Group recognises as expenses the related costs. Grant related income is deducted in reporting the related expense. 15#107Central Bank of the Republic of Armenia Notes to the 2019 consolidated financial statements 2. Summary of significant accounting policies (continued) (j) Financial instruments - key measurement terms (continued) Derecognition of financial assets and liabilities A financial asset (or, where applicable a part of a financial asset or part of a group of similar financial assets) is derecognised when: The rights to receive cash flows from the asset have expired; The Group has transferred its rights to receive cash flows from the asset, or retained the right to receive cash flows from the asset, but has assumed an obligation to pay them in full without material delay to a third party under a 'pass-through' arrangement; and The Group either (a) has transferred substantially all the risks and rewards of the asset, or (b) has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset. Where the Group has transferred its rights to receive cash flows from an asset and has neither transferred nor retained substantially all the risks and rewards of the asset nor transferred control of the asset, the asset is recognised to the extent of the Group's continuing involvement in the asset. Continuing involvement that takes the form of a guarantee over the transferred asset is measured at the lower of the original carrying amount of the asset and the maximum amount of consideration that the Group could be required to repay. Where continuing involvement takes the form of a written and/or purchased option (including a cash-settled option or similar provision) on the transferred asset, the extent of the Group's continuing involvement is the amount of the transferred asset that the Group may repurchase, except that in the case of a written put option (including a cash-settled option or similar provision) on an asset measured at fair value, the extent of the Group's continuing involvement is limited to the lower of the fair value of the transferred asset and the option exercise price. A financial liability is derecognised when the obligation under the liability is discharged or cancelled or expires. Where an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability, and the difference in the respective carrying amounts is recognised in profit or loss. (k) Offsetting Financial assets and liabilities are offset and the net amount reported in the consolidated statement of financial position only when there is a legally enforceable right to offset the recognised amounts, and there is an intention to either settle on a net basis, or to realise the asset and settle the liability simultaneously. Such a right of set off (a) must not be contingent on a future event and (b) must be legally enforceable in all of the following circumstances: (i) in the normal course of business, (ii) the event of default and (iii) the event of insolvency or bankruptcy. (1) Repurchase and reverse repurchase agreements Sale and repurchase agreements ("repo") are treated as secured financial transactions. Securities sold under sale and repurchase agreements are retained in the consolidated statement of financial position and, in case the transferee has the right by contract or custom to sell or repledge them, reclassified as securities pledged under sale and repurchase agreements. The corresponding liability is presented within deposits and accounts of financial and other institutions. The difference between the sale and repurchase price is treated as interest expense and accrued over the life of the repo agreements. Funds provided to purchase securities under agreements to resell ("reverse repo agreements") are recorded as placements with banks and other financial institutions. The difference between the sale and repurchase price, adjusted by interest and dividend income collected by the counterparty, is treated as interest income and accrued over the life of repo agreements using the effective interest method. (m) Securities lending and borrowing Securities lent to counterparties are retained in the consolidated statement of financial position. Securities borrowed are not recorded in the consolidated statement of financial position, unless these are sold to third parties, in which case the purchase and sale are recorded within net gain on financial instruments at fair value through profit or loss in profit or loss. The obligation to return them is recorded within financial liabilities at fair value through profit or loss. 16#1082. Central Bank of the Republic of Armenia Notes to the 2019 consolidated financial statements Summary of significant accounting policies (continued) (n) Notes and coins in circulation Notes and coins in circulation issued by the Bank are presented in the consolidated statement of financial position as a liability at nominal value. Printing and production costs of notes and coins are recognised in profit or loss as incurred. (0) Numismatic coins Numismatic coins are measured at the lower of cost and net realisable value. The cost of numismatic coins is based on the first-in first-out principle, and includes expenses incurred in acquiring the numismatic coins and bringing them to their existing location. Net realisable value is the estimated selling price less the estimated costs necessary to make the sale. During the sale the inflow amount is recognised as income in the consolidated statement of comprehensive income for the current year, and the amount of carrying value is recognised as expense in the consolidated statement of comprehensive income for the current year. (p) Property and equipment Property and equipment are carried at cost less accumulated depreciation and any accumulated impairment. Such cost includes the cost of replacing part of equipment when that cost is incurred if the recognition criteria are met. Likewise, when a major repair is performed, its cost is recognised in the carrying amount of the property and equipment as a replacement if the recognition criteria are satisfied. Where significant parts of property and equipment are required to be replaced at intervals, the Group recognises such parts as individual assets with specific useful lives and depreciates them accordingly. All other repair and maintenance costs are recognised in profit or loss as incurred. An item of property and equipment and any significant part initially recognised is derecognised upon disposal or when no future economic benefits are expected from its use or disposal. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is included in profit or loss when the asset is derecognised. Depreciation Depreciation of an asset begins when it is available for use. Depreciation is calculated on a straight-line basis over the following estimated useful lives: Land and buildings - Buildings - Building technical systems Networks, computer and other equipment Vehicles 2018 2019 30-80 years 30-80 years 3-20 years 3-20 years 2-15 years 2-15 years 5 years 5 years The residual value of an asset is the estimated amount that the Group would currently obtain from disposal of the asset less the estimated costs of disposal, if the asset were already of the age and in the condition expected at the end of its useful life. The assets' residual values and useful lives are reviewed and adjusted if appropriate, at the end of each reporting period. (q) Non-current assets classified as held for sale Non-current assets are classified in the consolidated statement of financial position as 'non-current assets held for sale' if their carrying amount will be recovered principally through a sale transaction, within twelve months after the end of the reporting period. Assets are reclassified when all of the following conditions are met: (a) the assets are available for immediate sale in their present condition; (b) the Group's management approved and initiated an active programme to locate a buyer; (c) the assets are actively marketed for sale at a reasonable price; (d) the sale is expected within one year and (e) it is unlikely that significant changes to the plan to sell will be made or that the plan will be withdrawn. Held for sale non-current assets are measured at the lower of their carrying amount and fair value less costs to sell. Non-current assets held for sale are not depreciated. (r) Intangible assets Intangible assets include computer software and licenses. Intangible assets acquired separately are measured on initial recognition at cost. The cost of intangible assets acquired in a business combination is fair value at the date of acquisition. Following initial recognition, intangible assets are carried at cost less any accumulated amortisation and any accumulated impairment losses. Intangible assets with finite lives are amortised over the useful economic lives of 1 to 10 years and assessed for impairment whenever there is an indication that the intangible asset may be impaired. Computer software maintenance costs are recognised in profit or loss as incurred. 17#1092. Central Bank of the Republic of Armenia Notes to the 2019 consolidated financial statements Summary of significant accounting policies (continued) (s) Impairment Impairment of financial assets Information on impairment assessment of financial assets is presented in Note 30. Non-financial assets The Group assesses at each reporting date whether there is an indication that an asset may be impaired. If any indication exists, or when annual impairment testing for an asset is required, the Group estimates the asset's recoverable amount. An asset's recoverable amount is the higher of an asset's or cash-generating unit (CGU) fair value less costs to sell and its value in use and is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets. When the carrying amount of an asset or CGU exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. All impairment losses are recognised in consolidated statement of comprehensive income and reversed only if there has been a change in the assumptions used to determine the asset's recoverable amount. The reversal is limited so that the asset's carrying amount does not exceed the carrying amount that would have been determined, net of depreciation, had no impairment loss been recognised. (t) Provisions Provisions are recognised when the Group has a present legal or constructive obligation as a result of past events, and it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate of the amount of obligation can be made. (u) Taxation The Bank is not subject to any taxes except for import duties. At the same time the Bank acts as a tax agent according to the procedures envisaged by the laws of the Republic of Armenia. The Group's subsidiaries are subject to income tax and other taxes on their operations in accordance with the laws of the Republic of Armenia. (v) Issued capital Issued capital represents the authorised capital of the Bank, which is the property of and belongs to the Republic of Armenia and may not be pledged, confiscated or otherwise alienated against the obligations of the Republic of Armenia. The non-interest bearing promissory note extended by the Government as envisaged by the article 11.4 of the Law to cover excess of the losses of the Group over its reserves is recognised as Promissory Note issued by the Government in the Equity of the Group. (w) Profit allocation The profit of the Group determined based on its consolidated financial statements shall be allocated as follows: a) b) 20% of the profit shall be addressed to replenish the general reserve until its total amounts 25% of the broad money; Appropriations shall be made to cover redemption expenses of the promissory note which have been previously issued by the Government to the Bank. The balance of the profit of the Group remaining after hereinbefore deductions shall be paid to the state budget. The calculation of the profit of the Group to be paid to the state budget shall not include positive difference of income and expense, generated from revaluation and acquisition of gold, SDR, foreign currency and their equivalents, adjusted to the extent of provisioning to recompense adverse results of previous. (x) Contingencies Contingent liabilities are not recognised in the consolidated statement of financial position but are disclosed unless the possibility of any outflow in settlement is remote. A contingent asset is not recognised in the consolidated statement of financial position but disclosed when an inflow of economic benefits is probable. 18#1102. Central Bank of the Republic of Armenia Notes to the 2019 consolidated financial statements Summary of significant accounting policies (continued) (y) Interest income and expense The Group calculates interest revenue on debt financial assets measured at amortized cost or at FVOCI by applying the effective interest rate to the gross carrying amount of financial assets other than credit-impaired assets, which is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument or a shorter period, where appropriate, to the net carrying amount of the financial asset or financial liability. The calculation takes into account all contractual terms of the financial instrument (for example, prepayment options) and includes any fees or incremental costs that are directly attributable to the instrument and are an integral part of the effective interest rate, but not future credit losses. The carrying amount of the financial asset or financial liability is adjusted if the Group revises its estimates of payments or receipts. The adjusted carrying amount is calculated based on the original effective interest rate and the change in carrying amount is recorded as interest income or expense. Once the recorded value of a financial asset or a group of similar financial assets has been reduced due to an impairment loss, interest income continues to be recognised using the original effective interest rate applied to the new carrying amount. (z) Fee and commission income Fees earned for the provision of services over a period of time are accrued over that period. 3. New accounting pronouncements At the date of authorisation of these consolidated financial statements, certain new standards, amendments and interpretations to the existing Standards have been published but are not yet effective. The Group has not early adopted any of these pronouncements. Management anticipates that all of the pronouncements will be adopted in the Group's accounting policy for the first period beginning after the effective date of the pronouncement. Information on new standards, amendments and interpretations that are expected to be relevant to the Group's consolidated financial statements is provided below. Certain other new standards and interpretations have been issued but are not relevant for the Group's consolidated financial statements. Amendments to IFRS 3: Definition of a Business (issued on 22 October 2018 and effective for acquisitions from the beginning of annual reporting period that starts on or after 1 January 2020) In October 2018, the IASB issued amendments to the definition of a business in IFRS 3 Business Combinations to help entities determine whether an acquired set of activities and assets is a business or not. They clarify the minimum requirements for a business, remove the assessment of whether market participants are capable of replacing any missing elements, add guidance to help entities assess whether an acquired process is substantive, narrow the definitions of a business and of outputs, and introduce an optional fair value concentration test. New illustrative examples were provided along with the amendments. Since the amendments apply prospectively to transactions or other events that occur on or after the date of first application, the Group will not be affected by these amendments on the date of transition. Amendments to IAS 1 and IAS 8: Definition of Material (issued on 31 October 2018 and effective for annual periods beginning on or after 1 January 2020) In October 2018, the IASB issued amendments to IAS 1 Presentation of Financial Statements and IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors to align the definition of 'material' across the standards and to clarify certain aspects of the definition. The new definition states that, 'Information is material if omitting, misstating or obscuring it could reasonably be expected to influence decisions that the primary users of general purpose financial statements make on the basis of those financial statements, which provide financial information about a specific reporting entity'. The amendments to the definition of material is not expected to have a significant impact on the Group's consolidated financial statements. 