Share of domestic debt exceeds 50% in Armenia`s public debt - expert 

ArmInfo.For the first time, based on the results of May 2024, the share of internal debt in the structure of Armenia's public debt exceeded 50%. This has its positive and negative sides, and primarily to ensure the 7% GDP growth promised by the authorities. A similar assessment was made by Associate Professor of the Armenian State University of Economics, economist Agasi Tavadyan.

As the economist points out, in recent years, the policy of  increasing domestic debt in the structure of public debt has been  implemented by financial authorities in order to contain currency  risks. Thus, by the end of May 2024, the government's debt amounted  to $11 billion 577 million or 4 trillion 496 billion drams, 50.2% of  which came from internal sources, and 49.8% from external sources.  The expert recalls that in 2017 (before the victory of the Velvet  Revolution and the coming to power of Nikol Pashinyan's government -  ed.), the government's internal debt amounted to 20.4% of the total  debt, and external debt - 79.6%.

In particular, as of 2017, the debt of the Armenian government  amounted to $6 billion 173 million or 2 trillion 988 billion drams.  During this period, public debt increased by 50.5% in drams, and in  dollars almost doubled - by 87.5%, which is mainly due to the  revaluation of the dram from 480 drams to 387 from the beginning of  2017, which made servicing the dollar debt, notes Tavadyan.

The economist recalls that the ratio of public debt to GDP crossed  the 50% mark for the first time in 2016, amounting to 51.9%. This was  mainly due to the currency crisis in Russia, which resulted in the  devaluation of all currencies in the region, including the Armenian  dram, sharply increasing the burden of servicing external public  debt. On an annual basis, the public debt/GDP ratio reached its  maximum in 2020, when it surpassed 63.5%, and on a quarterly basis,  reaching 69.8% in the first quarter of 2021. However, GDP growth in  2020 was negative, amounting to -7.2%, which is mainly due to  anti-epidemic measures and the 44-day war, which also contributed to  an increase in public debt.

In 2022, the government debt/GDP ratio was able to decrease mainly  due to the strengthening of the dram, which was due to the fact that  in 2022, due to sanctions against Russia, a sufficiently large amount  of foreign currency entered Armenia, which led to the devaluation of  the national currency and, as a consequence, , reducing the burden of  servicing public debt.

"This situation shows that external factors can have a significant  impact on the dynamics of the economy and public debt of Armenia.  However, it should be noted that such situations cannot be considered  as a stable trend, and in the long term it is necessary to pay  attention to the development of more sustainable mechanisms for  managing public debt," notes Agasi Tavadyan.

Having analyzed developments along the chain "public debt-national  currency-GDP-world situation>, the expert notes that the Armenian  economy is sensitive to global shocks, and public debt management  requires a cautious approach, taking into account the potential  impact of external factors.

"In general, it is welcome and encouraging that the weight of  domestic debt in the structure of public debt has crossed the 50%  threshold for the first time, as well as the fact that the  predominant currency of public debt is the Armenian dram. However,  starting from 2022, the dram is the most devalued among convertible  currencies, which has a negative impact on real exports, as well as  tourism and exports of IT products. This, in turn, could have a  negative impact on the 7 percent economic growth prospect envisaged  in the 2024 Budget Law.

Currently, there are key problems in the economy. It should be noted  that both a further devaluation of the Armenian dram and a drop in  GDP could have a negative impact on servicing the public debt, in  which case the ratio of public debt to GDP could exceed the 50  percent limit," he points out.

The expert is convinced that the policy of managing the public debt  of Armenia has undergone significant changes in recent years. The  increase in the weight of domestic debt and the predominance of debt  in drams are positive trends that help reduce currency risks.  However, at the same time, there are a number of issues that need to  be taken into account: the possible impact of currency devaluation on  the ratio of public debt to GDP; vulnerability of the Armenian  economy to global economic shocks; negative impact of the  strengthening of the dram on exports, tourism and the IT sector.

"In this situation, it is necessary to continue a balanced and  balanced policy of managing public debt, while paying attention to  the development of the real sector of the economy and maintaining  external competitiveness," summarizes Agasi Tavadyan.

According to the Ministry of Finance, in 2023 Armenia increased its  public debt by 11.4% or $1 billion 207.6 million - up to $11 billion.

845.3 million. During the reporting period, government debt in  American currency increased by $1 billion 208.3 million or by 12% -  from $10 billion 086.4 million by the end of 2022 to $11 billion  294.6 million, and in drams - by 602.3 billion drams or 15.2% - up to  4 trillion 571.9 billion drams.

According to the law "On the State Budget of the Republic of Armenia  for 2024", the public debt by the end of this year. will reach 5  trillion 314 billion drams (50.5% of GDP), instead of 4 trillion 659  billion drams expected by the end of 2023 (49.3% of GDP), and 4  trillion 659 billion drams actual for 2022 (49.2% GDP). The  government's debt will amount to 5 trillion 082.9 billion drams  (48.3% of GDP) or $11 billion, 892 million, against 4 trillion 446.1  billion (47% of GDP) or $10 billion 910 million expected at the end  of 2023 and 3 trillion 969.7 billion drams or $10 billion 086 million  - for 2022 (46.7% of GDP). In 2024, the government will need 805.2  billion drams to repay and service the debt, of which 483.0 billion  drams will be debt repayment, and 322.2 billion drams will be  interest payments.