Myth of economic growth and reality of debt burden

Along with impressive economic statistics, Armenia’s state debt is showing equally impressive growth. According to the Finance Ministry, Armenia’s state debt amounted to 12.3 billion dollars as of July 2024. Recall that in 2017, this figure was about $6.2 billion; that is, it has doubled under the current government.

Most of the debt is owed by the government; it is about 11.8 billion dollars. 512 million is owed by the Central Bank. It is important to note that in the structure of the state debt, the internal debt exceeded the external one.

The fact that the share of domestic debt is larger is important for several reasons. First, the attraction of domestic sources implies the return of interest payments and basic obligations to the economy. The money remains in the economy, which means an increase in the probability of its investment in the real sector. Whether conditions for investment are favorable or not is another story. The second important circumstance is the exclusion of currency risks of attracting obligations from domestic sources.

A negative factor is high interest rates on domestic debt, which led to an increase in the weighted average interest rate on public debt.

In the context of today’s realities, the above can lead to quite serious problems. It should be noted that starting from 2024, the Armenian state budget will bear a heavy burden of servicing the principal and interest amounts (1.6 billion dollars in 2024, 1.8 billion dollars in 2025). Naturally, a high interest rate implies an increase in the service burden.

At the same time, it is important to emphasize that the phenomenon of debt attraction is natural if, in the future, there are no problems of management, manageability, and, of course, service. Management is the effective use of money borrowed today, that is, aimed at sustainable and long-term economic growth. In terms of manageability, the GDP/debt ratio is at a good level today, compared to GDP in 2023 (48.4%).

Meanwhile, this figure is also unstable, as it is affected by the dollar devaluation by about 20% relative to the dram, as well as unstable GDP formed by temporary factors.

To sum up, the economic growth that is emerging today, which is mainly a record of statistical flows, a statistical myth, often simply has nothing to do with alarming developments in the real sector.
As an example, we can cite the significant growth of exports when, if the re-export factor is ignored, we actually have a decline in exports of domestic goods.

Therefore, the growth of public debt at such a pace in the absence of a stable basis for economic growth is concerning.