19#111Central Bank of the Republic of Armenia 3. New accounting pronouncements (continued) Notes to the 2019 consolidated financial statements Interest Rate Benchmark Reform: Amendments to IFRS 9, IAS 39 and IFRS 7 (issued on 26 September 2019 and effective for annual periods beginning on or after 1 January 2020) Interest Rate Benchmark Reform Amendments to IFRS 9, IAS 39 and IFRS 7 includes a number of reliefs, which apply to all hedging relationships that are directly affected by interest rate benchmark reform. A hedging relationship is affected if the reform gives rise to uncertainties about the timing and or amount of benchmark-based cash flows of the hedged item or the hedging instrument. As a result of interest rate benchmark reform, there may be uncertainties about the timing and or amount of benchmark-based cash flows of the hedged item or the hedging instrument during the period before the replacement of an existing interest rate benchmark with an alternative nearly risk-free interest rate (an RFR). This may lead to uncertainty whether a forecast transaction is highly probable and whether prospectively the hedging relationship is expected to be highly effective. The amendments come into effect from 1 January 2020, but entities may choose to apply them earlier. The amendments are not expected to have a significant impact on the Group's consolidated financial statements. Amendments to IFRS 10 and IAS 28: Sale or Contribution of Assets between an Investor and its Associate or Joint Venture (issued on 11 September 2014 and effective for annual periods beginning on or after a date to be determined by the IASB) The amendments address the conflict between IFRS 10 and IAS 28 in dealing with the loss of control of a subsidiary that is sold or contributed to an associate or joint venture. The amendments clarify that the gain or loss resulting from the sale or contribution of assets that constitute a business, as defined in IFRS 3, between an investor and its associate or joint venture, is recognised in full. Any gain or loss resulting from the sale or contribution of assets that do not constitute a business, however, is recognised only to the extent of unrelated investors' interests in the associate or joint venture. The IASB has deferred the effective date of these amendments indefinitely, but an entity that early adopts the amendments must apply them prospectively. The Group will apply these amendments when they become effective. Amendments to the Conceptual Framework for Financial Reporting (issued on 29 March 2018 and effective for annual periods beginning on or after 1 January 2020) The revised Conceptual Framework includes a new chapter on measurement; guidance on reporting financial performance; improved definitions and guidance - in particular the definition of a liability; and clarifications in important areas, such as the roles of stewardship, prudence and measurement uncertainty in financial reporting. Classification of Liabilities as Current or Non-current - Amendments to IAS 1 (issued on 23 January 2020 and effective for annual periods beginning on or after 1 January 2022) These narrow scope amendments clarify that liabilities are classified as either current or non-current, depending on the rights that exist at the end of the reporting period. Liabilities are non-current if the entity has a substantive right, at the end of the reporting period, to defer settlement for at least twelve months. The guidance no longer requires such a right to be unconditional. Management's expectations whether they will subsequently exercise the right to defer settlement do not affect classification of liabilities. The right to defer only exists if the entity complies with any relevant conditions as of the end of the reporting period. A liability is classified as current if a condition is breached at or before the reporting date even if a waiver of that condition is obtained from the lender after the end of the reporting period. Conversely, a loan is classified as non-current if a loan covenant is breached only after the reporting date. In addition, the amendments include clarifying the classification requirements for debt a company might settle by converting it into equity. 'Settlement' is defined as the extinguishment of a liability with cash, other resources embodying economic benefits or an entity's own equity instruments. There is an exception for convertible instruments that might be converted into equity, but only for those instruments where the conversion option is classified as an equity instrument as a separate component of a compound financial instrument. 20 20#112Central Bank of the Republic of Armenia Notes to the 2019 consolidated financial statements 4. Interest income In thousands of Armenian Drams Interest income from foreign currency assets Nostro accounts Term deposits Placements with the IMF Other Total interest income from foreign currency assets 2019 2018 2,754,182 382,698 1,354,020 597,257 24,634 18,015 70,469 99,022 3,231,983 2,068,314 Interest income from domestic currency assets Placements and investments with banks and other financial institutions Financial assets measured at fair value through other comprehensive income 30,722,771 24,458,016 1,317,084 1,458,881 Total interest income from domestic currency assets 32,039,855 25,916,897 35,271,838 27,985,211 Total interest income calculated using effective interest rate 5. Interest expense In thousands of Armenian Drams 2019 2018 Interest expense on foreign currency liabilities Other borrowed funds 3,676,153 3,735,460 Due to the IMF 2,518,184 2,810,517 Total interest expense on foreign currency liabilities 6,194,337 6,545,977 Interest expense on domestic currency liabilities Due to the Government (Note 27) 13,737,026 8,049,811 Debt securities issued 677,398 710,782 Deposits and accounts of financial and other institutions Other 281,005 1,034,651 202,443 135,818 Total interest expense on domestic currency liabilities 14,897,872 9,931,062 Total interest expense 21,092,209 16,477,039 6. Net foreign exchange loss In thousands of Armenian Drams 2019 2018 Net loss from foreign exchange translation Net gain on spot transactions Total net foreign exchange loss (1,982,331) 526,539 (1,455,792) (3,335,741) 349,174 (2,986,567) Included in the net loss from revaluation of monetary assets and liabilities is a foreign exchange translation loss of AMD 7,563,296 thousand on financial instruments at fair value through profit or loss (2018: loss in the amount of AMD 8,455,505 thousand). 7. Net (loss)/gain on derivatives In thousands of Armenian Drams 2019 Net (loss)/gain on forward contract with the Government (Note 27) Net gain/(loss) on swaps under own management (453,848) Net loss on futures under own management 5,851 (29,635) Total net (loss)/gain on derivatives 2018 552,850 (59,840) (24,208) 468,802 (477,632) In accordance with the agreement dated 5 January 2007 with the Government, the Bank is obliged to exchange main foreign currency denominated state budget inflows and outflows at exchange rates determined in the Government's budget message for the given year, which is a basis for the calculation of indexes in the Law on the State Budget of the Republic of Armenia. Gain or loss of the Bank as a result of such foreign currency exchange operations is accounted for as result on derivatives. 21#113Central Bank of the Republic of Armenia Notes to the 2019 consolidated financial statements 8. Net gain on financial instruments at fair value through profit or loss In thousands of Armenian Drams 2019 2018 Net gain on foreign securities under own management (excluding foreign exchange translation*) 14,508,756 12,789,190 Net loss on assets under trust management (excluding foreign exchange translation*) (33,271) (824,518) Net gain on money market instruments under own management (excluding foreign exchange translation*) Trust management fees (excluding foreign exchange translation*) Total net gain on financial instruments at fair value through profit or loss 44,229 (17,763) 156,277 (182,513) 14,501,951 11,938,436 * The foreign exchange translation of assets is included in "Net foreign exchange loss" (Refer to Note 6). 9. Other income 10. In thousands of Armenian Drams Numismatic coins Financial agency fee Other 2019 2018 725,162 651,905 163,865 259,379 3,337,231 2,825,131 4,226,258 3,736,415 Total other income Financial agency fee represents fee which is obtained by the Bank as an agent of the Government in accordance with the agency agreements. Based on the conditions of the agency agreements the Bank provides loans to commercial banks and other financial institutions. During the year ended 31 December 2019, the amount of AMD 2,460,686 thousand included in "Other" line represents the revenue of two subsidiaries of the Bank which render cash collection and plastic cards processing services (2018: AMD 2,091,643 thousand). Cost of production of banknotes, coins and numismatics In thousands of Armenian Drams Production of numismatic coins sold during the year Production of banknotes and coins Total cost of production of banknotes, coins and numismatics 2019 2018 618,159 210,762 546,085 4,477,131 828,921 5,023,216 In 2018 in connection with the 25th anniversary of the Armenian Dram, the Central Bank has issued and circulated the third series of banknotes of the Republic of Armenia, addressing a number of important issues of Armenian Dram protection by applying printing technology innovations. The banknotes structure has been optimized with the introduction of a new banknote with a nominal value of 2000 AMD. The third series of banknotes are represented by nominal values of 1000, 2000, 5000, 10 000, 20 000 and 50 000 AMD. 11. Other expenses In thousands of Armenian Drams 2019 2018 Employee compensation, staff training and related payments Depreciation and amortisation 8,292,421 8,149,397 4,231,048 4,649,127 Repairs and maintenance 1,672,598 1,864,696 Security and insurance expenses 562,394 434,751 Expenses on development and maintenance of payment system Professional services 467,193 482,285 136,632 188,075 Education, research and development of new projects 112,644 742,417 Other 2,420,388 2,873,593 Total other expenses 17,895,318 19,384,341 During the year ended 31 December 2019 and 31 December 2018, the expenses included into "Other" line represent subscription fees, communication expenses, utilities, rent expenses and stationary of the Bank and its subsidiaries. 22 22#114Central Bank of the Republic of Armenia Notes to the 2019 consolidated financial statements 11. Other expenses (continued) Amounts of employee compensation, staff training and related payments, depreciation and amortisation and repairs and maintenance expenses for the year ended 31 December 2019 and 31 December 2018 also include respective amounts of expenses of the Group's subsidiaries. 12. Placements and investments with banks and other financial institutions Placements with banks and other financial institutions in foreign currency In thousands of Armenian Drams Placements with banks and other financial institutions in foreign currency Nostro accounts Term deposits Margin requirements of interest rate futures Cash included in assets under trust management Impairment allowance 31 December 2019 31 December 2018 534,601,773 25,536,096 2,015 310,841,888 31,563,991 56,931 5,689,324 (147,896) (85,277) 559,991,988 348,066,857 Total placements with banks and other financial institutions in foreign currency Concentration of placements with banks and other financial institutions in foreign currency As at 31 December 2019 the Group had placements in three banks with individual balance exceeding 10% of total placements. The gross value of these placements as of 31 December 2019 amounted to AMD 458,250,623 thousand (31 December 2018: placements with three banks amounted to AMD 253,141,892 thousand). The term deposits have up to one month remaining maturity with the interest rate up to 2.06% (31 December 2018: up to 2.91%). As at 31 December 2018 AMD 5,689,324 thousand balance of cash included in assets under trust management represent balance maintained by the Bank for settlements under operations with foreign securities and futures within the framework of Agreement on investment management. As at 31 December 2018 AMD 1,451,250 thousand of term deposits denominated in foreign currency are pledged to secure bonds issued by the Group (refer to Note 24). Allowance for impairment of placements with banks and other financial institutions in foreign currency at amortised cost An analysis of changes in the gross carrying value and corresponding ECL in relation to Placements with banks and other financial institutions in foreign currency during the year ended 31 December 2019 is as follows: In thousands of Armenian Drams Stage 1 Total Placements with banks and other financial institutions in foreign currency Gross carrying value as at 1 January 2019 348,152,134 348,152,134 New assets originated or purchased Assets repaid At 31 December 2019 556,509,344 556,509,344 (344,521,594) (344,521,594) 560,139,884 560,139,884 Stage 1 Total In thousands of Armenian Drams Placements with banks and other financial institutions in foreign currency ECL as at 1 January 2019 New assets originated or purchased Assets repaid Changes to models and inputs used for ECL calculations At 31 December 2019 85,277 85,277 72,815 72,815 (85,268) (85,268) 75,072 75,072 147,896 147,896 23 23#115Central Bank of the Republic of Armenia Notes to the 2019 consolidated financial statements 12. Placements and investments with banks and other financial institutions (continued) Placements with banks and other financial institutions in foreign currency (continued) An analysis of changes in the gross carrying value and corresponding ECL in relation to Placements with banks and other financial institutions in foreign currency during the year ended 31 December 2018 is as follows: In thousands of Armenian Drams Stage 1 Total Placements with banks and other financial institutions in foreign currency Gross carrying value as at 1 January 2018 New assets originated or purchased Assets repaid At 31 December 2018 338,451,346 343,301,206 338,451,346 343,301,206 (333,600,418) (333,600,418) 348,152,134 348,152,134 Stage 1 Total In thousands of Armenian Drams Placements with banks and other financial institutions in foreign currency ECL as at 1 January 2018 New assets