Assessment of Armenia’s Public Debt Level

The effective management of public debt is vital for every country. It is a well-known fact that economy develops in accordance with certain rules which, in general, leads to cyclical development.

The main purpose of the analysis is to examine and estimate the dimension of public debt of Armenia at the same time illustrating recently recorded progress of external debt, give a qualitative assessment according to potentiality and severity of the debt burden.
Modern economic theory includes the following cycles according to periods:

  • Kitchen cycles: 3-4 years,
  • Business cycles: 7-11 years,
  • Kondratiev cycles: 45-60 y

Generally, every cycle has four stages, during which the role of the country, as an economic facilitator, is necessarily different. It is conditioned by the circumstance that economic problems do not have the same nature during different stages of the economic cycle. If in the growth period the main problem is the possible inflation as well as the huge money supply in the economy, the downturn stage is contrasted by the increase of demand for money in the economy, high unemployment and decline of production. This means that a “Financial incentive” for money market is necessary to activate the economy which in its turn enhances the economic situation planting further growth prerequisites.

The importance of public debt

In the aforementioned process of the economic buoyancy, it is not possible to overestimate the role of the public debt as it is practically impossible to stabilize the economy without the intervention related to the expenses of the state budget. In fact, the governments of the countries, regardless of their political stances and considerations, need to increase the public debt during the period of economic downturn to meet the demand for financial resources necessary for the economy, and, during the growth period, due to the appropriate tax policy to repay all the existing obligations.

Notwithstanding theoretical provisions, many countries in the world fail this model and not only fail to allocate sufficient resources during a single stage but also promote to the gradual accumulations of obligations which lead to bankruptcy, default (state budget financing does not suffice for debt service).  But what is that threshold, how and who controls it? In order to answer these questions it is necessary to define the concepts of absolute and relative sizes of public debt.

The absolute size of public debt is the sum of a country’s external (governments of other countries, international organisations, banks of other countries, etc.) and internal (banks, business entities, other residents of the country) debts expressed in absolute value.

Taking into amount the recent numbers, Armenia’s total public debt at the end of September, 2016 amounted to 2 trillion 655.2 billion drams or $5.595 million of which Armenia’s domestic debt stood at 476.6 drams or about $1 billion.[i] In order to understand whether the burden of the Armenia’s public debt is large or not, it is necessary to have a ratio for which the Gross Domestic Product (Gross Domestic Product) is often used. It is the market value of all finished products and services of the country for one year (or another period).[ii] While making this comparison, we face our first problem: the public debt is a temporary index, that is, it is recorded at any point, while GDP can be measured only in a given time period usually on a yearly basis. In that sense, the figures of the end-of-year public debt and GDP are put into comparison. This ratio is the relative estimate that enables to make judgements on the level of public debt burden.

The dynamics of the RA’s public debt is shown in the following graph. As can be seen from the graph the ratio of the public debt/GDP has sharply increased in 2009, which was conditioned by the government-funded financing to overcome the crisis. Nevertheless, during further “non-crisis” years, this figure not only showed a tendency to decline, but, on the contrary, continued to grow getting closer to 50% of GDP. This is, of course, a negative phenomenon and does not witness about a “healthy” regulation of public finances.

Moreover, as in September, 2016, in the conditions of almost unchanged GDP, the public debt has grown which means that the ratio of the public debt and GDP has gained greater value. Thus, in 2016, GDP amounted to 5 067.9 billion drams or $10 547 million.[iii] Taking into account the fact that during the last quarter of 2016 no big repayments of the public debt were recorded, it is possible to predict the index of public debt/GDP even before the official publication. That is, in 2016, it can be expected that the public debt will amount to not less than 53% of GDP (5 595/10 547) and the ratio of the external public debt/GDP will stand at about 43.5% (4 590/10 547).

However, even these relative indices do not allow us to make estimations of debt burden. In order to do this, one should have a basis of comparison. The International Monetary Fund distinguishes three levels of external debt burden for so-called “low-income” countries: low, medium and high at 30%, 40% and 50% of GDP respectively,[iv] which means that the size of Armenia’s public debt, according to this methodology, can be assessed in the intermediate point of average and heavy burden. This characterization can also be confirmed when considering the public debt/GDP ratio fixed by RA legislation. According to the Law of the Republic of Armenia on Public Debts, “As at 31st December of the current year, the Government’s debt should not exceed 60% of Armenia’s gross domestic product of previous year”.[v]  Meanwhile, the word “governmentt” has been added after June 23, 2015, and before that the notion “public debt” existed. That means after June 23, 2015, not the liabilities of The Central Bank of Armenia but the ones of the RA Government will be restricted by the law. As in September, 2016, CBA liabilities measures $506.4 million or 9.05% of the total public debt, that is, the new edition of the law allows the Armenian Government to extend an additional debt with 9.05%, while the CBA has no formal limitation on the growth of liabilities. According to this definition, Armenia is also close to the maximum debt limit (the difference is only 7%).

