Vardan Bostanjyan: Government’s external borrowings have not been used rational or purposefully

Vardan Bostanjyan, PhD in Economics, speaks of the growing foreign dept of Armenia, management of the state dept and possible risks, in an interview with ArmInfo.

By official data, Armenia’s foreign debt that totaled $1 billion 577.1 million in 2008 will reach $4.8-$4.9 billion by the end of 2015. According to the draft budget 2016, the state debt will amount to $5.5 billion or 49.9% of GDP in 2016 versus 48.3% in 2015.  According to the forecasts of the International Monetary Fund, by 2020, the foreign debt of Armenia will reach 62%. How will this affect the economy? What dangers do you see?

The foreign borrowings of any country are inherently a financial instrument that needs reasonable distribution.  It may be used to cover current expenses – salaries, social programs and others. These funds may be used in investment projects and establishment of new enterprises. In the first case, the government receives no benefits, while in the second case, new jobs and productions are created, which ensures long-term revenues to the budget.  The experience of the past years shows that Armenia has not used rationally any of its foreign borrowings.  As the distribution of the borrowed funds lacks transparency, we have no idea what these funds are spent on.  Meantime, the Government keeps borrowing more loans, increasing the burden on the budget, and hampering economic development. In 2016, the service of the foreign debt will become one of the most complicated problems of Armenia’s economy. 

As for the state debt service, the authorities say the size of the foreign debt is not alarming, as the state debt is manageable and its service will not break any of the budget programs. Do you think the state debt is manageable?

The state debt management is out of question. Our government settles the problem of the state debt management quite trivially – it just borrows more foreign loans. Management of borrowings means their rational use, first and foremost. However, what we can see in practice is that all the loans that have been borrowed by present have been embezzled and misappropriated. As a consequence, those borrowings did not help to develop the real economy of Armenia.

There are views that the state debt does not include all the funds it should. What do you think; does the official state debt reflect the real foreign liabilities of the country?

There are debts that are not part of the state debt by official classification, for instance, the debts connected with the arrears of wages to Nairit Plant staff.  There are many other examples too. The government guarantees the loans of many banks and these amounts are not registered as a debt. However, if we add these funds to the official state debt, it will total about $8-$9 billion, which exceeds the upper ceiling of the state debt stipulated by the law.

This summer, the National Assembly of Armenia passed amendments to the Law on the State Debt.. Doesn’t it mean that the Government keeps increasing the debt burden?

As there is no alternative to foreign borrowings amid such economic policy, there is no choice but to increase the upper ceiling of the state debt in ratio to GDP. As a consequence, the idea “state debt” was changed into government debt (the previous law set the upper ceiling of the foreign debt in ratio to GDP at 60% i.e. the law banned the government and Central Bank foreign borrowings exceeding 60% of GDP – editor’s note). Actually, the foreign debt of Armenia did not exceed the permissible limit thanks to some mechanical changes.  In addition, this amendment created an opportunity for the Government to borrow more loans. 

Don’t you think that our country follows the Greek scenario by sliding deeper in the debt pit?

In Greece – the country has a 10 million population – the state debt has reached $340 billion.  I don’t think we may face the Greek scenario. The danger of facing the same fate as Greece depends on how rationally the Government will be managing the borrowings from now on.