originated or purchased Assets repaid Changes to models and inputs used for ECL calculations At 31 December 2018 102,692 1,730 102,692 1,730 (17,865) (17,865) (1,280) (1,280) 85,277 85,277 Placements and investments with banks and other financial institutions in domestic currency In thousands of Armenian Drams 31 December 2019 31 December 2018 Placements and investments with banks and other financial institutions in domestic currency Loans to resident financial institutions under arrangement with the KfW, the World Bank, Asian Development Bank and European Investment Bank Repurchase agreements and other overnight facilities 127,976,053 127,837,551 126,669,774 163,433,113 Mortgage refinancing 90,373,958 76,566,659 Deposits and current accounts placed in commercial banks 63,926,423 50,942,450 Investments measured at amortised cost 24,082,487 24,090,275 Other loans 3,447,368 3,579,296 Impairment allowance (2,593,195) (2,801,183) Total placements and investments with banks and other financial institutions in domestic currency 433,882,868 443,648,161 Concentration of placements and investments with banks and other financial institutions in domestic currency As at 31 December 2019 placements with two banks had balances individually exceeding 10% of total placements with banks and other financial institutions denominated in domestic currency (31 December 2018: two banks). The Group accepted securities on reverse repurchase agreements as collateral, which the Group is permitted to sell or repledge. As at 31 December 2019 amounts receivable under reverse repurchase agreements are with 6 resident bank (31 December 2018: 10 resident banks) and are collateralised by the following securities: In thousands of Armenian Drams Treasury bonds of the Government Eurobonds issued by the Government Corporate bonds Total Fair value as at 31 December 2019 116,749,671 5,354,434 10,350,452 132,454,557 Fair value as at 31 December 2018 151,182,668 12,126,785 6,869,766 170,179,219 24#116Central Bank of the Republic of Armenia Notes to the 2019 consolidated financial statements 12. Placements and investments with banks and other financial institutions (continued) Placements and investments with banks and other financial institutions in domestic currency (continued) Loans to resident banks under the agreements with the KfW, Asian Development Bank (ADB), European Investment Bank (EIB) and the World Bank are provided by the Group to commercial banks and other financial institutions under the following programs which are financed by KfW Banking Group, EIB, ADB and International Bank for Reconstruction and Development (member of the World Bank): SME Support. The objective of the SME support Programs of the World Bank and KfW is to develop SMEs in Armenia, in particular by providing the necessary funding to the commercial banks and universal credit organisations in order to make lending to micro, small and medium size private enterprises efficient and profitable. This is supported by introducing new loan technologies in partner banks and organising the teaching and training of qualified loan experts. During 2014 a new credit line was received within the framework of the ADB "Women Entrepreneurship Support Sector Development" Program. The main objective of the program is to stimulate entrepreneurship development among women by increasing the availability of domestic currency funds for women-owned SMEs via the financial system of the Republic of Armenia. During 2015 a new loan was received from EIB, the loan will be used in order to make lending to SMEs in agro-processing, rural and tourism sectors through commercial banks and universal credit organisations. During 2017 one more loan was received from EIB within the framework of the "Armenia APEX II Loan for SMEs and MIDCAPS" Program. The conditions of this loan are mostly the same as that of the first phase. The main difference is climate change component inclusion that requires some actions from the side of sub-borrowers to improve the impact on the environment. During 2016 a new loan was received under "Support for the financing of the Energy Efficiency in MSME sector" Program. The objective of the Program is to introduce and expand the offer of energy efficiency loans in Armenian financial institutions and to cover at the same time the demand for energy efficiency loans from micro, small and medium sized enterprises (MSME). The Program aims at contributing to reduce the energy demand of Armenian MSME and the volume of CO2-emissions as well as to enhance the competitiveness of the enterprises. Development of the Renewable Energies. The overall objective of the Program is to contribute to an improved energy supply and to the further development of the private sector in Armenia by the cost-effective utilisation of renewable energy sources for electricity production. The Program envisages promoting the utilisation of renewable energy, in particular Small Hydro Power Plants ("SHPP"), by enhancing the access to loans for private entrepreneurs and private enterprises. Development of sustainable housing market. The purpose of the Program is the expansion of sustainable lending to private households by commercial banks and credit organisations for the purpose of either purchase or modernisation of housing. In accordance with the conditions of the programs the Group appoints eligible Armenian banks and financial institutions using technical and finance criteria, and places funds with appointed banks and financial institutions according to contracts signed with these counterparties. The banks and financial institutions specify final borrowers and assume risks for the loans extended. As at 31 December 2019 loans to resident banks under the agreements with the KfW, the World Bank, ADB and EIB are provided to 13 domestic banks (31 December 2018: 13 domestic banks) and 9 financial institutions (31 December 2018: 10 financial institutions). Mortgage refinancing has been provided to financial institutions with remaining maturity period up to 10 years (2018: 10 years). As at 31 December 2019 mortgage refinancing loans were collateralised with claims under loan agreements with the banks' and other financial institutions' customers in the amount of AMD 90,766,893 thousand (31 December 2018: AMD 76,750,175 thousand). As at 31 December 2018 mortgage refinancing loans in the amount of AMD 580,842 thousand and term deposits denominated in domestic currency in the amount of AMD 30,000 thousand are pledged to secure the Group's borrowings from the Government (refer to Note 23) and bonds issued (refer to Note 24). Current accounts and deposits placed in commercial banks represent on-demand and short-term placements made by the Group's subsidiaries in commercial banks. As at 31 December 2019 the management of the Group has classified investments in the amount of AMD 24,082,487 thousand as investments measured at amortised cost (31 December 2018: AMD 24,090,275 thousand as investments measured at amortised cost). Such decision was made due to the absence of liquid market for these investments and taking into account that the Group has ability and intention to hold them for the foreseeable future. Other loans are secured by real estate in the amount of AMD 2,830,489 thousand (31 December 2018: AMD 2,815,891 thousand), movable property and other assets in the amount of AMD 126,009 thousand (31 December 2018: AMD 108,763 thousand). 25 25#117Central Bank of the Republic of Armenia Notes to the 2019 consolidated financial statements 12. Placements and investments with banks and other financial institutions (continued) Placements and investments with banks and other financial institutions in domestic currency (continued) Allowance for impairment of placements and investments with banks and other financial institutions in domestic currency at amortised cost An analysis of changes in the gross carrying value and corresponding ECL in relation to Placements and investments with banks and other financial institutions in domestic currency during the year ended 31 December 2019 is as follows: In thousands of Armenian Drams Stage 1 Total Placements and investments with banks and other financial institutions in domestic currency New assets originated or purchased Assets repaid At 31 December 2019 Gross carrying value as at 1 January 2019 446,449,344 446,449,344 217,104,057 217,104,057 (227,077,338) (227,077,338) 436,476,063 436,476,063 In thousands of Armenian Drams Stage 1 Total Placements and investments with banks and other financial institutions in domestic currency ECL as at 1 January 2019 2,801,183 2,801,183 New assets originated or purchased 632,756 632,756 Assets repaid (222,275) (222,275) Changes to models and inputs used for ECL calculations (618,469) (618,469) 2,593,195 2,593,195 At 31 December 2019 An analysis of changes in the gross carrying value and corresponding ECL in relation to Placements and investments with banks and other financial institutions in domestic currency during the year ended 31 December 2018 is as follows: In thousands of Armenian Drams Stage 1 Total Placements and investments with banks and other financial institutions in domestic currency Gross carrying value as at 1 January 2018 New assets originated or purchased Assets repaid At 31 December 2018 307,508,525 264,384,650 (125,443,831) 307,508,525 264,384,650 (125,443,831) 446,449,344 446,449,344 In thousands of Armenian Drams Placements and investments with banks and other financial institutions in domestic currency ECL as at 1 January 2018 New assets originated or purchased Assets repaid Changes to models and inputs used for ECL calculations At 31 December 2018 Stage 1 Total 2,678,727 819,297 2,678,727 819,297 (462,358) (462,358) (234,483) (234,483) 2,801,183 2,801,183 13. Financial instruments at fair value through profit or loss In thousands of Armenian Drams 31 December 2019 31 December 2018 Assets Debt and other fixed-income instruments in foreign currency Foreign bonds under own management 763,710,331 Foreign bonds under trust management 614,675,994 78,054,256 Foreign money market instruments under own management 9,648,011 12,130,223 Total financial instruments at fair value through profit or loss in foreign 773,358,342 704,860,473 currency 26#118Central Bank of the Republic of Armenia Notes to the 2019 consolidated financial statements 13. Financial instruments at fair value through profit or loss (continued) As at 31 December 2019 and 31 December 2018 foreign securities at fair value under own management include: 31 December 2019 31 December 2018 346,945,790 35,843,569 639,177,514 24,001,326 100,531,491 231,886,635 763,710,331 614,675,994 In thousands of Armenian Drams Government bonds State agency bonds Other securities Total Debt securities at fair value through profit or loss under own management are quoted securities issued by governments of European countries and US treasury bills, securities issued by state agencies, foreign banks and other financial institutions. As at 31 December 2019 and 31 December 2018 the foreign bonds under trust management include: 14. In thousands of Armenian Drams Government bonds State agency bonds Other securities Total Derivative financial instruments In thousands of Armenian Drams Derivative financial assets Foreign currency swaps under own management Forward contract with the Government Total derivative financial assets Derivative financial liabilities Forward contract with the Government Foreign currency futures under own management Foreign currency futures under trust management Total derivative financial liabilities 31 December 2019 31 December 2018 15,447,463 5,403,404 57,203,389 78,054,256 31 December 2019 31 December 2018 29,911 13,938 43,849 79,455 1,645 54,741 42,299 81,100 97,040 As at 31 December 2018 the Group had 572 short futures contracts with the nominal value of EUR 78,912 thousand or AMD 43,689,507 thousand at the year-end official exchange rate of EUR to Armenian Dram, which were under discretionary asset management by the international financial institution for the purposes of regulating the interest rate risk. These operations were performed as a part of Investment Management Agreement. As at 31 December 2019 the Group had 10 long futures contracts with the nominal value of EUR 10,000 thousand or AMD 5,372,600 thousand at the year-end official exchange rate of EUR to Armenian Dram (31 December 2018: 97 short futures contracts with the nominal value of USD 54,600 thousand or AMD 26,412,750 thousand and 8 short futures contracts with the nominal value of EUR 800 thousand or AMD 442,920 thousand). In thousands of Armenian Drams Currency forward contract with the Government Foreign currency futures under own management Foreign currency futures under trust management Foreign currency swaps under own management Total Fair value Nominal value 2019 2018 2019 2018 Asset Liability Asset Liability 9,098,961 5,372,600 3,173,020 26,855,670 79,455 13,938 1,645 54,741 43,689,507 42,299 5,336,320 29,911 14,471,561 79,054,517 81,100 43,849 97,040 27#119Central Bank of the Republic of Armenia Notes to the 2019 consolidated financial statements 15. Investment securities In thousands of Armenian Drams Financial assets measured at fair value through other comprehensive income in foreign currency Equity investments - unquoted 31 December 2019 31 December 2018 Foreign securities SWIFT Total equity investments Debt instruments 1,937,372 3,211 1,940,583 1,914,789 3,211 1,918,000 Corporate bonds in foreign currency 761,584 1,067,864 Total debt investments 761,584 1,067,864 Total financial assets measured at fair value through other comprehensive income in foreign currency 2,702,167 2,985,864 Financial assets measured at fair value through other comprehensive income in domestic currency Debt instruments Securities of the Government of the Republic of Armenia 13,189,425 13,707,676 Promissory note of the Government (Note 25) 73,810,843 73,810,843 Total debt instruments 87,000,268 87,518,519 Equity investments Other investments Total equity investments Total financial assets measured at fair value through other comprehensive income in domestic currency Total financial assets measured at fair value through other comprehensive income 871,874 762,005 871,874 762,005 87,872,142 88,280,524 90,574,309 91,266,388 Foreign equity securities classified as financial assets measured at fair value through other comprehensive income in foreign currency as at 31 December 2019 represent investment of one of the Group's subsidiaries into the development fund initiated and led by the KfW. The development fund was established with the aim to foster economic development and prosperity in the Southeast Europe region including the Republic of Armenia through the sustainable provision of additional development finance. As at 31 December 2019 debt securities denominated in domestic currency and classified as financial assets measured at fair value through other comprehensive income in domestic currency represent coupon securities issued by the Government of the Republic of Armenia. As at 31 December 2019 debt securities denominated in foreign currency and classified as financial assets measured at fair value through other comprehensive income in foreign currency represent coupon securities issued by one of Armenian banks. Debt investment securities are recorded at fair value determined using a valuation technique, which uses current market rates to discount future cash flows of the financial instruments. As at 31 December 2019 carrying value of a non-interest bearing on-demand promissory