There are many examples of changes in the permissible threshold of public debt, for example with the latest changes in March, 2017, the $19.9 trillion was set as the upper limit of US public debt.[vi]

Developed countries have the potential to extend the public debt even more than 100 (e.g. USA) or even more than 200 percent of GDP (e.g. Japan), but these countries are characterized by high rates of economic growth and “budget discipline”, which enable them to have large debt burden under the conditions of  low interest expenses.

The effects of increase in the debt burden of Armenia

As mentioned, there are countries that can increase the level of public debt without significant expenses, so it is also important to consider the conditions for implicating liabilities in international debt markets. At the current stage of globalization, countries have access to international markets and issue government bonds in another currency. Countries try to give their bonds the names they want. Thus, Korea offers “Kimchi” (name of national dish) bonds, Turkey, “Baklava”, Japan offers “Samurai” bonds, and Australia has the bonds called “Kangaroo”. Armenia did not remain indifferent to this trend and in 2013 released its first bond issue of $700 million nominal volume for 10 years and with the “Kardashian” title.[vii] The profitability of coupon for these bonds (the expenditure of RA’s Government) amounted to 6%, but was distributed with 6.25%. On the 26th of March, 2016, the Government of Armenia implemented the second issue of Eurobonds of $500 million volume, 10 years’ maturity, 7.15% profitability of coupon, and 7.5% profitability[viii] of distribution. Besides the fact that the bonds are distributed at high interest rates, there is also an increase in interest rates, which testifies a decrease in trust towards the liabilities of the Government of Armenia. For comparison, it is worth pointing out that the profitability of the bonds with 10 years maturity issued by the US Treasury with 10 years maturity measures only 2.25%.[ix]

The aforementioned assures that the high debt burden and the high risk of the country’s economy have been a negative factor since 2013. And in March, 2016, the reduction of sovereign rating by the Moody’s international rating company (it is also conditioned by the high public debt burden) from the B1 stable forecast to the B1 negative forecast was added to it.[x] This means that the interest rate for future financial incentives should be higher.

The structure of Armenia’s external debt is also of particular interest.

According to lender countries and institutions, the RA Government’s external public debt formed with credit agreements has the following structure:

Table 1: the structure of the external debt of the Government of Armenia by creditors[xi]

The structure of RA Government’s external debt formed with credit agreements according to creditors 31.12.2015 30.06.2016 30.09.2016
RA Government’s debt on the external credits, million USD 2,936.20 3,051.00 3,151.10
The structure according to creditors, % 100 100 100
International organizations 84.8 84 84.1
Foreign countries 14.4 15.3 15.1
Commercial banks 0.8 0.8 0.8

As can be seen from the table, in the external debt of the Republic of Armenia, formed with credit agreements, the funds implicated by international organizations, 84% of the total, have dominance, from which the funds provided by the International Development Association have the largest share. Among international countries, Japan has the largest share of foreign investments measuring 8.8% of the general as of the end of September, 2016.


The foregoing comes to verify the fact that despite the burden of the RA public debt is still at a high level, it is still manageable. However, the fact that the ratio of public debt/GDP continues to grow year after year, with the conditions of low or zero GDP growth, is worrying. If we take into account the business cycle duration (up to 11 years), a new economic downturn can be triggered during 2019-2021, which would create a need of financial means for the Armenian economy. If the level of public debt is already approaching the maximum limit, either the Government of Armenia will not be able to attract new, large financial resources or will be able to attract them at rather high interest rates. Consequently, the risk of the RA sinking will also increase, which itself is the main cause of debt crisis in this case.

In order to avoid future economic shocks it is necessary to reduce absolute and relative levels of public debt. This means that taking into account the economic demands, the time for the implementation of reforms aimed at effective and targeted expenditure of budgetary funds has came, the time to reduce the shadow economy, and thus the time to improve the tax/GDP ratio and increase the state budget revenues.




[v] Article 5, Law of the Republic of Armenia on Public Debts («Հայաստանի Հանրապետության Օրենքը Պետական Պարտքի Մասին», հոդված 5)



[viii] RA Public Debt, Annual Report, 2015 (Հայաստանի Հանրապետության Պետական Պարտքը, Տարեկան Հաշվետվություն, 2015 թ)



[xi] Monthly newsletter of RA public debt – 30.09.2016, source: (Հայաստանի Հանրապետության պետական պարտքի ամսական տեղեկագիր ՝ 30.09.2016,


Author: Edgar Khachatryan. © All rights are reserved.

Translator: Anna Arushanyan.