Starting from April 30, 2018, the public debt of Armenia increased by $2.58 billion or 37.6% over four years. As of April 30, 2022, the public debt of Armenia was $9.45 billion. As a result, the national debt per capita is about $3,200.

Armenian media report that the country’s debt has been intensively increasing over the past ten years. In parallel, every year more and more amounts are allocated from the state budget for its maintenance. Meanwhile, the economy of Armenia, socially unsecured strata, pensioners, families receiving benefits are deprived of this money. On the other hand, there is doubt about the effectiveness of the use of borrowed funds.

Faktyoxla Lab. has tried to find out why the Armenian media are concerned about the current situation.

Let's start with the fact that there are different opinions regarding the public debt. If the growth of public debt in some countries leads to development, in others - to default.

Experts note that the country's public debt is divided into internal and external. Internal - in the currency of the country itself, external - in foreign currency. Domestic debt is considered to be almost "risk-free", since theoretically, if necessary, the Central Bank can always "print" the necessary amount of money to cover it. However, this practice is considered vicious, since it will be almost impossible to keep inflation under control. For example, as the entire national debt of both the US and the UK is domestic. And this is very profitable - why borrow currency when these countries have the highest reliability ratings, and their bonds are bought.

That is, the state borrows a lot and therefore everything is fine with it. Dynamically developing countries are given money easily and they can afford to work with large leverage. At the same time, it is not the amount of debt in relation to GDP that plays the main role.

So, the Ministry of Finance and the National Statistical Service of Armenia presented interesting data. Thus, according to the situation at the end of 2007, the state debt of Armenia (internal and external) amounted to about $1.7 billion. By the end of 2017, it had grown to almost $6.8 billion. In other words, in ten years the public debt has almost quadrupled.

A sharp increase in public debt was registered in 2009, when the global economic crisis also hit the Armenian economy. In addition, in 2014-2016 in particular, due to Western sanctions and falling oil prices, the economic situation in Russia, which is one of the main economic partners of Armenia, worsened. On the other hand, prices for non-ferrous metals, including copper and molybdenum, have declined in the world market during these years, while it is raw materials that play the main role in Armenia's industry and exports.

At the end of 2014, there was a depreciation of the Armenian dram. And since Armenia's external debt is taken in foreign currency, the devaluation of the dram mechanically led to an increase in debt.

In a difficult period for the country, the government considered that the situation could be saved by increasing the external debt. That is, the debt was increased to solve current problems.

As of the end of December 2017, Armenia's gross public debt amounted to about $6.8 billion. This means that over the past year it has grown by more than $830 million, or 14%.

The external debt alone is about $5.5 billion. Some $600 million of this amount is the debt of the Central Bank, the rest is the debt of the government. In general, external debt increased over the year by about $690 million, or 14.3%.

Domestic debt is about $1.3 billion, its growth is more than $140 million, or 12.6%. Domestic debt is mainly government bonds in drams purchased by residents. As of the end of December last year, the domestic debt was over 619 billion drams.

It turns out that during the indicated period, the total debt of Armenia consisted of 81.1% of external and 18.9% of internal debts. The Ministry of Finance concluded that the most significant market risk in the government's debt portfolio is exchange rate risk. In order to mitigate this risk, the government intends to increase domestic debt in drams in the coming years.

On the other hand, it is technically much easier for the government to take on domestic debt. The process is carried out at the expense of government bonds. So, citizens buy bonds for 100,000 drams, and the state undertakes to buy back these bonds, paying 100,000 drams plus 10% for them. Meanwhile, in the case of domestic loans, this process is more complex and lengthy.

According to experts, in the coming years, Armenia's public debt will continue to grow. The revenues received by the state budget do not cover all the budgeted expenditures. Therefore, the state attracts funds from external and internal sources. According to the forecasts underlying the 2018 budget, by the end of the year, the public debt will amount to about $7.2 billion.

Interestingly, 2025 is an important mark in the Armenian public debt calendar. This is the time of payment for currency bonds (Eurobonds). Armenia is going to partially pay off. But the main part will have to be paid by issuing new bonds. Thus, they hope to roll over the debt for several more years ahead.

The authorities assure that in 2022 there will be a return to the logic of the "golden rule" of public finances, established by fiscal rules, which will create a solid foundation for long-term high economic growth, ensure a stable reduction in the debt-to-GDP ratio and improve the spending structure. In particular, it is planned to increase the share of capital expenditures in total expenditures, as a result of which the volume of capex (about 350 billion drams) will exceed the size of the state budget deficit (242.2 billion drams).

The fiscal policy of Armenia for 2021-2026, focused on stimulating economic growth (at least at a rate of 7%, and in the presence of favorable external conditions, 9%), through improved tax administration, will also lead to an increase in the tax-to-GDP ratio by 0.9% p.p. As a result of fiscal consolidation, the authorities promise to reach a figure below 60% of GDP by 2026.

In 2022, some 518.2 billion drams (about $1.050 billion) will be required to service and repay the government debt, of which 303.6 billion drams (about $615 million) will be debt repayments, and 214.6 billion drams - interest payments (about $434.7 million or 2.1% of GDP against 185.5 billion drams this year). It is planned to pay 170.3 billion drams ($345.1 million) to repay and service external loans. In 2022, the weighted average interest rate on government debt will be 5%, instead of 4.6% in 2021. Government debt service costs (interest payments) will amount to 2.7% of GDP.

By the end of 2022, the World Bank (International Development Association and the International Bank for Reconstruction and Development) will have 35.3% of the external debt of Armenia.

Instead of focusing on increasing domestic revenues, making spending more efficient through better prioritization and project selection, better debt management, and greater transparency, populist measures are being proposed in Armenia.

Thus, the public debt has become one of the most important problems for Armenia. An increase in debt will limit the development of human capital and other important projects due to high costs of servicing it, affect the economic well-being of current and future generations, and increase political dependence on key regional players.