note issued by the Government amounts to AMD 73,810,843 thousand (2018: 73,810,843 AMD thousand). The management believes that the carrying amount of the promissory note approximates its fair value. An analysis of changes in the gross carrying values and associated ECLs in relation to debt securities at FVOCI in domestic currency during the year ended 31 December 2019 is as follows: In thousands of Armenian Drams Debt securities at FVOCI in domestic currency - securities of the Stage 1 Total Government of the Republic of Armenia Gross carrying value as at 1 January 2019 New assets originated or purchased Assets repaid At 31 December 2019 13,707,676 742,495 (1,260,746) 13,707,676 742,495 (1,260,746) 13,189,425 13,189,425 28#120Central Bank of the Republic of Armenia Notes to the 2019 consolidated financial statements Stage 1 Total - securities of the 15. Investment securities (continued) In thousands of Armenian Drams Debt securities at FVOCI in domestic currency Government of the Republic of Armenia ECL as at 1 January 2019 New assets originated or purchased Assets repaid Changes to models and inputs used for ECL calculations 60,164 60,164 1,940 1,940 (1,964) (1,964) (25,820) (25,820) 34,320 34,320 At 31 December 2019 An analysis of changes in the gross carrying values and associated ECLs in relation to debt securities at FVOCI in domestic currency during the year ended 31 December 2018 is as follows: In thousands of Armenian Drams Debt securities at FVOCI in domestic currency - securities of the Government of the Republic of Armenia Gross carrying value as at 1 January 2018 New assets originated or purchased Assets repaid At 31 December 2018 Stage 1 Total 17,521,378 456,861 (4,270,563) 13,707,676 17,521,378 456,861 (4,270,563) 13,707,676 In thousands of Armenian Drams Stage 1 Total Debt securities at FVOCI in domestic currency - securities of the Government of the Republic of Armenia ECL as at 1 January 2018 New assets originated or purchased Assets repaid Changes to models and inputs used for ECL calculations At 31 December 2018 66,446 66,446 2,122 2,122 (2,773) (2,773) (5,631) (5,631) 60,164 60,164 An analysis of changes in the gross carrying values and associated ECLs in relation to debt securities at FVOCI in foreign currency during the year ended 31 December 2019 is as follows: In thousands of Armenian Drams Debt securities at FVOCI in foreign currency Gross carrying value as at 1 January 2019 Assets repaid At 31 December 2019 In thousands of Armenian Drams Debt securities at FVOCI in foreign currency ECL as at 1 January 2019 Assets repaid Changes to models and inputs used for ECL calculations At 31 December 2019 Total Stage 1 1,067,864 1,067,864 (306,280) (306,280) 761,584 761,584 Stage 1 Total 11,999 11,999 (3,018) (3,018) (2,008) (2,008) 6,973 6,973 An analysis of changes in the gross carrying values and associated ECLs in relation to debt securities at FVOCI in foreign currency during the year ended 31 December 2018 is as follows: In thousands of Armenian Drams Debt securities at FVOCI in foreign currency Gross carrying value as at 1 January 2018 New assets originated or purchased At 31 December 2018 Stage 1 Total 1,067,864 1,067,864 1,067,864 1,067,864 29 29#121Central Bank of the Republic of Armenia 15. Investment securities (continued) In thousands of Armenian Drams Debt securities at FVOCI in foreign currency ECL as at 1 January 2018 New assets originated or purchased At 31 December 2018 16. Operations with the International Monetary Fund Assets due from the IMF In thousands of Armenian Drams Placements with the IMF Notes to the 2019 consolidated financial statements Stage 1 Total 11,999 11,999 11,999 11,999 31 December 2019 31 December 2018 Membership quota in the IMF (subscription) SDR holdings in the IMF Accrued interest Total placements with the IMF 85,438,192 2,953,756 6,282 88,398,230 86,655,352 2,887,490 5,655 89,548,497 The Republic of Armenia is a member of the International Monetary Fund. The Bank holds the quota for the Republic of Armenia membership in the IMF. The quota balance is a special type asset. Quotas vary based on the economic size of each country and are determined by the Board of Governors of the IMF. The quota determines a member's voting power in the IMF, the limits of access to the financial resources of the IMF and a participant's share in the allocation of SDRs, the IMF's unit of account. The 75% of the quota of the Republic of Armenia was paid in the form of non-interest-bearing promissory notes issued to the IMF by the Bank. As at 31 December 2019 the quota of the Republic of Armenia in the IMF amounted to SDR 128,800 thousand, or AMD 85,438,192 thousand at the year-end official exchange rate of Armenian Dram to SDR (2018: SDR 128,800 thousand or AMD 86,655,352 thousand at the year-end official exchange rate of Armenian Dram to SDR). The quota does not earn interest and is a non-current asset. The Bank maintains an SDR-denominated current account with the IMF used for processing and settlement of transactions with the IMF. This current account earns interest based on the SDR Interest Rate which is published by the IMF on a weekly basis. Movements in SDR holdings account during the years ended 31 December 2019 and 31 December 2018 were as follows: In thousands of Armenian Drams Balance of SDR holdings as at 1 January Purchase of SDRs 2019 2,887,490 37,649,890 2018 3,491,637 34,626,810 Repayment of loans to the IMF: On behalf of the Bank PRGT EFF On behalf of the Government (4,182,497) (2,867,948) (17,289,350) (15,701,960) PRGT (13,514,842) (13,831,234) Payment of loan related commission Other fees (76,712) (913) (1,011) Payment of interest for use of the IMF resources: On behalf of the Bank (2,003,820) (2,201,503) Payment of interest for use of funds received under SDR allocation (611,525) (526,439) Income on SDR holdings 23,945 19,568 Translation differences Balance of SDR holdings as at 31 December (120,430) 2,887,490 The amounts of transactions in the table above are represented in AMD equivalent at SDR/AMD exchange rates at the dates when each of transactions had place. 72,090 2,953,756 30 30#122Central Bank of the Republic of Armenia Notes to the 2019 consolidated financial statements 16. Operations with the International Monetary Fund (continued) Liabilities due to the IMF In thousands of Armenian Drams Securities account Adjustment account for AMD liabilities to the IMF Account 1 Account 2 SDR allocation ECF: Carrying value Deferred income Interest accrued Total liabilities due to the IMF 31 December 2019 159,285,304 (823,199) 31 December 2018 159,285,304 (6,611,507) 9,436,432 35,173,286 2,590 2,703 58,366,397 59,197,890 14,341,411 18,797,753 13,795,377 17,928,595 546,034 869,158 477,671 339,968 240,948,903 266,323,100 The Securities account, Adjustment account and Account 1 represent the amounts of the liability of the Bank as per EFF and the membership quota. Currently all major settlements with the IMF are made through Account 1. Account 2 is used by the IMF for administrative purposes. As at 31 December 2019 part of the Bank's liabilities to the IMF and the membership quota are covered by the promissory note in the amount of AMD 159,285,304 thousand (31 December 2018: AMD 159,285,304 thousand). Except for membership quota and liability in respect of SDR allocation, the Bank's liability to the IMF as at 31 December 2019 represents liabilities as per Extended Credit Facility and Extended Fund Facility. Funds received under Extended Fund Facility are recorded on Account 1. The Extended Credit Facility provides financial assistance to the countries with protracted balance of payments problems. The ECF was created under the newly established Poverty Reduction and Growth Trust (the "PRGT") as part of a broader reform to make the IMF's financial support more flexible and better tailored to the diverse needs of Low Income countries, including in times of crisis. As at 31 December 2019 the ECF bears no interest (2018: 0%). The loans outstanding as at 31 December 2019 mature in June 2020 - June 2023 (31 December 2018: June 2019 - June 2023). The Extended Fund Facility (the "EFF") is provided to the countries to overcome medium-term payment problems. The EFF interest rate is floating and published by the IMF on a weekly basis as Adjusted Rate of Charge. The loans outstanding as at 31 December 2019 mature in March 2020 - June 2027 (31 December 2018: June 2019 - December 2027). The IMF for the purpose of increasing the international reserves of the member countries makes SDR allocations to the member countries. The SDR allocation interest rate is floating and published by the IMF on a weekly basis as SDR interest rate. The SDR allocation has no maturity date but can be cancelled by the IMF. 31#123Central Bank of the Republic of Armenia 17. Property and equipment Notes to the 2019 consolidated financial statements In thousands of Armenian Drams Land and buildings Networks, computer and other equipment Vehicles Construction in progress Right of use assets Total Cost Balance as at 1 January 2018 Additions 74,768,836 22,757,194 8,703 728,828 649,251 33,700 1,882,115 29,146 Disposals (1,030,936) (424,987) 100,057,396 800,377 (1,455,923) Transfer 1,759,679 138,733 (1,898,412) Balance as at 31 December 2018 75,506,282 23,199,768 682,951 12,849 99,401,850 Impact of adopting IFRS 16 (Note 2) Additions 710,342 (888,809) (175,310) 33,110 (88,674) 209,466 482,988 25,346 (2,640) 482,988 978,264 (1,155,433) 74,617,473 23,734,800 627,387 222,315 505,694 99,707,669 Disposals Balance as at 31 December 2019 Depreciation Balance as at 1 January 2018 13,879,646 12,619,217 461,753 Charge for the period 2,712,586 1,400,991 53,818 Disposals (107,904) (359,176) 26,960,616 4,167,395 (467,080) Transfer (35,821) 35,821 Balance as at 31 December 2018 16,448,507 13,696,853 515,571 30,660,931 Charge for the period 2,419,263 1,220,232 44,250 102,501 3,786,246 Disposals (159,832) (172,230) (84,741) (2,640) (419,443) Balance as at 31 December 2019 18,707,938 14,744,855 475,080 99,861 34,027,734 Carrying amount At 31 December 2019 55,909,535 8,989,945 152,307 222,315 405,833 65,679,935 59,057,775 At 31 December 2018 9,502,915 167,380 12,849 68,740,919 Construction in progress consists mainly of construction of premises. Upon completion, assets are transferred to buildings respectively. 18. Intangible assets In thousands of Armenian Drams Cost Computer software Contracts in progress Total Balance as at 1 January 2018 Additions 4,135,615 146,661 991,453 89,257 5,127,068 235,918 Disposals (11,075) (11,075) Transfer 7,035 (7,035) Balance as at 31 December 2018 4,278,236 1,073,675 5,351,911 Additions 694,758 35,000 729,758 Disposals (91,382) (91,382) Balance as at 31 December 2019 4,881,612 1,108,675 5,990,287 Amortisation Balance as at 1 January 2018 2,089,958 Charge for the period 481,732 Disposals (10,502) 2,089,958 481,732 (10,502) Balance as at 31 December 2018 2,561,188 Charge for the period 444,802 Disposals (36,447) Balance as at 31 December 2019 2,969,543 2,561,188 444,802 (36,447) 2,969,543 Carrying amount At 31 December 2019 At 31 December 2018 1,912,069 1,108,675 3,020,744 1,717,048 1,073,675 2,790,723 32#124Central Bank of the Republic of Armenia 19. Other assets in domestic currency In thousands of Armenian Drams Numismatic coins Prepayments and receivables Other Impairment allowance Total other assets Notes to the 2019 consolidated financial statements 31 December 2019 7,596,449 31 December 2018 7,872,280 3,108,299 5,129,659 1,545,359 1,826,495 (10,998) (33,288) 12,239,109 14,795,146 As of 31 December 2019 prepayments and receivables include other financial assets in the amount of AMD 800,217 thousand (31 December 2018: AMD 1,625,937 thousand). An analysis of changes in the ECLS for other financial assets for the year ended 31 December 2019 is as follows: In thousands of Armenian Drams Other financial assets Gross carrying value as at 1 January 2019 New assets originated or purchased Assets repaid At 31 December 2019 In thousands of Armenian Drams Other financial assets ECL as at 1 January 2019 New assets originated or purchased Assets repaid Changes to models and inputs used for ECL calculations At 31 December 2019 Stage 1 Total 1,625,937 110,843 (936,563) 1,625,937 110,843 (936,563) 800,217 800,217 Stage 1 Total 33,288 33,288 1,047 1,047 (18,779) (18,779) (4,558) (4,558) 10,998 10,998 An analysis of changes in the ECLs for other financial assets for the year ended 31 December 2018 is as follows: In thousands of Armenian Drams Other financial assets Gross carrying value as at 1 January 2018 New assets originated or purchased Assets repaid At 31 December 2018 In thousands of Armenian Drams Other financial assets ECL as at 1 January 2018 New assets originated or purchased Assets repaid Changes to models and inputs used for ECL calculations At 31 December 2018 Stage 1 Total 2,418,111 49,594 (841,768) 2,418,111 49,594 (841,768) 1,625,937 1,625,937 Stage 1 Total 50,194 165 (16,960) 50,194 165 (16,960) (111) (111) 33,288 33,288 33#125Central Bank of the Republic of Armenia Notes to the 2019 consolidated financial statements 20. Deposits and accounts of financial and other institutions In thousands of Armenian Drams Foreign currency liabilities Vostro accounts and deposits of domestic banks Current accounts of related parties Current accounts of other legal entities Total foreign currency liabilities Domestic currency liabilities Vostro accounts and deposits of domestic banks Current accounts and term deposit of related parties Current accounts of other legal entities Other deposits Total domestic currency liabilities Total deposits and accounts of financial and other institutions 31 December 2019 31 December 2018 373,816,783 244,798,174 1,475,390 1,745,105 989,282 772,384 376,281,455 247,315,663 343,857,702 364,466,344 284,157 49,870 975,287 674,295 2,002,678 2,002,678 347,119,824 367,193,187 723,401,279 614,508,850 Concentration of deposits and accounts of financial and other institutions As at 31 December 2019 three counterparty banks had balances, individually exceeding 10% of the total amount of deposits and accounts of financial and other institutions, amounting to AMD 390,862,187 thousand (31 December 2018: three banks with total balance of AMD 299,682,463 thousand). 21. Other borrowed funds In thousands of Armenian Drams Due to the KfW Due to the EIB Due to the World Bank Due to the ADB Other Total other borrowed funds 31 December 2019 31 December 2018 59,582,037 63,695,678 51,891,908 54,856,643 20,267,749 21,285,991 6,590,621 6,684,513 4,409,806 5,187,927 142,742,121 151,710,752 The loans due to the KfW are provided under an intergovernmental agreement on financial cooperation between the Government and the Federal Republic of Germany to finance special loan programs placed through domestic commercial banks (Note 12). The loans mature from 2020 to 2048 (31 December 2018: from 2019 to 2048). The repayment of the loans to the KfW is guaranteed by the Government. The loan due to the World Bank is provided by the World Bank for financing small and medium enterprises through domestic commercial banks and financial institutions (Note 12). The loan matures during the period from 2020 to 2035 (31 December 2018: from 2019 to 2035). The loan due to ADB is provided by the Asian Development Bank for financing women-owned small and medium enterprises (Note 12) through commercial banks and financial institutions and matures during the period from 2020 to 2044 (31 December 2018: from 2019 to 2044). The loan due to the EIB is provided by the European Investment Bank for financing agriculture and tourism sectors through domestic commercial banks and financial institutions (Note 12). The loan matures during the period from 2020 to 2030 (31 December 2018: from 2019 to 2030). The loan obtained by one of the Group's subsidiaries from French Agency for Development included into category "Other" matures during the period from 2020 till 2025 (31 December 2018: from 2019 to 2025). As at 31 December 2019 the balance outstanding under this loan facility is AMD 4,409,806 thousand (31 December 2018: AMD 5,187,927 thousand). 