The State Debt Is Approaching $10 Billion: How Manageable Is It?

Armenia’s state debt increased by 8.1% in the last year when it went from $9.2 billion in July 2021 to $9.9 billion in July of 2022, adding on an additional $748 million to the state debt.

Since the end of 2021, Armenia’s external debt has decreased by $247 million, from about $6.6 billion to $6.401 billion. However, its internal debt has increased by $996 million, from $2.5 billion to $3.5 billion.

How Is State Debt Formed?

State debt is the total amount of government and Central Bank debt. According to the Law “On State Debt,” the government, state institutions, and the Central Bank assume the state debt on behalf of the Republic of Armenia. The state debt is composed of internal debt and foreign debt. 

Internal debt is defined as the aggregate debt owed to Armenia’s citizens by the Republic of Armenia. External debt is the aggregate debt the Republic of Armenia and the Central Bank owe to foreigners and foreign countries. External debt is obtained from borrowed money, credit exchanges and loans from foreign countries, international organizations, lending institutions and foreign state guarantees or agreements.

According to data from August 2022, the biggest creditors of Armenia’s external debt are the International Bank for Reconstruction and Development (IBRD) (19.3%), the International Development Association (IDA) (19%) and  the Asian Development Bank (ADB) (17.3%). While 79.3% of Armenia’s external debt is owed to international organizations, Armenia’s total debt to foreign countries amounts to 20.4%; the majority of which is to Russia at 7.6%, Germany at 5.4%, and France at 3%; 0.3% of Armenia’s state debt is to commercial banks.

Since foreign debt is mostly paid in U.S. dollars, the devaluation of the dollar has had a positive effect on the state debt, however, the revenue collected to pay off the state debt is in Armenian drams (AMD). According to the Central Bank, on January 31, 2022, 1 US dollar was valued at 482 AMD, however, as of October 30, 2022 it has become 395 AMD. Since the dollar has depreciated by about 18 percent from the beginning of 2022, the foreign debt calculated in Armenian drams has decreased from 6.6 billion AMD to 6.4 billion AMD.

The Manageability of Debt 

Arshaluys Margaryan, Head of the State Debt Management Department at the Ministry of Finance, says that Armenia’s state debt is more than manageable. He emphasized that the increasing dram component in Armenia’s state debt will allow for greater manageability. 

“It’s a wonderful situation in terms of debt management, especially when internal debt is growing at a faster rate than external debt,” says Margaryan. “This year, we practically haven’t acquired any external debt, while taking on an internal debt of about 160 billion AMD.” He explains how the more the share of the debt in dram increases, the more that risk decreases, and the debt in dram has increased from 10% five years ago to 33-34% today.

According to Margaryan, it’s not possible to determine what sort of condition the debt will be in based on its physical volume; to better understand one must study more qualitative indicators. He explains how the state debt has increased much slower than the GDP in 2022, meaning that Armenia is borrowing less than the economy is growing.

The Law on “State Debt,” states that by December 31, of any given year, the state debt should not exceed 60% of the GDP of the previous year. As of December 31, 2021 the debt-to-GDP ratio was 63.4%.

The reason behind this is when the government’s debt exceeds 60% of the GDP, the average expenditures of the previous seven years is calculated and then reduced by 0.5%; this then becomes the new threshold for current primary expenditures. The government also submits a project plan to the Standing Committee on Financial-Credit, Budgetary and Economic Affairs of the National Assembly to reduce the trajectory of government debt below 60% within the next five years.

This year, the appreciation of the dram has established a favorable situation for paying off the state debt. Nevertheless, the government did not pay off more than the set amount this year. While Margaryan agrees that it is much more desirable to borrow money at a higher exchange rate and repay it at a lower rate; he also believes that this situation cannot last forever, so it should not be a point of focus.

The Debt Isn’t Big, the GDP Is Just Too Small

Economist and former Chair of the Central Bank of Armenia, Bagrat Asatryan, concurs that the state debt is completely manageable, adding that Armenia has never had a problem managing the state debt. According to him, the conditions created in 2022 and the exchange rate fluctuations have created a more favorable situation in some sense. There has already been noticeable progress in this year’s debt management. 

“I have always believed that the debt is not too big, but that the GDP is too small,” says Asatryan. “Making strides to increase the growth rate of the economy will allow the GDP to grow. In countries like ours, the economy can also develop by attracting foreign loans.”

As for investments, Asatryan defines it with one word…“pitiful”. According to Asatryan, when such fluctuations occur in exchange rates, the government should strive to reduce external obligations as much as possible and pay off more debt. He states that he has noticed the internal debt increasing at the expense of the external debt which (has decreased over the last seven to eight months.

“But overall, the debt is decreasing, and we will probably end the year with a debt-to-GDP ratio below 60%,” predicts Asatryan.

