Armenian economy is very close to default as it depends a lot on the funs of external debt, Representative of the Republican Party of Armenia, former MP Gagik Minasyan told reporters on February 11. He said that the necessary funds are not generated inside the country, there is no investment, there is no political stability. He believes that the only way to achieve change is that the current government of Armenia must leave, and without this, the collapse is inevitable.

Faktyoxla Lab. has tried to figure out how close Armenian economy is to default, and if so, whether the change of the current Armenian government will correct the situation.

Let’s start with the fact that the Karabakh conflict and the protracted pandemic led to the fact that Armenia lost political stability, predictability, and as a result, Western investors. Following them, Armenia is also losing Russian investors. And this is already a shortage of resources, which greatly complicates the possibility of overcoming the crisis.

At the end of 2021, the public debt of Armenia amounted to $9.226 billion, having increased over the year by $1.257 billion, or 15.8%. According to the latest data from the Ministry of Finance, in 2021, the public debt has grown due to both domestic and foreign debt. At the same time, domestic debt increased faster than external debt. Thus, as of the end of 2021, Armenia’s external debt, the vast majority of which was formed at the expense of loans from foreign states and organizations, amounted to $6.643 billion, which is $583 million, or 9.6%, more than in 2020. In the structure of external debt, $6.185 billion is the debt of the government. During the year, this amount increased by $585 million, or 10.5%. Part of the external debt - about $458 million, which falls on the share of the Central Bank of Armenia, decreased by 0.5% during the year. As of the end of 2021, domestic public debt amounted to $2.583 billion, which was $674 million or 35.3% more compared to the same period in 2020. Domestic debt is formed mainly through the purchase of government treasury bonds by residents.

Indeed, for the implementation of budgeted expenditures, the Armenian government periodically borrows from foreign states and organizations, but tax deductions and other incoming amounts are not enough. As a result of periodically arising social and economic shock situations, the attraction of debt is gaining wider scope. In this regard, over the past ten years, the public debt of Armenia has doubled, becoming a big burden for the economy and citizens of the country. At the same time, if over the past ten years the external debt of Armenia has increased almost twice, the internal debt grew five times.

However, is Pashinyan’s government the only one to blame for this?

According to Armenian experts, the previous government announced its intention to increase the weight of internal debt in the structure of the state debt of Armenia. This trend has been most noticeable since 2016. According to the National Statistical Service, Armenia’s external public debt at the end of August 2016 amounted to $4.541 billion, having increased over the month by 1% or $48.8 million compared to the previous month. Compared to the beginning of the year, the external debt increased by 5.4% or $232 million.

According to the Ministry of Finance, in 2012, 180․8 billion drams were allocated from the state budget of Armenia to pay off only the interest on the state debt. Some 108.3 billion drams of the total amount was used to pay off interest on domestic debt, and 72.5 billion drams to pay off interest on external debt. The amount allocated for interest on the debt turned out to be 16.1 billion drams, or 8․9%, more than in 2020. In parallel with the increase in public debt, interest also grows every year. To date, only the interest on the debt “takes away” about 10% of budget expenditures.

According to data at the end of 2021, the government’s debt will be 60․8% of GDP. If we compare with the figure for 2020 - 63.5%, then this is 2.7% less. Since 2020, the public debt of the Armenian government has crossed the “red line,” that is, it has exceeded 60% of GDP, which means a violation of the golden rule of fiscal policy. Therefore, when planning the budget for 2021-2022, the government has committed to gradually reduce the government’s debt-to-GDP ratio. It is expected that in 2022 it will be 60.2%.