34#126Central Bank of the Republic of Armenia 22. Other liabilities in domestic currency In thousands of Armenian Drams Other liabilities in domestic currency Payables Demand deposits of employees Other liabilities Total other liabilities in domestic currency Notes to the 2019 consolidated financial statements 31 December 2019 31 December 2018 2,133,087 2,386,248 1,251,847 1,137,386 1,023,623 979,786 4,408,557 4,503,420 23. Due to the Government of the Republic of Armenia 31 December 2019 31 December 2018 In thousands of Armenian Drams Foreign currency liabilities Current accounts of the Government Total foreign currency liabilities Domestic currency liabilities Term deposits Current accounts of the Government Loans from the Government Total domestic currency liabilities Total due to the Government of the Republic of Armenia 1,248,593 5,822,025 1,248,593 5,822,025 285,000,475 41,045,292 135,487,725 49,117,388 321,865 326,045,767 327,294,360 184,926,978 190,749,003 Term deposits of the Government have maturity of less than one year and interest rate is ranging from 5.25% to 5.93% (31 December 2018: from 5.59% to 5.91%). Loans from the Government outstanding as at 31 December 2018 represent loans obtained by one of the Group's subsidiaries from the Government under the Mortgage Loan Market Refinancing Project based on the general agreement signed on 13 June 2009. Loan's nominal interest rate is 7% per annum with maturity date till June 2019. As at 31 December 2018 mortgage refinancing loans to banks and financial institutions with a gross value of AMD 580,842 thousand serve as collateral for loans from the Government. 24. Debt securities issued As at 31 December 2019 the subsidiary company of the Group had in issue coupon bonds with AMD 6,500,000 thousand par value and 3 years maturity (31 December 2018: coupon bonds with AMD 7,710,600 thousand par value and 3-5 years maturity). As at 31 December 2019 the average annual yield on these bonds is from 7.36% to 8.13% (31 December 2018: from 8.1% to 11.8%). The carrying value of the issued bonds as at 31 December 2019 is AMD 6,626,428 thousand (31 December 2018: AMD 7,838,688 thousand). As at 31 December 2018 term deposits denominated in domestic currency in the amount of AMD 30,000 thousand and term deposits denominated in foreign currency in the amount of AMD 1,451,250 thousand serve as collateral for debt securities issued. 25. Management of capital Capital of the Group comprises the residual value of the Group's assets after deduction of its liabilities. The size of the capital is established by the Law. In accordance with this Law the amount of issued capital of the Bank is AMD 100,000 thousand. The authorised capital of the Bank is the property of and belongs to the Republic of Armenia and may not be pledged, confiscated or otherwise alienated against the obligations of the Republic of Armenia. The Bank's objectives when managing capital are to maintain an appropriate level of capital to ensure economic independence of the Bank and ability to perform its functions. The Bank's management considers total capital under management to be equity as shown in the consolidated statement of financial position. Objectives and policies of managing components of the Bank's capital are defined by the respective internal regulations approved by the decisions of the Board of the Central Bank of the Republic of Armenia (the "Board"). Formation of funds and reserves of the Bank for covering financial risks associated with performance of its functions is carried out in accordance with the regulations approved by the Board and the Law. 35#127Central Bank of the Republic of Armenia Notes to the 2019 consolidated financial statements 25. Management of capital (continued) The general reserve is formed according to the Law and cannot be distributed. General reserve is formed to cover general risks (potential losses) arising as a result of banking operations. Promissory Note issued by the Government represents a contribution made by the Government by the way of issuing a non-interest bearing on demand promissory note in the case when the losses in the result of the financial year in the consolidated financial statements of the Group exceed the aggregate amount of its reserves. As at 31 December 2019 and 31 December 2018 carrying amount of a non-interest bearing on-demand promissory note issued by the Government amounts to AMD 73,810,843 thousand. Revaluation reserve for financial assets measured at fair value through other comprehensive income in the amount of AMD 2,422,299 thousand (positive effect) as at 31 December 2019 (31 December 2018: AMD 1,838,897 thousand (positive effect) represents difference between the fair value of the Group's financial assets measured at fair value through other comprehensive income as at the reporting date and their fair value at initial recognition. 26. Commitments Capital commitments The capital commitments outstanding at 31 December 2019 related to the Group's development of software amount to AMD 488,542 thousand (31 December 2018: AMD 338,420 thousand). Litigation The Group management is unaware of any actual, pending or threatened significant claims against the Group. 27. Related party transactions Transactions with members of the key management Amount of the key management remuneration included into "Employee compensation, staff training and related payments" line (refer to Note 11): In thousands of Armenian Drams Key management including the Board members Total 2019 2018 319,776 319,776 329,949 329,949 Total amount of loans issued to the members of the key management outstanding as at 31 December 2019 is AMD 173,288 thousand (31 December 2018: AMD 183,833 thousand). Total amount of deposits placed in the Bank by the members of the key management outstanding as at 31 December 2019 is AMD 194,873 thousand (31 December 2018: AMD 261,940 thousand). During the year ended 31 December 2019 the Group recognized interest expenses in amount of AMD 25,540 thousand and interest income in amount of AMD 5,790 thousand from the transactions with the key management (31 December 2018: 29,216 AMD thousand and 4,513 AMD thousand). In accordance with the Bank's internal regulations, loans cannot be provided to the Bank's employees who have deposits with the Bank. 36#128Central Bank of the Republic of Armenia Notes to the 2019 consolidated financial statements 27. Related party transactions (continued) Transactions with the Government of the Republic of Armenia The outstanding balances and average contractual interest rates with the Government are as follows: 31 December 2018 31 December 2019 Average contractual interest rate Balance outstanding Balance outstanding Average contractual interest rate In thousands of Armenian Drams Consolidated statement of financial position Assets Securities of the Republic of Armenia classified as financial assets measured at fair value through other comprehensive income (Note15) 13,189,425 13,189,425 11.4% 13,707,676 13,707,676 11.0% Promissory note issued by the Government (Note 15) Balance at 1 January 73,810,843 Balance at 31 December 73,810,843 Assets at 31 December 87,000,268 73,810,843 73,810,843 87,518,519 Liabilities Due to the Government of the Republic of Armenia (domestic currency, Note 23) 326,045,767 4.9% 184,926,978 4.5% Due to the Government of the Republic of Armenia (foreign currency, Note 23) 1,248,593 Liabilities at 31 December 327,294,360 5,822,025 190,749,003 The movement of deposits included in liabilities due to the Government in domestic currency was as follows: In thousands of Armenian Drams Balance at 1 January Additions 2019 135,487,725 1,033,000,000 Interest charge Redemption (including interest payment) 13,324,977 (896,812,227) (870,120,065) 2018 115,325,158 883,000,000 7,282,632 285,000,475 135,487,725 Balance at 31 December The movement of the loans from the Government in domestic currency was as follows: In thousands of Armenian Drams 2019 2018 Balance at 1 January Interest charge Redemption (including interest payments) 321,865 9,698 (331,563) 965,468 46,067 (689,670) 321,865 Balance at 31 December Amounts included in the consolidated statement of comprehensive income in relation to transactions with the Government are as follows: In thousands of Armenian Drams 2019 2018 Consolidated statement of comprehensive income Interest income from Government securities Interest expense Net foreign exchange (loss)/gain Net (loss)/gain on derivatives 1,317,084 (13,737,026) (59,234) (453,848) 1,458,881 (8,049,811) 68,796 552,850 In accordance with the agreement dated © January 2007 with the Government the Bank is obliged to exchange main foreign currency denominated state budget inflows and outflows at exchange rates determined in the Government's budget message for the given year which is a basis for the calculation of indexes in the Law On the State Budget of the Republic of Armenia. Gain or loss of the Group as a result of such foreign currency exchange operations is accounted for as result on derivatives. 37#129Central Bank of the Republic of Armenia Notes to the 2019 consolidated financial statements 27. Related party transactions (continued) Transactions with other related parties The information in the tables below relates to the balances and results of transactions with the entities, in the governing body of which the Bank has its representatives. In thousands of Armenian Drams Consolidated statement of financial position Liabilities 31 December 2019 Balance outstanding Average contractual interest rate Balance outstanding 31 December 2018 Average contractual interest rate Current accounts and term deposits (domestic currency) (Note 20) Current accounts (foreign currency) (Note 20) 284,157 1,475,390 5.5% 0.0% 49,870 1,745,105 5.6% 0.0% Total 1,759,547 1,794,975 The movement of deposits and current accounts of transactions with other related parties was as follows: In thousands of Armenian Drams Balance at 1 January Additions Interest charge Redemption (including interest payment) Balance at 31 December 2019 1,794,975 2018 119,887,747 3,060,662 241,526,352 28,256 (119,951,431) 1,759,547 54,555 (242,846,594) 1,794,975 28. Cash and cash equivalents Cash and cash equivalents at the end of the financial year as shown in the consolidated statement of cash flows are composed of the following items: In thousands of Armenian Drams Cash Nostro accounts (Note 12) SDR holdings in the IMF (Note 16) Total cash and cash equivalents 29. Fair value of financial instruments 31 December 2019 31 December 2018 39,603,848 534,601,773 2,953,756 577,159,377 355,967,550 42,238,172 310,841,888 2,887,490 Fair value measurements are analysed by level in the fair value hierarchy as follows: (i) level one are measurements at quoted prices (unadjusted) in active markets for identical assets or liabilities, (ii) level two measurements are valuation techniques with all material inputs observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices), and (iii) level three measurements are valuations not based on observable market data (that is, unobservable inputs). Management applies judgement in categorising financial instruments using the fair value hierarchy. If a fair value measurement uses observable inputs that require significant adjustment, that measurement is a Level 3 measurement. The significance of a valuation input is assessed against the fair value measurement in its entirety. 38#130Central Bank of the Republic of Armenia Notes to the 2019 consolidated financial statements 29. Fair value of financial instruments (continued) (a) Recurring fair value measurements Recurring fair value measurements are those that the accounting standards require or permit in the consolidated statement of financial position at the end of each reporting period. The levels in the fair value hierarchy into which the recurring fair value measurements are categorised as follows: In thousands of Armenian Drams Level 1 31 December 2019 Level 2 Level 3 Total Level 1 31 December 2018 Level 2 Level 3 Total Assets carried at fair value Financial assets Financial instruments at fair value through profit or loss Government bonds (Note 13) 639,177,514 639,177,514 362,393,253 State agency bonds (Note13) 24,001,326 Other securities (Note13) 100,531,491 24,001,326 41,246,973 100,531,491 289,090,024 Money market instruments 9,648,011 9,648,011 12,130,223 (Note13) Derivative financial assets (Note 14) Investment securities 362,393,253 41,246,973 289,090,024 12,130,223 43,849 43,849 measured at fair value through other comprehensive income Foreign securities (Note15) 1,937,372 1,937,372 1,914,789 1,914,789 Securities of the Government of the Republic of Armenia (Note15) 13,189,425 13,189,425 13,707,676 13,707,676 Promissory note issued by the Government (Note15) 73,810,843 73,810,843 Corporate bonds in foreign currency (Note15) 761,584 761,584 73,810,843 1,067,864 73,810,843 1,067,864 Total assets with recurring fair value 773,358,342 measurements 89,699,224 863,057,566 704,860,473 90,501,172 43,849 795,405,494 Level 1 31 December 2019 Level 3 Total Level 1 31 December 2018 Level 3 Total In thousands of Armenian Drams Liabilities carried at fair value Financial liabilities Foreign currency futures under own management (Note14) 1,645 1,645 54,741 Forward contract with the Government (Note14) 79,455 79,455 Foreign currency futures under trust management (Note14) 42,299 Total liabilities with recurring fair value measurements 1,645 79,455 81,100 97,040 54,741 42,299 97,040 The description of valuation technique and description of inputs used in the fair value measurement for level 2 measurements at 31 December 2019: In thousands of Armenian Drams Assets carried at fair value Financial assets Investment securities measured at fair value Fair value Valuation technique Inputs used through other comprehensive income Foreign securities (Note15) 1,937,372 DCF Corporate bonds in foreign currency (Note15) Securities of the Government of the Republic of Armenia (Note 15) 761,584 DCF EUR risk-free rate Quoted prices Government bonds 13,189,425 DCF yield curve Government bonds Promissory note issued by the Government (Note15) Total recurring fair value measurements at Level 2 73,810,843 DCF yield curve 89,699,224 39#131Central Bank of the Republic of Armenia 29. Fair value of financial instruments (continued) (a) Recurring fair value measurements (continued) Notes to the 2019 consolidated financial statements The description of valuation technique and description of inputs used in the fair value measurement for level 2 measurements at 31 December 2018: In thousands of Armenian Drams Assets carried at fair value Financial assets Fair value Valuation technique Inputs used Investment securities available for sale Foreign securities (Note 15) 1,914,789 DCF Corporate bonds in foreign currency (Note 15) 1,067,864 DCF Securities of the Government of the Republic of Armenia (Note 15) EUR risk-free rate Quoted prices Government bonds 13,707,676 DCF yield curve Government bonds Promissory