Economist: Armenia to face sovereign default in first half of 2023

Despite the "rapid economic growth", which is projected at a level of 13-14 per cent by the end of 2022, and the outpacing growth rates of budget revenues, the state debt of Armenia continues to rise.

As of October this year, the debt load of the country made $10.1 billion, Caliber.Az reports with reference to the Armenian media.

However, the financial authorities do not stop at that, continuing to attract new debt obligations.

The Armenian parliament on November 9 approved two loan agreements totaling $200 million. All the funds will be used for the budget support program. The loan agreement with the Asian Development Bank "Financial Stability and Financial Markets Development Program" was signed on November 17 of this year, within the framework of the agreement $100 million will be allocated to Armenia. The rate is floating. The loan repayment term is 12 years, the grace period is 3 years.

The second credit agreement was signed on the same day, but with the French Development Agency. The document stipulates 100 million euros to be allocated in two tranches. The Armenian government will have to choose the interest rate: either floating or 3.87 per cent. The loan repayment term is 20 years, and the grace period is 5 years.

It is noteworthy that the credit means are attracted in conditions when budget revenues are considerably higher than the expectations laid down in the main financial document. According to the State Revenue Committee, the tax revenues to the treasury in the past 9 months exceeded by 77 billion drams (over $194 million).

Under the conditions of domestic revenues surge, the Ministry of Finance considers the country's debt burden a normal phenomenon.

"Debts are attracted to solve specific problems. And revenues may continue to grow, which is natural. According to the results of this year the budget tax revenues will make about 1.95 trillion drams (about $5 billion), and in 2023 - 2.2 billion drams ($5.4 billion). But our expenditures are also growing and there is a deficit (about $732 million or 11,2 per cent of expenditures) which should be financed by attracting debt," Armenian Minister of Finance Tigran Khachatryan explained.

Meanwhile, the cause of Armenia's state debt growth was a spike in domestic debt - by 56 per cent - with an 8 per cent drop in external debt compared to the beginning of the year. As a result, the external debt stabilized at $6.1 billion, while the internal debt reached $3.9 billion. On the whole, if Armenia's external debt has almost doubled over the past 10 years, the internal debt has increased five times.

According to experts' calculations, the specific debt load per capita will have reached $3.4 thousand by October 1, 2022 (in 2021 it was $3.1 thousand). At the same time, the population of Armenia decreased by 3.5 thousand people to 2.971 million for the year.

Meanwhile, the growth of the state debt is accompanied by GDP growth, which is positive news for the economic and financial authorities of the country. According to the Ministry of Finance, the ratio of state debt to GDP by 2022 will make 52 per cent (with 63 per cent of GDP by 2020), which is due both to the growth of GDP and the factor of the sharp devaluation of the dollar and euro to the Armenian national currency - 15 per cent and 20 per cent respectively compared to March this year.

Armenia's debt burden began to grow sharply in 2008, which coincided with the accession to power of President Serzh Sargsyan and the global financial-economic crisis. At the same time, it was shrinking before 2008. During the crisis, the Armenian government opened the door to foreign borrowing to finance budget expenditures, especially the social component of the budget (to prevent the growth of poverty and the sharp impoverishment of the population, which can also have political consequences).

As a result of the policy of financial expansion, Armenia's foreign debt doubled between 2008 and 2018, passing the $7 billion mark (60 per cent of GDP) by the end of 2018, but at the same time, the size of the economy did not increase much. The economy grew two to three times slower than the country's debt growth rate, for which the opposition sharply criticized the government. Another jump in the debt burden occurred in 2020 when the country's economy was hit by a double blow - the consequences of the Coronocrisis and the war in Karabakh.

Since 2020, Armenia's national debt has crossed the "red line," that is, it has exceeded 60 per cent of GDP, which means a violation of the golden rule of fiscal policy.

Atom Margaryan, a doctor of economic sciences, considers the level of efficiency of spending credit funds in Armenia to be extremely low. "The simple reason is that the increase in the debt burden of the country was not followed by the industrialization of the economy and the strengthening of its real sector. It was mainly the service sector that developed with the redistribution of the existing national wealth. They create practically nothing new. In this case, when the economy as a whole earns little, the increase of debt becomes one of its main problems," said Atom Margaryan, head of the Laboratory of Innovation and Institutional Research of the Armenian State University of Economy, in his interview with journalists.

He points out that the country's consolidated debt, which includes both government and business debt, is also growing. "In general, the whole country, including households, is in a debt trend. Roughly speaking, everyone is borrowing from everyone," says Margaryan. - The situation in all categories - business, households, and government debt - has critically deteriorated. In fact, the consolidated debt of our country already exceeds the GDP, which is in the range of $14.5-15 billion."

Due to the fact that the Central Bank of the country has almost doubled the refinancing rate (it is now at 10.5 per cent) in order to curb inflation last year, thereby "raising the cost of money," commercial banks began to borrow from foreign creditors.

"Commercial banks also began to issue debt securities, presenting this as a great achievement, which is nonsense. This is one of a number of paradoxes for a normally developing economy. Despite the fact that not only large banks but also small ones are doing this," Margaryan said and summarized. – We have come to the point where the debt began to work against the economy. The authorities are now pursuing a policy of reducing the cost of debt, allowing for the strengthening of the dram due to billions of dollars coming into the country mainly from Russia. The situation in this regard is similar to the one that happened in 2004-2007 when the dram steadily strengthened amid the influx of a large number of transfers into the country. But in the end, it will lead to disastrous consequences."

Already in the first half of 2023, according to Margaryan, the country may face a situation that is called a sovereign default in the economic lexicon – this is a complete or partial refusal of the state from payments on internal and external obligations.