ArmInfo.The results of Eurasian Development Bank (EDB) experts' assessments indicate that above a threshold value of 37-38% of GDP, growing public debt still features a very small positive effect on economic growth of Armenia. This is stated in the published new Working Paper of the Eurasian Fund for Stabilization and Development WP20 / 04 "Optimal Debt and Quality of Institutions".
The report says that the current crisis caused by the COVID-19 pandemic has presented many countries with a choice - to stimulate economic development of countries by increasing debt obligations or to focus on fiscal sustainability in the face of macroeconomic uncertainty. To answer these questions, the working paper calculated the optimal level of debt, taking into account the institutional characteristics of the countries. Investigation of the debt-GDP relationship within clusters reveals monotonic increasing of the debt threshold from less institutionally developed countries to more developed ones. While economies with weak political institutions have a 36.8% debt-to-GDP threshold, in countries with strong institutions, the debt threshold is above 55% of GDP. In countries with modest performance of political institutions, the threshold is close to 38% of GDP. The current distribution of debt thresholds stresses the greater resilience of the advanced economies to growing debt burdens compared to their less institutionally sustainable peers.
The public debt of Russia and Kazakhstan is at a comfortably low level (less than 20% of GDP), not exceeding the optimal level of 37-38% of GDP. It is advisable for other countries in the zone of operations of the Eurasian Development Bank (EDB) and the Eurasian Fund for Stabilization and Development (EFSD) to approach their debt positions more carefully, given the current level of development of their institutions.
Nevertheless, the assessment results indicate that in Armenia, the growth of public debt, even if the threshold value of 37-38% of GDP is exceeded, will have a small positive effect on economic growth. In the case of Belarus, Kyrgyzstan and Tajikistan, no negative effect was found when the debt exceeded the optimal level. At the same time, the relationship between debt and economic growth depends on a wide range of characteristics of a given country, which must be taken into account when formulating policy. In developing countries, there are other factors that allow debt levels to rise without increasing the risk of default, such as access to highly concessional finance. "Based on this, it is worth noting that the results of this study do not indicate the need to reduce the level of debt burden to the estimated optimal level," says Yevgeny Vinokurov, Chief Economist of the EDB and EFSD. "Rather, countries need to pursue a balanced debt policy and carefully assess whether additional borrowing will stimulate economic growth or lead to a deterioration in fiscal positions without giving the expected result."
To note, according to the RA Statistical Committee, by January 1, 2020, the state debt of Armenia reached $ 7.3 billion, of which the external debt amounted to $ 5.8 billion. In y-o-y terms, the total public debt increased by 5.8%, and the external debt - by 5.5%. For 9 months of 2020, the national debt increased by 7.3% to $ 7.9 billion (with a y-o-y growth of 11.3%), and external debt - by 3.3% to $ 5.98 billion (with a y-o-y growth of 8.7%). Armenia's GDP in 2019 amounted to 6.569 trillion drams ($ 13.7 billion, with a y-o-y growth of 7.6%), and in the first 9 months of 2020 amounted to 4.284 trillion drams ($ 8.8 billion, with a y-o-y decline of 6.3%). The share of Armenia's public debt in GDP in 2019 amounted to 53.5% (against 55.8% in 2018).
According to the WB's October forecasts for 2020, the share of Armenia's public debt in GDP will increase to 63.8% with a slight decrease in 2021 to 63.6%. And in terms of Armenia's GDP, the World Bank predicts a 6.3% decline in 2020 with a 4.6% growth in 2021.
