(Adds exchange rate, trade regulator)
By Hasmik Mkrtchyan
YEREVAN, March 3 (Reuters) - The IMF said on Tuesday it would consider granting a $540 million standby loan to Armenia after the former Soviet state moved to float its dram currency to tackle the effects of the global crisis.
The Armenian central bank also raised the refinancing rate by 100 basis points to 7.75 percent.
"Armenia has been negatively affected by the global economic and financial crisis after many years of strong economic performance," International Monetary Fund resident representative Nienke Oomes told a news conference.
The dram tumbled to 372.11 against the dollar from 305.75.
Oomes noted falling exports, a slowdown in remittances, and the decreasing price of copper -- one of Armenia's main exports -- on world markets.
Oomes said Armenia was feeling the impact of its much larger neighbour Russia sliding into its first recession in 10 years, and welcomed the central bank steps.
"We are very happy with the decision of the central bank," Oomes said. "We believe the exchange rate should be floating. The central bank should not intervene very much." The World Bank issued a statement also welcoming the move.
Armenia, a landlocked country of 3.2 million people, has seen GDP growth halve to 7.2 percent in the first 11 months of 2008 from 13.6 percent in the same period the year before. Oomes said the economy could contract by 1.5 percent by end-2009, with inflation likely at 8 percent.
Estimates suggest the dram could depreciate between 17 and 30 percent, Oomes said. The central bank said it expected the dram's exchange rate to average 360-380 to the dollar versus 306 on March 2.
"Due to the financial and economic crisis, worsening terms of trade and slowing capital inflows the central bank's board made a decision to limit currency interventions and return to free float policy," the central bank said in a statement.
"RISKY STEP"
If the central bank stays true to its word, Armenia would become the first country to totally abandon a currency peg as a result of the global financial crisis.
Russia has seen mounting market speculation of further devaluation, while currency pegs across emerging markets have come under continuing pressure.
"This is an aggressive step but I think it's a clever strategy," said Commerzbank head of emerging research Michael Ganske. "(But) it is obviously a risky step because there could be a huge depreciation of the currency."
He said Armenia had greater flexibility because of its size.
Armenia's trade regulator said it was stepping up monitoring and called on traders to avoid unjustified price hikes.
Analysts say the political opposition, still smarting from presidential elections it says were rigged last year and a subsequent police crackdown on protests, will likely seek to exploit the crisis to exert pressure on the government.
The IMF executive board is expected to meet on Friday to consider the loan request.
"The managing director of the IMF will recommend that the IMF executive board approves a request for a $540 million, 28-month standby arrangement," the IMF said in a statement.
Armenia would be able to draw on $239 million immediately.
The IMF had already approved a $13.6 million loan programme in November last year.
In February, Yerevan agreed a $500 million stabilisation loan from Russia. Russian firms control a significant chunk of the Armenian economy, and a considerable number of Armenians work in Russia and send money home to families.
A $525 million loan from the World Bank, the Asian Development Bank, the EBRD and Black Sea Trade and Development Bank to support Armenian businesses has been agreed in principle, and will likely be officially approved in May.
The Armenian NASDAQ OMX exchange said the sum of trade was $3.42 mln on Tuesday, at an average rate of 372.11 drams against the dollar. It closed at 372.49 drams.
(Additional reporting by Farah Master in London; Writing by Matt Robinson in Tbilisi; Editing by Ron Askew)