Armenian public debt

Armenia’s public debt was more than $10 billion last year, but the Prime Minister stated that it was “a light debt burden”. Economist Narek Karapetyan, commenting on Nikol Pashinyan’s statement, agreed that in 2022 there were indeed “good dynamics”.

“True, we have exceeded 10 billion, but over the past year the country’s debt-to-GDP ratio has decreased from 60.3% to 46.7%,” Karapetyan said. According to him, in developing countries this figure is on average 60%.

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The Prime Minister stated that the country’s debt burden compared to the country’s gross domestic product is considered “light”. Nikol Pashinyan also stressed that the ratio of public debt to GDP in 2022 has significantly decreased to 46.7%.

“Countries are divided into those with light, medium and heavy debt. Thanks to economic growth, Armenia has again found itself among the countries with a small debt,” the prime minister said.

According to him, by reducing the long burden, the country has gained economic stability:

“But it’s not about debt, it’s about how we use debt to increase the country’s economic growth potential.”

Pashinyan believes that the amounts raised as debt should be directed to capital expenditures.

Economist Narek Karapetyan, an expert at the Amberd Analytical Center, considers the amount of debt to be “acceptable”, including in the context of the country’s legislation, and says that there are fiscal rules that determine the debt acceptable for the country and what is beyond acceptable limits.

According to him, three versions of the response to the debt/GDP ratio have been established — in the case of 40, 50 and 60%. And for each case, the appropriate measures that the state needs to take are indicated. The International Monetary Fund and the World Bank consider debt above 70% high risk.

“When the debt exceeds 40%, we must have a certain spending policy, at least make as much capital expenditure as we attract new debt. It is assumed that in this way the debt will create assets of the appropriate volume, which will allow financing the same debt in the future,” Karapetyan believes.

After 50%, the government must contain current spending. This means that wages and pensions should rise in proportion to GDP growth in recent years. The rules get tougher after the 60% line. Then the government is obliged to develop a debt reduction program for the next five years.

According to Karapetyan, the relief of Armenia’s long burden is the result of more positive than expected economic changes and the strengthening of the national currency.

He notes that in addition to the debt burden, risk indicators are the interest rate and maturity, the conditions for attracting debt in general, and the comparability of the interest rate of debt and economic growth:

“The interest rate of debt must be below the rate of economic growth in order for it to be manageable in the medium and long term. When the interest rate of debt is lower than economic growth, it will decrease automatically.”

Commenting on the positive developments in the Armenian economy against the backdrop of the Russian-Ukrainian war, Karapetyan said that there has been a huge influx of funds — about $1 billion — but believes it was spent inefficiently.

“The money came, but the capital was not created. Banks transferred part of this amount to their foreign accounts. The other part remained in the Armenian economy as additional liquidity for banks. Part was invested in the government bond market. Most of these funds did not go directly to the real sector of the economy. We have not been able to fully realize these funds.”

According to Karapetyan, both the appropriate infrastructure and the capabilities of the economy, the ability to absorb investments, are important:

“Our economy does not have enough capacity to absorb significant investment, although the financial capacity may be the same as last year.”