Armenia's government debt leads it to economic collapse

Armenia's government debt leads it to economic collapse

The topic of government debt remains one of the most pressing in Armenia. The government claims that the talks about the catastrophic situation in the issue of government debt are groundless. However, experts don't agree with these statements. According to the law, the level of 60%, which limits the ratio of volume of government debt to GDP, is considered to be critical. As ex-Prime Minister Hrant Bagratyan noted, it is alarming that Finance Ministry reports on government debt are different from the conclusions of experts and other sources, the Central Bank in particular.

The total government debt of Armenia amounted to $5.3452 billion by the end of June, increasing by 5.3% or $267.5 million since the beginning of the year. From this amount, according to the National Statistical Service, 4 billion 470 million 386 thousand dollars are external debt, while 874 million 834 thousand dollars are internal.

According to the budget, the government debt of the country of expected GDP will amount to 49.4% in 2016, and the ratio of external debt to GDP will be 42.8%. Experts predict that government debt will amount to $5.569 billion on the results of 2016, of which 86.6% will be external debt. So government debt is approaching the level of 50% of GDP. Although the level of 60% is critical, economists consider the fact that the ratio of government debt to GDP is approaching 50% to be dangerous, because the country is not carrying out any serious economic development programs.

"We have such a structure of the economy that even the level of government debt at 25-30% is an alarming figure, because we can observe a catastrophic decrease in investments over the past 5 years. Our economy cannot pay for government debts," the head of the economic commission of the opposition party 'Armenian National Congress' Vahagn Khachatryan says.

Experts are concerned not only about rapidly increasing volumes of government debt, but also about the fact that the growth of debts exceeds economic growth, which is also a disturbing signal. According to economist Vilen Khachatryan, government debt increases by nearly $40-50 million every month. By the end of the year it will reach $5.6 billion. Meanwhile, in 2016 it increased by $600 million, while economic growth amounted to $300 million.

It is also important that the increase in the amount of government debt had no impact on the economy of the country, since it was mainly used for budget expenditures.

"The budget deficit, which became unprecedented in 2016, amounts to approximately 4% of GDP, and dealing with deficits of such amounts is only possible using government debt: funds are attracted and then used for government expenditures, particularly in the social sector. As a result, these expenditures are used for consumption and do not contribute to the development of the economy," the economist Mesrop Arakelyan thinks.

Experts, citing a set of factors such as the absence of development programs, significant decrease in investments and stagnation in the economy, believe that the government debt of Armenia threatens the country's economic situation. The current situation in Armenia is compared to the economic situation in Greece more and more often Some experts believe that Armenia could become bankrupt, since it takes loans not for economic development, but to pay its debts.

"4 or 5 years from now Armenia will be in Greece's situation – on the verge of bankruptcy, since it will not be able to repay its government debt because it has significantly increased over the past few years, while the economy is still at the same point," Bagratyan said.

Servicing the external debt costs $500 million today, and in 2020-2025 it will require $1-1.5 billion per year. And considering the growth rates of debt and GDP, it is clear that the economy will not keep up with the debts.