As of the end of July 2023, Armenia's public debt amounted to about $11.352 billion. According to the Ministry of Finance, compared to the beginning of the year, the amount of debt increased by $714 million, or 6.7%. As Armenian experts note, the internal public debt is growing faster than the external one. Armenia's external public debt at the end of July amounted to $6.663 billion. This means that over seven months this figure increased by $218 million, or 3.4%․ Financiers divide debts into bad ones when loan proceeds are used for current expenses, and good ones when funds are used for development.

Faktyoxla Lab. has tried to find out what the current public debt of Armenia is. Does it harm the country or help it?

Let's start with the fact that, according to economists, the main thing is not the absolute value, but the cost of servicing the public debt. The country's public debt, as is already known, is divided into internal and external. Internal - in the currency of the country itself, external - in foreign currency. External means debts to foreigners. Debts on securities denominated in foreign currency and issued for purchase by foreign agents. Internal - duty to its citizens and enterprises, government obligations to individuals, organizations and banks within the country. Domestic debt is considered to be almost “risk-free”, since theoretically, if necessary, the Central Bank of any country can always “print” the necessary amount to cover it. However, this practice is considered vicious, since it will be almost impossible to keep inflation under control. For example, the entire national debt of both the US and the UK is domestic. And this is very profitable - why borrow foreign currency when these countries have the highest reliability ratings, and their bonds are bought. The national debt itself is not a reason to worry; it is more of a macroeconomic indicator. The real situation is reflected by the ratio of the size of public debt to the volume of GDP. According to World Bank estimates, a country's public debt becomes problematic when it reaches 77% of the country's annual GDP. However, many countries have been living with large debt for decades, for example, France, Italy and Japan have this figure exceeding 100%. The US is no exception - at the end of 2022 it was at around 129%. And, for example, Japan’s national debt is 261% of GDP, according to data for 2022.

The main reason for the formation of public debt is the budget deficit. If the state's expenses exceed its income, then a budget deficit is formed, that is, a lack of funds to pay for goods and services purchased by the state and to transfer payments provided for in the budget.

Debt tends to grow. Since it is equal to the amount of the budget deficit, the main reasons for its formation and growth coincide with the reasons for the budget deficit: low GDP growth, military expenditures or a change of government in the country, a decrease in tax revenues, force majeure factors (technological and environmental disasters), corruption, due to with large investments, for example in industry, ineffectiveness of tax and economic policies. Also, public debt can be negative or positive. Negative government debt is a plus. Its presence means that the state's reserves are sufficient to cover obligations.

In short, the main thing is to ensure that the ratio of public debt to GDP does not cross the dangerous line of 77%. And ideally, a country should have as little debt as possible.

The state, just like any other debtor, has to repay its obligations while paying interest. And the higher the level of trust in the state, the more willingly they will lend to it, and the lower the rate it will offer. If there is no confidence in the state, and investors expect it to default, then in order to attract capital, the government will increase the rate on its bonds. The state pays, like any other debtor, according to a schedule - each bond issue records the dates and amounts of payments, as well as the final settlement date when the entire issue will be repaid. The solvency of the state is assessed according to many parameters. The most important thing is the availability of liquid assets.

In Armenia, the bulk of external debt consists of loans provided by international organizations and foreign countries.

To implement socio-economic programs, Armenia continues to take out new loans. In April of this year, the Government of the Republic of Armenia and the International Bank for Reconstruction and Development (IBRD) signed a new loan agreement - “Green, sustainable and inclusive development policy loan” - for a total amount of 92 million euros.

During this period, domestic debt grew at a more accelerated pace. Over the seven months of this year, domestic debt increased by $496 million, or 11.8%, amounting to $4.688 billion.

In May, the country's total debt exceeded $11 billion. Internal debt, despite higher growth rates, is still inferior to external debt. According to the government, an increase in the share of domestic debt helps reduce currency risk. Domestic debt is issued and serviced in Armenian drams and is protected from the negative impact of dollar exchange rate fluctuations. On the other hand, this leads to an increase in interest rate risk and debt servicing costs, since interest on domestic debt, if not always, then very often significantly exceeds interest on external debt. In parallel with the growth of public debt, interest on the debt is also growing.

In January-July 2023, according to the Ministry of Finance, about 126 billion drams were allocated from the state budget to pay interest on the debt, of which 74 billion were intended to pay off interest on domestic debt, about 52 billion on external debt.

The strengthening of the dram did not have a significant impact on the public debt.

Since in Armenia the calculation and repayment of external debt is carried out in US dollars, and in 2022 the Armenian dram strengthened, in this regard, last year was favorable for debt servicing. In other words, the strengthening of the dram against the dollar was in favor of the government debt.

During 2022, the dollar depreciated by almost 20%. As a result, the debt decreased in dram terms and increased in dollar terms.

The strengthening of the dram against the dollar continued this year, but at a slower pace. If in December 2022 the public debt was calculated based on the average dollar exchange rate of 393.57 drams, then in July 2023 - from the average exchange rate of 386.22 drams. This means that the dollar fell by only 2%. Consequently, exchange rate fluctuations did not have a significant impact on performance and debt servicing.

If in dollar terms the total public debt increased by 6.7%, then in dram terms – by 4.7%. In the latter case, the state debt amounts to 4.384 trillion drams.

So, in general, it is necessary to understand that situation with government debt is more of a necessity than a desire. Even strong and rich states have debts, pay them and fulfill certain obligations. Debt can be seen as a lever of pressure that can significantly affect relations between countries. All this affects the value of the country's assets and its solvency.

It’s better not to borrow money, and once borrowed, it is necessary to repay it as soon as possible - any financier will say so.