According to Armenian experts, 2021 has become extremely unstable for the Armenian economy. After the shock and decline experienced in 2020, the country's economy began to recover at a modest pace. But low salaries and high price increases could not lead to an increase in people's well-being. According to the Statistical Committee of Armenia, in 2021, compared to the previous year, the Economic Activity Index (EAI) of Armenia increased by 5.8%. This is lower than the figure envisaged by the government's program, and much lower than the figures predicted by the Armenian Ministry of Economy. A rather modest recovery is due, in particular, to some increase in activity in the areas of construction and foreign trade. According to the government's five-year program, in 2021 and the next four years, the authorities expected at least 7 percent economic growth. The greatest optimism was shown by Economy Minister Vahan Kerobyan, who in his interviews repeatedly spoke about double-digit economic growth. But, in January 2022, when it was already obvious that there would be no double-digit growth, the minister said that his statement about resigning if the promised indicator was not met was a joke. In turn, the Central Bank announced its own indicator of economic growth - 4.2%. In fact, both the government, the economy minister and the Central Bank were wrong in their forecasts.

After a 7.5% economic downturn registered in 2020, a 5.8% growth registered in 2021 showed that the Armenian economy has not yet recovered and fully overcome the shock experienced in 2020. Over the past ten years, the highest economic activity was recorded in 2019, the lowest in 2020. If the indicator of economic activity is not compared with the indicators of employment, price growth and poverty, this is just an empty artificial figure. According to official statistics, in 2021, the average salary in Armenia (including taxes) was 204,048 drams, which is 7.6% more than in the previous year. In particular, the average salary of employees in the public sector was 179,174 drams, an increase of 5.2%, in the private sector – 215,674 drams and 8.4%, respectively. At the same time, Armenia, like the rest of the world, experienced a high level of inflation last year. In 2021, the agricultural sector experienced a decline of 1.1% compared to the previous year. Industrial volumes grew by 3.3%. The highest growth rate was registered in the service sector - 7.8%. Trade volumes increased by 7.5%, construction volumes – by 7.4%. In Armenia, the energy sector is also experiencing stagnation - the volume of electricity generation has declined. The situation is similar in agriculture. According to the Statistical Committee, in 2021, exports from Armenia increased by 19.1%, amounting to $3 billion, while imports increased by 16.9%, amounting to $5.3 billion.

Armenian experts point to a big gap between imports and exports. The resulting deficit in the balance of payments absorbs serious foreign exchange resources, which leads to an increase in external debt and a rise in the value of money.

Meanwhile, in early February of this year, at a government meeting, Prime Minister Nikol Pashinyan stated that in December 2021, 659,471 jobs were registered in Armenia, which is an absolute record in the history of the Third Republic.

“Never before have there been so many jobs in Armenia as in December 2021. Compared to 2020, this number increased by 37,629, compared to 2019 - by 30,758, compared to 2018 - by 70,977. In December 2021, the average monthly salary was 277,661 drams, which is 30,000 drams or 12% more than in December 2020, 43,000 drams or 18% more than in 2019, and 54,000 drams, or 24.6% more than in 2018,” Pashinyan said.

According to the prime minister, in 2021, working citizens were paid salaries totaling 139.600 billion drams. This is 15.7 billion drams or 13% more than in 2020 and 38.7 billion drams or 38% more than in 2018: unfortunately, there was a significant increase in prices. In December 2021, it amounted to 7.7%, which is more than was envisaged in the state budget. “Unfortunately, rising prices are a global problem. We are trying to take measures to contain it and hope that this year we will be able to bring price increases to the planned average. And if in parallel to this we can achieve the bar we set - 7 percent economic growth, then I hope that we will get the opportunity to enter the regime of growing prosperity.” According to Pashinyan, in 2021, economic growth amounted to 5.8%, which is more than originally planned.

And finally, let’s move to transfers. As Armenian experts note, in 2021 their value has slightly decreased, amounting to less than $1 billion per year. Russia accounts for the lion’s share here. The decrease in the index is due to the fact that the rate of migration has increased, and most of the labor migrants have not returned from Russia, having moved their families there as well. Of course, this will create serious problems for the economy in the medium term, because the labor force is leaving Armenia.

Considering the above, it is safe to say that the Armenian economy can get out of the crisis only if the country solves communication problems with all neighboring countries. From this point of view, the socio-economic, geopolitical and geostrategic dividends for Armenia can be provided by the Zangazur Corridor, which will expand the country’s ties with Russia, Azerbaijan, Turkey and Iran and have a positive impact on Armenia’s economy. Otherwise, a catastrophe awaits Armenia.