Monday, December 11 2017 18:05

ArmInfo. Armenia is beginning to change fiscal rules, as well as changing the legal framework that regulates public debt. The draft resolutions providing for amendments to the RA Law on the Budget System of the Republic of Armenia and on the State Debt presented by the Minister of Finance will be discussed by the country's parliament on December 12 at an extraordinary meeting.

As the Department of State Debt Management told ArmInfo, amending the legislation will not complete the process of regulating the public debt sphere and the next 2018 promises to be a turning point in terms of establishing new fiscal rules.

Legislation on public debt expects two major changes. The first amendment is directly related to the current budget rules. As ArmInfo correspondent was told, the current law "On State Debt" states that by December 31 2017 the state debt should not exceed 60% of GDP for 2016. If the state debt by December 31 2017 exceeds 50% of GDP for 2016, then the deficit of the state budget for 2017 should not exceed 3% of the average GDP for the last three years. Law will consider the government's transactions that do not comply with this requirement null and void. However, this approach to managing public debt in the Ministry of Finance was considered excessively strict, noting that countries with such legislative regulation, one by one, are already reviewing this rule of law.

According to Artak Marutyan, Deputy Head of the Department of Public Debt Management, Head of the Accounting and Servicing Department, a very ambiguous situation was created within the framework of the current legislative regulation. The established framework of 60% and 50% limited actions to attract new borrowings from only one of the players in the process - the government, which in such a situation could not expect a deficit of more than 3% of the average GDP of the previous three-year period. "Thus, the government had its hands tied, and the Central Bank - no," he said.

In addition, according to the expert, since after exceeding the 60% threshold of the national debt in GDP, the transactions were considered invalid, in fact, the government faced a legislative taboo for any debt operations, both in attracting new borrowed funds and in repaying them. "However, it is clear that the country will soon exceed 60% of the threshold of the year, which means that the government can thus approach the state of technical default, which is much worse." Therefore, raising the bar becomes an indispensable solution," said Marukyan.

Based on the recommendations of the International Monetary Fund (IMF), the RA Ministry of Finance proposed to provide three thresholds for the level of public debt - 40%, 50% and 60% for the medium and long term. Thus, if the threshold of the national debt exceeds 40%, capital expenditures should exceed the deficit of the state budget. When the 50% norm is exceeded, the requirements are toughened and, in addition to the previous requirement, restrictions are imposed on current expenses. Thus, according to the Finance Ministry, the "golden rule" of the debt, which provides for the possibility of financing through borrowing exclusively capitals, will work. Approaches are further tightened after the national debt exceeds 60% of GDP - current expenditures are linked to domestic revenues, especially with tax revenues.

In addition, if the previously acceptable threshold of public debt in 60% was set in relation to GDP for the past year, then under new installations it will be considered in relation to GDP for the current year. At the same time, in case of force majeure - a global natural disaster, war, in the conditions of a crisis economy, the government will be allowed to exceed 60%. Exceeding this permissible threshold, the law will oblige the government to submit to the National Assembly a program in which it will be shown how the Cabinet plans to reduce the level of public debt. According to the new rule, as Artak Marutyan explained, the Ministry of Finance records that since the republic exceeded 40% of the national debt in GDP, further borrowing can be used only for capital construction, which creates the potential that will ensure the country's growth in the near future. In addition, having established a 50% threshold, the Ministry of Finance will seek to link hands to those politicians who, based on populist considerations, within the framework of electoral programs, decide to make a sharp increase in pensions and wages. "You want to increase current expenditures - to ensure the corresponding growth of GDP," the representative of the Ministry of Finance said, noting that Armenia already knows the situation when, due to external borrowing, most of the current expenses were financed. "Now this will be done away with and borrowing will go to capital investment, increasing the potential for economic growth," he explained. Thus, according to the expert, "the law not only does not inflame the appetite of the country's economic authorities, but also acts as a kind of deterrent mechanism and a yellow traffic light signal, in order to have time to lose speed and not fly out into the ditch."

However, the legislative regulation of the sphere will not stop there. The Armenian Finance Ministry is working on a comprehensive amendment to the RA Law on State Debt. Today, the national debt includes two main components - the Government's debt and the external debt of the Central Bank. As the head of the Department for Public Debt Management Arshaluys Margaryan noted, Armenia is going to radically revise the structure of the state debt, removing the CB's debt. As the head of the department pointed out, Armenia was the only country in the world that in 2000 included the Central Bank's debt in the total debt of the republic. "Traditionally, the structure of public debt includes community debt, the debt of the capital's municipality, state structures, but not the Central Bank's debt," the expert said. As Margaryan admitted, at one time he himself insisted on including the Central Bank's debt in the general structure of the national debt as a kind of deterrent. Later, the Ministry of Finance revised this approach. Amendment to the Law "On State Debt" from 2015, the Central Bank's debt has already been deducted from the budget rule. So, if the previous law limited the amount of external debt in relation to GDP at 60%, that is, the law did not allow the debts taken by the government and the Central Bank together to exceed 60% of the country's GDP and in the event of excess of 50% The threshold was triggered by the rule on limiting the deficit, as part of the latest edition, restrictions were imposed only on the government's debt.

According to Artak Marutyan, today's changes are conditioned by the need to meet the requirements of the international standard set in relation to the state debt. "In the international practice under the General government debt - the debt of the common government is understood only by the debt of the central government and municipalities. Since the municipalities of Armenia do not have debts as such, it turns out that the General government debt is equal to the debt of the central government and all budget rules should work only at the level the debt of the central government," Marutyan explained.

Relevant recommendations in this direction have already been voiced by the European Union. There was a proposal to include in the national debt the debt of the central government and the debt of municipalities.  As indicated in the Ministry of Finance, it is also possible that the name of the law itself will be revised, and the scope will be regulated in the framework of the RA Law "On the Debt of the Government", providing for the government's net debt, without municipalities and without the Central Bank.

In addition, the circle of people with a mandate for concluding loan agreements will be expanded. Within the initiative, there will be a need to change related laws, for example, the RA Law "On International Treaties of the Republic of Armenia". At present, without the special powers to negotiate under the international treaty of the Republic of Armenia and to sign an interstate loan agreement, the president, the prime minister and the foreign minister have the right. The rest are mandated by the President. The legislative initiative will authorize the conclusion of international loan agreements for a wider range of individuals.

These initiatives, as assured in the Finance Ministry, will not untie the hands of the Central Bank and the Government to attract new loans. "In any case, neither the Central Bank nor the Armenian Cabinet can uncontrolledly attract foreign borrowings, since loans are mainly attracted from the IMF, and all economic measures are coordinated with it .If some measure is not agreed with the IMF, it will affect credit rating of the republic, which we really appreciate," Artak Marutyan concluded.

ArmInfo analysts believe that the growing external debt and high migration in Armenia increasingly deepen the specific debt burden per capita to $ 2.1 thousand by July 1, 2017, out of which $ 1.7 thousand comes from external debt. According to various estimates, by the end of 2017 this figure will be $ 2,240, which if you blindly believe the official statistics on the number of the resident population of the country (2.9 million people).