ARMENIA POLITICS DIVIDED OVER INCREASING DEBT

Hurriyet Daily News
March 12 2010
Turkey

The Armenian government has defended its debt saying the borrowing
is needed to keep the economy on an even keel. Opposition parties,
however, fear the government has taken on too much debt in its efforts
to support the economy during the global crisis. Experts warns that
the external debt will deepen

Georgia’s pro-Western President Mikhail Saakashvili (L) speaks with
Armenian President Serge Sarkisian during their meeting in Batumi,
Georgia. AFP photo.

Armenia’s opposition parties fear the government has taken on too much
debt in its efforts to support the economy during the global crisis,
the Institute for War & Peace Reporting, or IWPR, reported on its
Web site.

Armenia has been hit hard by the downturn as its economy shrank roughly
15 percent in 2009. The government said the collapse would have been
even more dramatic had it not boosted spending by borrowing so heavily.

"When business is playing a passive role in the economy, the state
must, in turn, take on the role of trying to maintain a level economy.

If we had not done this, the situation would be a lot worse,
qualitatively worse," said Finance Minister Tigran Davtyan.

Roughly 90 percent of the state debt is to external parties. By the end
of 2009, the debt had come to 36 percent of gross domestic product,
or nearly $2.5 billion. Some 43 percent is owed to the World Bank
and roughly 20 percent to Russia; the International Monetary Fund
is also a significant creditor. According to the Dashnaktsutyun,
an opposition party, external debt will rise to $3.5 billion by the
end of this year or 43 percent of GDP.

Others are also forecasting an increasingly dangerous debt burden.

Aristomene Varudakis, head of the World Bank’s Yerevan office, said by
the end of 2011, external debt will equal 50 percent of GDP, up from
just 13 percent in 2008. Criticism has grown in recent months over
the swelling debt levels, particularly a $500 million credit to Russia
which was not categorized as aid but as a commercial transaction.

"Our dangerous debts are commercial. The debts of the IMF and the
World Bank are not big. You can take one billion dollars in debt, but
servicing this debt can cost a tenth of the commercial debt that the
state is taking out," according to Hrant Bagratyan, a former prime
minister who later became an opposition figure.

Although there are no official, published figures, he is also critical
of how expensive debt servicing is set to become. "In 2008, Armenia
paid eight million dollars to service its external debt, but in 2013
the sum to be paid will be 478 million dollars. That means in a few
years time we will be spending twice as much on servicing debt as we
spend on the army, which even now we can’t maintain," he said.

The deputy head of the central bank, Vahce Gabrielyan, was one of
many officials who tried to calm the critics. "It is probable that
we will restructure our external debt, but this does not mean we will
end up with bad conditions or come under political pressure," he said.

Bagratyan, however, was most concerned about such "political
pressure." He worried that, having taken out these giant debts, Armenia
might be forced to make concessions – such as in its stand-off with
Azerbaijan over the status of Nagorno-Karabakh – if it fails to pay
for them.

"The situation is just catastrophic. If this goes on, then in a year
we will ourselves be asking for a solution to the Karabakh problem
that we are currently rejecting," he said.

Independent analyst Samvel Avagyan, a columnist for the daily Capital,
a financial newspaper in Yerevan, said a debt burden of a third of
GDP was probably not something to worry about.

"In our credit history there have been years that have been worse
when, as in 1999, the state debt of Armenia exceeded 50 percent of
GDP. However, the current tendency is such that the level of state debt
in the future will inevitably exceed 50 percent of GDP, and possibly,
even 60 percent," he said.

Prime Minister Tigran Sarkisian declined to make any specific
predictions on the level of the debt, but said it was not a problem.

"The credits taken in 2009 can be divided into two… [The first] are
aimed at improving infrastructure and all their weight will fall on
the state budget. The second part the state has offered or will offer
as credit to entrepreneurs. In this case, the weight of repaying the
credit will fall on the businesses, despite the fact that they are
part of the state’s external debt."

The criticism faced by the prime minister, however, is not only
connected to the volume of the debt, but also for its usage. Many
economists, including Avagyan, say the money has been spent unwisely.

Avagyan said the money has been channeled as credit via banks,
as direct credits to large companies or as social payments to the
unemployed and pensioners. However, he said many small businesses had
been unable to access this money from any of Armenia’s 20 commercial
banks.

His opinion is widely held among economists, and even among government
supporters, such as Vardan Bostanjyan, a parliamentary deputy from
Prosperous Armenia, which is part of the government coalition. "Among
those to blame are the authorities themselves," he said.

But his criticism was not as fierce as that of Bagratyan, who was
particularly unimpressed with the credits given directly by the
government to big companies – such as the $40 million loaned to
Armrosgazprom, the local arm of Russian state gas company Gazprom.

Ara Nranyan, an economist who is also a deputy for the opposition
Dashnaktsutyun, said the government needed to consider new measures
to achieve results.

"Sadly, we have seen no actual steps to constructively change the
situation," he said. "We have said many times that imports must be
substituted with locally-produced goods. What have we done for local
producers or to create jobs? Almost nothing. Those funds sourced from
abroad must be sent to those areas that will help the development of
the real economy and the creation of jobs."