note issued by the Government Total recurring fair value measurements at Level 2 73,810,843 90,501,172 DCF yield curve The valuation technique, inputs used in the fair value measurement for level 3 measurements and related sensitivity to reasonably possible changes in those inputs are as follows at 31 December 2019: In thousands of Armenian Drams Fair value Valuation technique Inputs used Range of inputs (weighted average) Reasonable change Sensitivity of fair value measurement Liabilities carried at fair value Financial liabilities Derivative financial liabilities 79,455 DCF 1) AMD risk-free rate 2) USD risk-free rate 3) EUR risk-free rate 1) 5.60% 2) 3.17% 3) 0.97% 1) +100/-100 b.p. 2) +100/-100 b.p. 3) 15/-15 b.p. 4) USD/AMD spot rate at 4) 479.70 the year-end 4) n/a 1) (6,796)/6,866 2) 6,973/(7,047) 3) 6.8/(6.8) 4) n/a 5) EUR/AMD spot rate at 5) 537.26 the year-end 5) n/a 5) n/a 6) Expected net amount 6) USD 18,856 of external debt - USD 6) ± 10% 6) (7,423)/7,423 thousand 7) Expected net amount 7) EUR 100 of external debt - EUR thousand 7) ± 10% 7) (81)/81 The valuation technique, inputs used in the fair value measurement for level 3 measurements and related sensitivity to reasonably possible changes in those inputs are as follows at 31 December 2018: In thousands of Fair Armenian Drams value Valuation technique Inputs used Assets carried at fair value Financial assets Derivative financial assets Range of inputs (weighted average) Reasonable change Sensitivity of fair value measurement 13,938 DCF 1) AMD risk-free rate 2) USD risk-free rate 3) EUR risk-free rate 1) 5.99% 2) 4.46% 2) +50/-15 b.p. 3) 1.59% 3) + 20/-1 b.p. 4) USD/AMD spot rate at 4) 483.75 4) n/a 1) +100/-80 b.p. 1) (2,532)/2,044 2) 1,259/(379) 3) 9/(0.4) 4) n/a the year-end 5) EUR/AMD spot rate at 5) 553.65 5) n/a 5) n/a the year-end 6) Expected net amount 6) USD 6,445 of external debt - USD 6) ±10% 6) (1,414)/1,414 thousand 7) Expected net amount 7) EUR 100 of external debt - thousand EUR 7) ±10% 7) (20)/20 The above tables disclose sensitivity to valuation inputs for derivative financial liabilities and derivative financial assets, if changing one or more of the unobservable inputs to reflect whether reasonably possible alternative assumptions would change fair value significantly. The sensitivity of fair value measurement disclosed in the above tables shows the direction that an increase or decrease in the respective input variables would have on the valuation result. 40#132Central Bank of the Republic of Armenia 29. Fair value of financial instruments (continued) (b) Notes to the 2019 consolidated financial statements Valuation processes for recurring level 3 fair value measurements Level 3 valuations are periodically reviewed by the Accounting and Finance Departments of the Bank with making decision in respect of the appropriateness of the valuation technique which is used and analysis of the valuation model inputs. The level three instruments are valued at the net present value of estimated future cash flows using discount factors determined based on the characteristics of each individual financial instrument. When appropriate, the back testing is performed by the Group. (၁) Assets and liabilities not measured at fair value but for which fair value is disclosed Fair values analysed by level in the fair value hierarchy and carrying value of financial assets not measured at fair value are as follows: In thousands of Armenian Drams Level 2 Level 3 31 December 2019 Carrying value Level 2 Level 3 31 December 2018 Carrying value Financial assets Placements with banks and other financial institutions in foreign currency Nostro accounts Term deposits 534,601,773 25,490,105 Cash included in assets under trust management Margin requirements of interest rate futures 2,015 Placements and investments with banks and other financial institutions in domestic currency 534,601,093 25,388,880 310,841,888 31,604,817 5,689,324 2,015 56,931 310,841,261 31,479,341 5,689,324 56,931 Repurchase agreements and other overnight facilities 126,669,774 126,669,774 163,433,113 163,433,113 Loans to resident financial institutions under arrangement with the KfW, the World Bank, Asian Development Bank and European Investment Bank 126,172,483 125,805,219 126,846,911 125,409,306 Mortgage refinancing 91,827,494 90,352,136 73,037,990 76,542,692 Deposits and current accounts placed in commercial banks 63,899,322 63,580,371 50,778,773 50,708,941 Other loans and investments 3,277,650 22,882,147 971,940,616 22,882,147 27,475,368 3,374,976 21,550,404 27,554,109 993,874,856 765,664,723 21,550,404 791,715,018 Total The management believes that the carrying amount of deposits and accounts of financial and other institutions in foreign currency and in domestic currency, amounts due to the IMF and other borrowed funds approximates their fair value. The fair value hierarchy for these financial liabilities is Level 2. Fair values analysed by level in the fair value hierarchy and carrying value of the remaining financial liabilities not measured at fair value are as follows: In thousands of Armenian Drams Financial liabilities Due to the Government of the Republic of Armenia 31 December 2019 Level 2 Carrying value Level 2 31 December 2018 Carrying value Foreign currency liabilities Current accounts of the Government 1,248,593 1,248,593 5,822,025 5,822,025 Domestic currency liabilities Current accounts of the Government 41,045,292 Term deposits 285,098,705 41,045,292 285,000,475 49,117,388 135,463,400 49,117,388 135,487,725 Loans from the Government 321,865 321,865 Debt securities issued Total 6,756,066 334,148,656 6,626,428 333,920,788 8,006,693 7,838,688 198,731,371 198,587,691 The fair values in level 2 and level 3 of fair value hierarchy were estimated using the discounted cash flows valuation technique. The fair value of floating rate instruments that are not quoted in an active market was estimated to be equal to their carrying amount. The fair value of unquoted fixed interest rate instruments was estimated based on future cash flows expected to be received discounted at current interest rates for new instruments with similar credit risk and remaining maturity. 41#13330. Central Bank of the Republic of Armenia Notes to the 2019 consolidated financial statements Risk management Introduction Risk is inherent in the Group's activities but it is managed through a process of ongoing identification, assessment, treatment, monitoring and reporting, subject to risk limits and other controls. This process of risk management is critical to the Group to be able to perform its main functions and each individual within the Group is responsible for the risk exposures relating to his or her duties. The Group is exposed to credit risk, liquidity risk and market risk, the latter being subdivided into trading and non-trading risks. It is also subject to operating risks. The risk management process does not include business risks such as changes in the environment, technology and industry. They are monitored through the Group's strategic planning process. The Board is ultimately accountable for risk management; however, there are separate independent bodies responsible for managing and monitoring risks. The Board The Board is accountable for the overall risk management approach and for approving the strategies and principles. Institutional framework International reserves of the Republic of Armenia are the Bank's claims on non-residents in freely convertible foreign currencies. The reserves are reflected in the consolidated statement of financial position of the Group. The Bank manages the reserves in accordance with the principles envisaged by the article 52 of the Law, by investing the reserves within the Investment framework set by the Board. The reserves can be used to finance external payments/trade imbalances, to regulate indirectly the impact of such imbalances on the exchange rate, and to ensure the international obligations of Armenia are duly performed. The Bank uses reserves to provide foreign exchange services to the Government and state agencies of Armenia, e.g. foreign currency conversions or external debt servicing. The Bank has a three level decision-making system, whereby the Board sets the Strategic Asset Allocation framework for the reserves management for a long-term time horizon (three years), whereas the Investment Committee of the Bank was given executive power on short-term tactical benchmarks. Portfolio managers, in turn, have been delegated authority to decide on current management issues within the framework of tactical benchmarks and active risk tolerance. Administration and control According to the Bank's structure, the Financial Markets Directorate is responsible for Armenia's international reserves management. The Financial Operations Department is in charge of operations related to day-to-day management of reserves. The Risk Management Department is responsible for risk assessment, providing support for development of strategic asset allocation and benchmarking, compliance monitoring, performance evaluation and reporting. Issues related to reserves management are discussed on a monthly basis by the Investment Committee of the Bank, which includes the heads of all structural units involved in the entire process of reserves management, as well as the Bank's Chairman and the Deputy Chairman. The Risk Management Department reports on the performance of reserves management to the Investment Committee on a quarterly basis and to the Board on a semi-annual basis. Each quarter the Bank presents information on condition and composition of international reserves to the Government and makes that information publicly available. Asset allocation and risk management According to the principles set forth in article 52 of the Law, Armenia's international reserves are managed based on the principle of adequate liquidity and security of reserves while ensuring of profit maximisation. For this purpose, the Risk Management Department develops drafts of strategic asset allocation and tactical benchmarks subject to approval by the Board and the Investment Committee, respectively. The investment benchmarks include all limits and rules governing the investment process as well as the structure of assets consistent with the reserves management principles set by the Board. Credit risk Credit risk is the risk that the Group will incur a loss because its customers, clients or counterparties failed to discharge their contractual obligations or because of credit quality deterioration. The Group manages and controls credit risk by setting limits on counterparty eligibility and on the amount of risk it is willing to accept for individual counterparties and for geographical and industry concentrations, and by monitoring exposures in relation to such limits. 42#134Central Bank of the Republic of Armenia Notes to the 2019 consolidated financial statements 30. Risk management (continued) Credit risk (continued) The Group has established credit quality review process to provide early identification of possible changes in the creditworthiness of counterparties. For the purpose of assessment of credit quality of international reserves the Group evaluates the counterparty creditworthiness based on the credit ratings assigned by leading internationally recognised credit rating agencies. The Group sets minimum rating requirement for securities issued by governments, government agencies, other government authorities, financial institutions and supranational organisations. These ratings cannot be lower than certain prescribed minimum level which is regularly reviewed. To monitor the credit risk the Group uses an in-house developed model, which allows assessing the issuer default probability based on stock prices and balance sheet data. It belongs to the class of structural models, providing an economically meaningful explanation of default based on the asset-liability structure and financial leverage. The model is based on the barrier option price formula which is one of components of implied rating issued by FITCH. Ratings and model results are used to build a matrix of investment limits for each rating group, maturity, individual counterparties, and asset classes. The matrix is the main tool for the credit risk management. Derivative financial instruments Credit risk arising from derivative financial instruments is, at any time, limited to those with positive fair values, as recorded in the consolidated statement of financial position. Maximum credit risk without collateral or other credit enhancement The maximum exposure to credit risk for the components of the consolidated statement of financial position, including derivatives, before the effect of mitigation through the use of master netting and collateral agreements, is best represented by their carrying amounts. Where financial instruments are recorded at fair value, the carrying value represents the current credit risk exposure but not the maximum risk exposure that could arise in the future as a result of changes in values. For more detail on the maximum exposure to credit risk for each class of financial instrument, references shall be made to the specific notes. 43#135Central Bank of the Republic of Armenia Notes to the 2019 consolidated financial statements 30. Risk management (continued) Credit quality per class of financial assets Financial assets of the Group, except equity investments are classified by the lowest out of the ratings assigned to the Group's counterparties by the international rating agencies Fitch IBCA, Moody's and Standard & Poor's. The ratings are listed below as per the coding of the rating agency Moody's using the rating correspondence table of Bloomberg information system. Rating AAA is the rating used for identification of highly reliable international financial institutions such as the Bank for International Settlements. 31 December 2019 In thousands of Armenian Drams Credit rating Amount % in financial assets Amount 31 December 2018 % in financial assets Financial assets - neither past due nor impaired Placements with banks and other financial institutions in foreign currency Nostro accounts P-1 532,987,070 95.2 309,503,541 89.0 P-3 917,020 0.2 745,740 0.2 NP 479,581 0.1 9,997 0.0 Unrated 218,102 0.0 582,610 0.1 Term deposits P-1 Unrated 16,802,086 3.0 26,713,063 7.6 5,291,040 0.9 2,422,901 0.7 NP 3,442,970 0.6 2,428,027 0.7 Cash included in the assets under trust management and margin requirement of interest rate futures P-1 Impairment allowance Total placements with banks and other financial institutions in foreign currency 2,015 0.0 5,746,255 1.7 (147,896) (85,277) 559,991,988 100.0 348,066,857 100.0 Financial instruments at fair value through profit and loss Government bonds Aaa Aa1-Aa3 554,666,536 71.7 339,271,806 48.1 84,510,978 11.0 23,121,447 3.3 State agency bonds and other securities Aaa 24,001,326 3.1 23,291,590 3.3 Aa1-Aa3 0.0 17,955,383 2.5 Other securities Aaa Aa1-Aa3 92,376,738 11.9 244,997,616 34.8 8,154,753 1.1 43,462,831 6.2 Money market instruments Aa1 Unrated 0.0 629,577 0.1 9,648,011 1.2 12,130,223 1.7 Total financial instruments at fair value through profit and loss 773,358,342 100.0 704,860,473 100.0 Financial assets measured at fair value through other comprehensive income, excluding equity investments Securities of the Government of the Republic of Armenia Ba3 13,189,425 15.0 0.0 Securities of the Government of the Republic of Armenia B1 0.0 13,707,676 15.5 Promissory note issued by the Government Promissory note issued by the Government Corporate bonds in foreign currency Total financial assets measured at fair value through other comprehensive income, excluding equity investments Ba3 73,810,843 84.1 0.0 B1 0.0 73,810,843 83.3 Unrated 761,584 0.9 1,067,864 1.2 87,761,852 100.0 88,586,383 100.0 As at 31 December 2019 current accounts and term deposits included in the unrated credit rating category amounting to AMD 207,768 thousand and AMD 5,291,040 thousand respectively (31 December 2018: AMD 166,690 and 2,422,901 thousand) represent current accounts and placement of the Group's subsidiaries with local commercial banks. As at 31 December 2019 money market instruments included in the unrated credit category amounting to AMD 9,648,011 thousand represent securities issued by the Bank for International Settlements and are considered to have low credit risk (31 December 2018: AMD 12,130,223 thousand). 