EDB: Growing public debt still features a very small positive effect  on economic growth of Armenia

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.