However, he thinks that the government is not taking advantage of the current favorable situation (i.e. growing importing possibilities), but the government is not reacting adequately. Asatryan believes that the government should not only reduce its debt but it should also create favorable conditions for the private sector during exchange rate fluctuations.

Indicators Aren’t Worrying if the Debt is Spent Efficiently 

Dr. Hayk Mnatsakanyan, Head of the Finances and Accounting Department at Yerevan State University, believes that debt indicators are not a concern if the debt is spent efficiently. He brings up the example of Japan, whose state debt is over 200% of its GDP. However, he believes that there is no doubt that the whole world would be ready to provide loans to Japan because Japan manages its debt efficiently, which in turn leads to economic development.

“How efficiently we spend our debt should be clear from its indicators,” says Mnatsakanyan. “Unfortunately, none of the indicators have shown us high-level efficiency because the poverty level and the unemployment rates aren’t decreasing and the structure of the GDP has not undergone significant change. As a result, we seem to be stuck in the same place, which is worrying.”

Mnatsakanyan explains that loans granted for a certain period of time for certain projects are given an appropriate repayment schedule. According to him, the first peak in Armenia’s schedule will be in 2025, during which repayments of more than $1 billion should be made.  Even though leading up to this period, the state did not take advantage of the exchange rate fluctuations by not making early repayments; the Central Bank, on behalf of the state, collected major funds from the market, increasing the reserves. According to Mnatsakanyan, it is expected that a part of this will be used for future repayments.

“Let’s focus on the fact that the size and scale of the debt are not as significant as the benefits the debt provides. The way in which a debt is managed has a usefulness and purpose in and of itself,” says Mnatsakanyan. “It is very important to utilize our established means as well as our debt to properly manage our capital expenditures. However, in terms of capital expenditures, we have had shortcomings both within the budget and with planned expenses. If capital investments and capital expenditures do not increase, the economy cannot develop.”

The reason why the state does not spend borrowed funds efficiently in most cases has to do with the shortcomings of the federal system. Mnatsakanyan thinks that the management mentality of the state system must change. 

Manageability Does Not Mean Efficient Spending

Tatul Manaseryan, a professor and former MP of the National Assembly, says that in order to assess the manageability of a debt, one must have data on what the debt is spent on, and  this information is usually not available to the public nor to experts.

“If we look at the amount of the debt as such, it is not a large amount, but it is of course still a concern for Armenia,” says Manaseryan. There have been many cases when a new debt was acquired to cover part of the old debt.” He brings up the example of a similar debt that existed in 2009, when during the global financial crisis, Armenia simply did not have enough money in the budget to solve its social issues.

According to him, another problem is the conditions under which Armenia takes on debt and how that money can contribute to developing the economy. Manaseryan states that experience has shown that, apart from small individual projects, large loans were not  provided to the Republic of Armenia to finance large production and industrial projects.

It is his belief that both external and internal debt should be targeted and there is serious work to be done here.

While Manaseryan claims that the state debt has proven to be manageable he also explains that this isn’t a consolation, because the debt being “manageable” does not mean that the existing funds were used effectively.  “It means that the interest rates or a part of the principle were attempted to be repaid on time, or a new agreement was reached on the repayment schedule,” he says.

According to him, the biggest problem is that the public has not seen any real results from these loans, and more importantly, past and current administrations  have not been accountable for the debts they have accumulated. This is not a new phenomenon and detailed reports were never presented to the public. Manaseryan explains how when loans were collected the administrations claimed that the money would be for reforms in the judicial system (to name one example); citizens never felt how a loan actually served them whether or not it served its purpose.

Reducing the Debt-to-GDP Ratio: the Main Vision

The government’s 2022-2026 State Debt Reduction Program hopes to fiscally consolidate the government’s debt in order to reduce it below 60% of the GDP by 2026. The program aims to gradually improve the income-GDP index through tax revenues. As for expenditures, it plans to gradually increase capital expenditures that will create long-term economic growth in the GDP and reduce the current “expenditure-GDP” index.

During a government session on September 29, the state budget for 2023 was addressed and Finance Minister Tigran Khachatryan mentioned that new debt funds will be incurred at the end of 2023; bringing the total amount of the government’s debt within 50% of the GDP.

“Recent macroeconomic developments and the appreciation of the dram have contributed to a significant improvement in the government’s debt-to-GDP ratio in 2022. Based on the results of 2021, the government’s debt to GDP was 60.3%, if the trajectory follows suit the results of this year’s debt to GDP ratio will be lower than 53%,” elaborated Khachatryan. “When you consider how important it is to stabilize the government’s debt in a more manageable and safe environment, we plan to continue this policy in the coming year.”

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