44#136Central Bank of the Republic of Armenia 30. Risk management (continued) Credit quality per class of financial assets Notes to the 2019 consolidated financial statements 31 December 2018 % in financial assets 31 December 2019 Credit rating Amount % in financial assets Amount In thousands of Armenian Drams Placements and investments with banks and other financial institutions in domestic currency Loans to resident financial institutions under arrangement with the KfW, the World Bank, Asian Development Bank and European Investment Bank Settled after the end of the reporting period Not due at the date of authorisation of the consolidated financial statements for issue Total Mortgage refinancing Total Deposits and current accounts in commercial banks Total Repurchase agreements and other overnight facilities Total Investments measured at amortised cost 6,122,724 4.8 5,680,274 4.4 121,853,329 127,976,053 95.2 100.0 122,157,277 127,837,551 95.6 100.0 Settled after the end of the reporting period Not due at the date of authorisation of the consolidated financial statements for issue 4,349,372 4.8 3,807,115 5.0 86,024,586 90,373,958 95.2 100.0 72,759,544 76,566,659 95.0 100.0 Settled after the end of the reporting period Not due at the date of authorisation of the consolidated financial statements for issue 7,457,060 11.7 12,950,261 25.4 56,469,363 63,926,423 88.3 100.0 37,992,189 50,942,450 74.6 100.0 Settled after the end of the reporting period 126,669,774 126,669,774 100.0 100.0 163,433,113 163,433,113 100.0 100.0 Settled after the end of the reporting period Not due at the date of authorisation of the consolidated financial statements for issue 2,549,404 10.6 583,173 2.4 21,533,083 24,082,487 89.4 100.0 23,507,102 24,090,275 97.6 100.0 3,447,368 3,447,368 (2,593,195) 100.0 3,579,296 100.0 100.0 3,579,296 (2,801,183) 100.0 Total Other loans Total Impairment allowance Total placements and investments with banks and other financial institutions in domestic currency 433,882,868 443,648,161 The Bank makes decisions regarding its placements with local banks and financial institutions taking into account its role of the banking regulator and the lender of last resort and therefore does not allocate ratings to local banks and financial institutions. Thus, the analysis of credit quality of these assets is limited to the stage of respective transaction. Impairment assessment The Group calculates ECL based on several probability-weighted scenarios to measure the expected cash shortfalls, discounted at an approximation to the EIR. A cash shortfall is the difference between the cash flows that are due to an entity in accordance with the contract and the cash flows that the entity expects to receive. The mechanics of the ECL calculations are outlined below and the key elements are as follows: PD EAD LGD The Probability of Default is an estimate of the likelihood of default over a given time horizon. A default may only happen at a certain time over the assessed period, if the facility has not been previously derecognised and is still in the portfolio. The Exposure at Default is an estimate of the exposure at a future default date, taking into account expected changes in the exposure after the reporting date, including repayments of principal and interest, whether scheduled by contract or otherwise, expected drawdowns on committed facilities, and accrued interest from missed payments. The Loss Given Default is an estimate of the loss arising in the case where a default occurs at a given time. It is based on the difference between the contractual cash flows due and those that the lender would expect to receive, including from the realisation of any collateral. It is usually expressed as a percentage of the EAD. 45#137Central Bank of the Republic of Armenia Notes to the 2019 consolidated financial statements 30. Risk management (continued) Impairment assessment (continued) The ECL allowance is based on the credit losses expected to arise over the life of the asset (the lifetime expected credit loss or LTECL), unless there has been no significant increase in credit risk since origination, in which case, the allowance is based on the 12 months' expected credit loss (12mECL). The 12mECL is the portion of LTECL that represent the ECLS that result from default events on a financial instrument that are possible within the 12 months after the reporting date. Both LTECL and 12mECL are calculated on either an individual basis or a collective basis, depending on the nature of the underlying portfolio of financial instruments. The Group has established a policy to perform an assessment, at the end of each reporting period, of whether a financial instrument's credit risk has increased significantly since initial recognition, by considering the change in the risk of default occurring over the remaining life of the financial instrument. Based on the above process, the Group groups its assets into Stage 1, Stage 2, Stage 3 and POCI, as described below: Stage 1: Stage 2: Stage 3: POCI: When assets are first recognized, the Group recognizes an allowance based on 12mECL. Stage 1 assets also include facilities where the credit risk has improved and the asset has been reclassified from Stage 2. When an asset has shown a significant increase in credit risk since origination, the Group records an allowance for the LTECL. Stage 2 assets also include facilities, where the credit risk has improved and the asset has been reclassified from Stage 3. Assets considered credit-impaired. The Group records an allowance for the LTECL. Purchased or originated credit impaired (POCI) assets are financial assets that are credit impaired on initial recognition. POCI assets are recorded at fair value at original recognition and interest revenue is subsequently recognized based on a credit-adjusted EIR. ECL are only recognized or released to the extent that there is a subsequent change in the lifetime expected credit losses. Definition of default and cure The Group considers a financial instrument defaulted and therefore Stage 3 (credit-impaired) for ECL calculations when the counterparty's rating downgrades lower than the rating predefined by the Group. Regardless of the change in credit grades in all cases when the borrower becomes 90 days past due on its contractual payments, financial instrument is considered as defaulted. As a part of a qualitative assessment of whether a customer is in default, the Group also considers a variety of instances that may indicate unlikeliness to pay. When such events occur, the Group carefully considers whether the event should result in treating the customer as defaulted and therefore assessed as Stage 3 for ECL calculations or whether Stage 2 is appropriate. Such events include: ► Internal rating of the borrower indicating default or near-default; The borrower requesting emergency funding from the Group; A material decrease in the underlying collateral value where the recovery of the loan is expected from the sale of the collateral; A covenant breach not waived by the Group; The debtor (or any legal entity within the debtor's group) filing for bankruptcy; Debtor's listed debt or equity suspended at the primary exchange because of rumors or facts about financial difficulties. It is the Group's policy to consider a financial instrument as 'cured' and therefore re-classified out of Stage 3 when none of the default criteria have been present for at least six consecutive months. The decision whether to classify an asset as Stage 2 or Stage 1 once cured depends on the updated credit grade, at the time of the cure, and whether this indicates there has been a significant increase in credit risk compared to initial recognition. PD estimation process For the counterparties that have ratings assigned by the international rating agencies Annual Transition Matrix of Moody's rating company is used. For the counterparties that do not have ratings assigned by the international rating agencies the probability of default is assessed based on internal Financial Stability Index using extrapolation of rated counterparties' probability of default. Exposure at default The exposure at default (EAD) represents the gross carrying amount of the financial instruments subject to the impairment calculation. 46#138Central Bank of the Republic of Armenia Notes to the 2019 consolidated financial statements 30. Risk management (continued) Impairment assessment (continued) Loss given default For each group of financial assets the recovery rates corresponding to the debt seniority status of respective financial instruments (Moodys') or recovery rates of the country of domicile (IMF) are used to calculate the LGD rate. Significant increase in credit risk The Group continuously monitors all assets subject to ECLs. In order to determine whether an instrument or a portfolio of instruments is subject to 12mECL or LTECL, the Group assesses whether there has been a significant increase in credit risk since initial recognition. The Group considers an exposure to have significantly increased in credit risk when the counterparty's credit rating has changed since initial recognition pursuant to the internal principles of risk management. The assessment of significant increase in credit risk for exposures of local commercial banks and financial institutions, with no international credit ratings, is based on performance of individual exposure and overall financial stability index of commercial banks and financial institutions. Macro prudential analysis on systemic risk dimensions consist another tool to consider the feasibility to reclassify certain asset from Stage 1 to Stage 2. Regardless of the change in credit grades the credit risk is deemed to have increased significantly since initial recognition if contractual payments are more than 30 days past due. Forward-looking information and multiple economic scenarios In its ECL models, the Group relies on a broad range of forward looking information as economic inputs, such as: ► GDP growth; Unemployment rates; CPI; International reserves; Monetary policy rate; Equity Index Price; Foreign exchange rates; Credit/GDP ratio; Other macroeconomic factors depending on the specificities of each country. The inputs and models used for calculating ECLs may not always capture all characteristics of the market at the date of the financial statements. To reflect this, qualitative adjustments or overlays are occasionally made as temporary adjustments when such differences are significantly material. Offsetting financial assets and financial liabilities As at 31 December 2019 the Group had reverse repurchase contracts with commercial banks which fall under master netting arrangements, which are enforceable in case of default. The Group also made margin deposits as collateral for its outstanding derivative positions. The trust manager may set off the Group's liabilities with the margin deposit in case of default. 47#139Central Bank of the Republic of Armenia Notes to the 2019 consolidated financial statements 30. Risk management (continued) Offsetting financial assets and financial liabilities (continued) The table below shows financial assets offset against financial liabilities in the consolidated statement of financial position, as well as the effect of enforceable master netting agreements and similar arrangements (ISDA, RISDA, etc.) that do not result in an offset in the consolidated statement of financial position: In thousands of Armenian Drams 31 December 2019 Gross amount of recognized financial assets Gross amount of recognized financial liabilities set off in the statement of financial position Net amount of financial assets presented in the statement of financial position Related amounts not set off in the statement of financial position Financial instruments Net amount Financial assets Repurchase agreements and other overnight facilities 126,669,774 Total 126,669,774 126,669,774 126,669,774 126,669,774 126,669,774 In thousands of Armenian Drams 31 December 2018 Gross amount of recognized financial assets Gross amount of recognized financial liabilities set off in the statement of financial position Net amount of financial assets presented in the statement of financial position Related amounts not set off in the statement of financial position Financial instruments Financial assets Repurchase agreements and other overnight facilities 163,433,113 163,433,113 Total 163,433,113 163,433,113 163,433,113 The geographical concentration of the Group's assets and liabilities is set out below: 163,433,113 31 December 2018 31 December 2019 In thousands of Armenian Drams Armenia OECD CIS and other foreign banks Total Armenia OECD Assets 39,603,848 39,603,848 42,238,172 Cash Placements with banks and other financial institutions in foreign currency Placements and investments with banks and other financial institutions in domestic currency Financial instruments at fair value through profit or loss Derivative financial assets Financial assets measured at fair value through other Net amount CIS and other foreign banks Total 42,238,172 8,866,115 547,390,347 3,735,526 559,991,988 4,944,031 341,961,418 1,161,408 348,066,857 433,882,868 433,882,868 443,648,161 443,648,161 773,358,342 773,358,342 704,860,473 704,860,473 43,849 43,849 comprehensive income 88,633,726 Placements with the IMF 1,940,583 88,398,230 90,574,309 88,398,230 89,348,388 1,918,000 89,548,497 91,266,388 89,548,497 Property and equipment and intangible assets Other assets 68,700,679 12,239,109 Total assets 651,926,345 60,029 1,411,147,531 111,846 3,847,372 68,700,679 12,410,984 2,066,921,248 71,531,642 14,795,872 666,550,115 71,531,642 62,689 1,138,351,077 97,272 1,258,680 14,955,833 1,806,159,872 Liabilities Notes and coins in circulation 607,209,301 607,209,301 566,706,467 566,706,467 Deposits and accounts of financial and other institutions Derivative financial liabilities Due to the Government Due to the IMF Other borrowed funds Debt securities issued Other liabilities Total liabilities Net assets 722,819,276 13,072 568,931 723,401,279 614,176,880 13,072 318,898 614,508,850 79,455 327,294,360 1,645 240,948,903 136,151,500 6,590,621 6,626,428 4,557,977 1,668,586,797 (1,016,660,45 177,340 377,292,460 618,296 7,777,848 81,100 327,294,360 240,948,903 142,742,121 6,626,428 5,353,613 2,053,657,105 97,040 190,749,003 266,323,100 145,026,239 97,040 190,749,003 266,323,100 6,684,513 151,710,752 7,838,688 4,649,880 1,384,120,918 7,838,688 287,622 411,747,073 333,144 7,336,555 5,270,646 1,803,204,546 2) 1,033,855,071 (3,930,476) 13,264,143 (717,570,803) 726,604,004 (6,077,875) 2,955,326 48#140Central Bank of the Republic of Armenia 30. Risk management (continued) Notes to the 2019 consolidated