Armenian expert on risks of further domestic debt growth 

ArmInfo.The increase of the share of domestic debt in the total government debt up to 47% in Armenia by  May 2023 can be considered from two aspects - both as an achievement by Armenia's economic authorities and their "involuntary" torpedoing economic progress, Armenia's former minister of finance, international expert Vardan Aramyan said in an interview with ArmInfo. 

"Any instrument requires sensible use. There is a wise saying: 'The  dose makes the poison.' It could well be applied to our domestic  debt, as, if it exceeds the permissible norm, this debt could impede  economic growth in the country," Mr Aramyan said. 

Setting the ceiling

Recent years have seen a steady growth in the share of domestic debt  in the government debt: 14% in 2019, 29.4% in 2021, 41.6% in 2022 and  46.6% as of the end of this April. The share of debt in the AMD terms  was 28.8% in 2021, 37.9% by the end of last year, and 39.8% as of May  2023. According to the Government's national debt management strategy  for 2023-2025, the share of the domestic debt by the end of the  period in question is to be 37.3%, with that of the debt in AMD terms  to be 36.9%.  

In this context, Mr Aramyan singled out two pieces of news. The  pieces of good news is that world experiences does not know a crisis  or default because of a country's insufficient liquid assets and  incapability of paying off its domestic debt. In this context,  domestic debt is not only the AMD debt, but also resident debt  holders. 

Refocusing on the domestic debts is well justified in terms of both  using domestic savings and low risks due to possible rollover. 

On the other hand, restructuring its could cost much, which was the  case in Argentina, where domestic debt instruments were re-issued at  an annual interest rate of over 200%. If the government has liquid  assets problems, involving debt repayment, it can always avert  default because of the domestic debt due to seignorage. The risk is  possible temporary inflation because of injection of huge funds in  the economy. "In this respect, domestic debt is always better than  foreign debt," Mr Aramyan said. 

Debt with no risk 

The critical risk level involves the foreign debt, the foreign  exchange capital in the international market, followed by the  domestic debt instruments in terms of the national currency, with  nonresidents being holders of part of it (which is foreign debt as  well)

The country's most "secure" debt is its debts to international  organizations (WB, IMF, ADB, CFI). 

"Experience shows crises are extremely rare because of such  circumstances, as such 'actors' are not inclined to see a debtor  nation with its economy going deeper into crisis," Mr Aramyan said.  The IMF, which is mandated to maintain macroeconomic and fiscal  stability, and the WB, which is mandated to ensure economic  development, in allocating funds to the country for development  projects even as part of the budget support loan, assign the  government "homework", which is, in fact, a reforms package. 

Speaking of a "secure" domestic or national debt based on the  "debt/GDP' ratio is a thankless job. 

"The world saw Russia's crisis, with the country's debt reaching  38.5% of its GDP in 1998, and the crisis in Argentina, with the  country's debt reaching 128% of the GDP. That is, the debt/GDP ratio  is important, but not the only one. Creditors attach importance to  the current economic developments rates, prospects for economic  progress, the government's policy, effective taxation, share of taxes  in the GDP, budget expenditures, etc.   

Loans to government, not to local businesses 

The annually issued debt instruments, like any "medicine" could cause  harm to the organism.   

Mr Aramyan recalls the crowding-out effect (in 2020, Armenia's  government issued AMD 300bln domestic debt instruments, in 2021, AMD  250bln and in 2020, AMD 250bln), when the government crowds our  investments thus depriving the economy of potential investments  amounting to dozens of billions of U.S. dollars. Moreover, most of  the local companies have restricted access to foreign loans, so they  can take out loans only in Armenia.  

"Banks prefer issuing loans at the same interest rates to the  government with no risks, and, albeit indirectly, the government  facilitates crowding-out thus depriving the country of one more  factor of growth," Mr Aramyan said. 

Some concern 

Mr Aramyan is somewhat concerned over the government debt structure.  The reason is that in 2020 the share of long-term bonds decreased,  with that of short-term bonds increasing. If this trend goes on, it  is pregnant with liquidity-related problems.  The second group of  risks is macroeconomic risks. The improved national debt/GDP ratio is  due to 18% AMD appreciation (the factor's role is, according to the  expert, 5 to 6 per cent).  

"At the end of 2022, the share foreign exchange debts in the  government debt was 62.1% against 71.2% at the end of 2021," Mr  Aramyan said. The rapid economic growth, without production growth  and huge investments in export-oriented industries, played its  significant role. Its share is 3-3.5% more in the 'improved' national  debt/GDP ratio," the expert said. 

"And what if the 'exogenous factors' that facilitated the 'boom'  should suddenly disappear? How large will the national foreign  exchange debt be and what will happen to the GDP? Let us not forget  that had a similar 'boom' from 2002 to 2008, with an unprecedented  growth in money transfers and non-export industries.  Then the year  2009 'befell', with a GDP decline of over 14%," Mr Aramyan said.