financial statements Liquidity risk and funding management Liquidity risk is the risk that the Group will be unable to meet its payment obligations when they fall due under normal and stress circumstances. As a fiscal agent of the Government and the monetary authority of the Republic of Armenia, the Bank is responsible for public debt service, the Government's foreign payments. From this perspective proper cash and liquidity management is crucial. Based on the international reserve management objectives Armenia's international reserves have been divided into three tranches working capital, liquidity and investment tranches. While the first two are designed to meet short-term/instant and mid-term liquidity requirements, the purpose of the investment tranche is accumulation of wealth. Depending on the designation of portfolio/tranche the policy varies in terms of benchmarks and the choice between active or passive management. Analysis of financial liabilities by remaining contractual maturities The tables below show liabilities at 31 December 2019 and 31 December 2018 by their remaining contractual maturity. The amounts of liabilities disclosed in the maturity table are the contractual undiscounted cash flows. Such undiscounted cash flows differ from the amount included in the consolidated statement of financial position because the amount in the consolidated statement of financial position is based on discounted cash flows. Financial derivatives are included at the contractual amounts to be paid or received, unless the Group expects to close the derivative position before its maturity date in which case the derivatives are included based on the expected cash flows. In thousands of Armenian Drams Financial liabilities Notes and coins in circulation Deposits and accounts of financial and other institutions Derivative financial liabilities Due to the Government Due to the IMF Other borrowed funds Debt securities issued Total non-discounted financial liabilities 31 December 2019 Demand and less than 1 month From 1 to 3 months From 3 months to 1 year From 1 to 5 years More than 5 years No maturity Total 607,209,301 607,209,301 721,432,655 2,100,625 723,533,280 81,100 56,578,091 150,046,431 1,110,868 125,058,221 81,100 331,682,743 23,094,242 738,484 16,943,615 124,500 387,000 1,386,039,631 151,281,799 167,583,703 65,167,801 73,311,020 7,149,500 145,628,321 11,972,325 70,873,733 143,675,049 245,020,285 161,866,852 7,661,000 82,846,058 143,675,049 2,077,054,561 31 December 2018 Demand and less than From 1 to 3 months From 3 months to 1 year From 1 to 5 years More than 5 years No maturity Total In thousands of Armenian Drams Financial liabilities Notes and coins in circulation Deposits and accounts of financial and other institutions 1 month 566,706,467 566,706,467 612,518,304 200,700 2,100,625 Derivative financial liabilities Due to the Government 97,040 75,591,432 Due to the IMF Other borrowed funds Debt securities issued Total non-discounted financial liabilities 699,760 97,812,401 1,317,354 124,500 1,255,613,003 99,254,255 18,503,791 19,937,289 15,273,479 5,258,160 59,173,419 614,819,629 97,040 191,907,624 85,235,919 72,021,333 3,373,500 162,731,377 21,161,217 85,185,419 145,687,369 273,339,148 173,179,991 8,756,160 106,346,636 145,687,369 1,828,806,059 Market risk Market risk is the risk that the fair value or future cash flows of financial instruments will fluctuate due to changes in market variables such as interest rates, foreign exchange rates, and equity prices. The Group classifies exposures to market risk into either trading or non-trading portfolios. 49#14130. Central Bank of the Republic of Armenia Notes to the 2019 consolidated financial statements Risk management (continued) Interest rate risk Interest rate risk arises from the possibility that changes in interest rates will affect future cash flows or the fair values of financial instruments. Within the three-level management structure the Board defines the overall risk tolerance, which is the acceptable level of interest rate risk in the long run. It also outlines portfolio optimisation principles. The risk tolerance is defined as a minimum acceptable return over a certain period of time (now three years) with a 95 percent confidence level. The authority to set tactical benchmarks is delegated to the Investment Committee. The purpose of tactical benchmarks is to maximize return in a shorter period (one year). In contrast to strategic decisions, benchmarks take into account current market trends and forecasts. Optimal portfolios are constructed based on scenario analysis using VAR-MGARCH model simulated yield curves as well as internal and market consensus expectations on interest rates and credit spreads. For optimal portfolio selection Black-Litterman and Markowitz models with certain constraints are used. For monitoring and managing risk, the Risk Management Department within the Financial Markets Directorate uses a number of widely used risk measures like Value at Risk, Key Rate Duration, Information Ratio, Spread Duration, PCA Duration, and Tracking Error. The following table demonstrates the sensitivity of the Group's equity, which is calculated by revaluing fixed rate financial assets measured at fair value through other comprehensive income at 31 December 2019 for the effects of the assumed changes in interest rates. The sensitivity of equity is analysed by maturity of the asset. The sensitivity of equity is based on the assumption that there are parallel shifts in the yield curve. 2019 2018 In thousands of Armenian Drams Change in yield curve, b.p. Effect on equity Change in yield curve, b.p. Effect on equity Currency AMD AMD USD USD +100 -100 +35 -35 (617,272) 671,185 +100 -80 (616,764) 532,393 (19,763) 7,868 +50 (16,287) -15 5,229 The following table demonstrates the sensitivity of profit of the Group, which is calculated by revaluing financial instruments at fair value through profit and loss as of 31 December 2019 and 31 December 2018, based on the assumption of changing interest rates. Amounts included in the table below are presented in the original currency. Currency USD EUR GBP Change in basis points +100/-100 +50/-50 +20/-20 2019 Increase/(decrease) of net result on financial instruments at FVTPL and equity (4,380,747)/4,380,747 (503,299)/503,299 (26,083)/26,083 Change in basis points +50/-15 +20/-1 +50/-20 2018 Increase/(decrease) of net result on financial instruments at FVTPL and equity (2,595,600)/778,680 (65,493)/817,498 (130,250)/52,100 The Group, also, has liabilities with floating interest rates outstanding as at 31 December 2019 and 31 December 2018. The following table demonstrates the sensitivity of the Group's profit or loss and equity as at 31 December 2019 and 31 December 2018 based on the assumption of changing interest rates on borrowings obtained by the Group: In thousands of Armenian Drams Change in basis points Currency USD SDR +/-145 +/-41 2019 Increase/(decrease) of net interest expense and decrease/(increase) of equity 299,205/(299,205) 394,759/(394,759) Change in basis points +/-161 +/-36 2018 Increase/(decrease) of net interest expense and decrease/(increase) of equity 342,279/(342,279) 407,588/(407,588) The sensitivity of the valuation technique inputs used in the fair value measurement for level 3 measurements is disclosed in Note 29. 50#142Central Bank of the Republic of Armenia Notes to the 2019 consolidated financial statements 30. Risk management (continued) Currency risk Currency risk is the risk that the value of a financial instrument will fluctuate due to changes in foreign exchange rates. The Board sets the clear principles of currency allocation, whereas the Investment Committee determines and revises the actual weights of respective currencies. The following tables present sensitivities of profit or loss and equity to reasonably possible changes in exchange rates applied at the end of the reporting period relative to the Armenian Dram with all other variables held constant: 2019 2018 In thousands of Armenian Drams Increase in currency rate in % Increase/ (decrease) of profit and equity Increase in currency rate in % Increase/ (decrease) of profit and equity Currency USD 3.00% 18,882,379 3.50% 18,192,069 EUR 6.50% 11,089,753 8.00% 9,350,778 GBP 9.00% 3,316,392 10.00% 3,570,141 JPY 6.50% 1,034,228 7.00% 1,489,656 RUB SDR 13.00% 50,093 15.00% 5.00% (7,957,065) 6.00% 56,940 (11,007,547) 2019 2018 In thousands of Armenian Drams Decrease in currency rate in % Increase/ (decrease) of profit and equity Decrease in currency rate in % Increase/ (decrease) of profit and equity Currency USD -3.00% (18,882,379) -3.50% (18,192,069) EUR -6.50% (11,089,753) -8.00% (9,350,778) GBP -9.00% (3,316,392) -10.00% (3,570,141) JPY -6.50% (1,034,228) -7.00% (1,489,656) RUB -13.00% SDR -5.00% (50,093) 7,957,065 -15.00% -6.00% (56,940) 11,007,547 The expected change in the exchange rates was determined by the Group by analysing annual standard deviations based on the historical market data of respective exchange rates. The currency composition of reserves is defined for each liquidity tranche, aiming to hedge the factors underlying the creation of each tranche. Currently Armenia's foreign public debt is the main foreign currency demand driving factor. As a result, the currency composition of the reserves mainly mirrors the currency composition of debt. Currency composition for short term liquidity tranche is affected by the composition of the flows generated from foreign trade as well as possible intervention needs and current payments. The currency composition is subject of revision at least semi-annually. Operating risk - control over subsidiaries As disclosed in Note 2, the Bank has equity investments in a number of subsidiaries that are engaged in financial sector development and infrastructure activities. The purpose of such investments was to support development of the Armenian financial sector to ensure stability and normal activity of the financial system of the Republic of Armenia which is one of the objectives of the Bank as prescribed by the Law. The control over subsidiaries' activities is exercised by the Bank through the following: ► Participation in the shareholders' meetings; Appointment of subsidiaries' management (Boards of Directors of each of subsidiaries are appointed by the shareholders and Boards of Directors appoint Executive Directors in the each of subsidiaries); Regular analysis of performance of subsidiaries through review of their financial information at least on an annual basis including review of results of external audit of the financial statements of subsidiaries; Performing analysis of subsidiaries' further development strategy including development of the divestment strategy, where appropriate; Review of subsidiaries' activities within the scope of the Bank's Internal Audit work which is determined based on risk assessment results. In 2015 the Bank has adopted a policy of activation of discussions with possible potential institutional investors regarding the disposal of its investments in the subsidiaries of the Bank. 51#143Central Bank of the Republic of Armenia Notes to the 2019 consolidated financial statements 31. Maturity analysis The following tables provide information on amounts expected to be recovered or settled before and after twelve months after the reporting period. In thousands of Armenian Drams Assets Cash in foreign currency Current 31 December 2019 Non-current Total 39,603,848 39,603,848 Placements with banks and other financial institutions Financial instruments at fair value through profit or loss Placements and investments with banks and other 556,489,586 773,358,342 3,502,402 559,991,988 773,358,342 financial institutions in domestic currency 224,131,595 209,751,273 433,882,868 Financial assets measured at fair value through other comprehensive income 75,374,736 15,199,573 90,574,309 Placements with the IMF 2,960,039 85,438,191 88,398,230 Property and equipment 65,679,935 65,679,935 Intangible assets Other assets 3,020,744 3,020,744 11,576,011 834,973 12,410,984 Total assets 1,683,494,157 383,427,091 2,066,921,248 Liabilities Notes and coins in circulation 607,209,301 Deposits and accounts of other financial institutions 723,401,279 607,209,301 723,401,279 Derivative financial liabilities 81,100 81,100 Due to the Government 327,294,360 327,294,360 Due to the IMF 23,072,079 217,876,824 240,948,903 Other borrowed funds 14,940,400 127,801,721 142,742,121 Debt securities issued 126,428 6,500,000 6,626,428 Other liabilities 4,889,874 463,739 5,353,613 Total liabilities 1,701,014,821 352,642,284 2,053,657,105 Net position as at 31 December 2019 (17,520,664) 30,784,807 13,264,143 In thousands of Armenian Drams Assets Current 31 December 2018 Non-current Total Cash 42,238,172 42,238,172 Placements with banks and other financial institutions in foreign currency 344,738,924 3,327,933 348,066,857 Financial instruments at fair value through profit or loss Placements and investments with banks and other 704,860,473 704,860,473 financial institutions in domestic currency 241,356,600 202,291,561 443,648,161 Derivative financial assets 43,849 43,849 Financial assets measured at fair value through other comprehensive income 75,369,453 15,896,935 91,266,388 Placements with the IMF 2,893,145 86,655,352 89,548,497 Property and equipment 68,740,919 68,740,919 Intangible assets 2,790,723 2,790,723 Other assets 13,199,399 1,756,434 14,955,833 Total assets 1,424,700,015 381,459,857 1,806,159,872 Liabilities Notes and coins in circulation 566,706,467 Deposits and accounts of other financial institutions 612,508,850 2,000,000 566,706,467 614,508,850 Derivative financial liabilities 97,040 97,040 Due to the Government 190,749,003 Due to the IMF 19,550,143 246,772,957 190,749,003 266,323,100 Other borrowed funds 13,226,647 138,484,105 151,710,752 Debt securities issued 4,838,688 Other liabilities 5,235,792 3,000,000 34,854 7,838,688 5,270,646 Total liabilities 1,412,912,630 390,291,916 1,803,204,546 Net position as at 31 December 2018 11,787,385 (8,832,059) 2,955,326 52 62#144Central Bank of the Republic of Armenia Notes to the 2019 consolidated financial statements 32. Changes in liabilities arising from financing activities In thousands of Armenian Drams Carrying amount at 31 December 2017 Loans received Loans redeemed Foreign currency translation Other Carrying amount at 31 December 2018 Carrying amount at 1 January 2019 Loans received Loans redeemed Lease payments Foreign currency translation Other Carrying amount at 31 December 2019 Total liabilities from financing activities 448,299,233 9,419,398 (29,292,741) (10,199,454) 129,281 418,355,717 418,838,705 6,346,555 (34,421,137) (82,489) (6,392,359) (172,406) 384,116,869 The "Other" line includes the effect of accrued but not yet paid interest. The Group classifies interest paid as cash flows from operating activities. 33. Events after the reporting period The recent outbreak of novel coronavirus (COVID-19) negatively affects economic conditions regionally as well as globally. The full impact of coronavirus outbreak is unclear yet and the Group monitors the situation closely. As the situation is fluid and rapidly evolving, the Group doesn't consider it practicable to provide quantitative assessment of the potential impact of the outbreak on the Group. Following to the Group's policy disclosed in Note 30, in March 2020 the Group announced its intention to dispose its investment in the subsidiary engaged in cash delivery/transportation activities through liquidation. 53#145CENTRAL BANK OF ARMENIA