Municipal debt financing in Armenia through borrowing and issuance of bonds

Abstract

This paper is based on the results of the Policy Internship Project conducted at the USAID funded Local Government Project, Phase 3 (LGP 3) implemented in Armenia by Research Triangle Institute (RTI). Armenian local governments, like in most post-Communist countries, face with the challenge of remedying years of under-investment and under-maintenance in basic infrastructure like water supply, sewage, roads, housing stock etc. Local governments today have severe budget constraints preventing them to sufficiently invest into development of mentioned infrastructure. Therefore prudent borrowing can augment investment capacity with the expectation that local government can later repay the incurred debt either from the future earnings of the facilities built or repaired over their useful life or from local government general revenues. According to the RoA “Law on Local Self-Government” and “Law on Budgetary System” local governments have the right to issue bonds and take commercial bank loans, however, the exact procedures and techniques seem to be not in place yet and therefore there has been no precedent so far. The purpose of this paper is to review the possibilities of introducing municipal borrowing from commercial banks and issuing bonds in the RoA as widespread municipal debt financing instruments. In many countries these are used by subnational governments or public authorities under their jurisdiction to raise funds for capital construction, repair of public infrastructure and thus improve the quality of public services. The results of the research have revealed that the legal and institutional environment in Armenia does not support the development of these instruments, financial and administrative capacities of local governments are not sufficient for borrowing as well as paying back bank credits on time: we also have found that the market is not prepared yet for issuing and circulating municipal bonds. Finally, policy recommendations are made on how to improve the legal framework, administrative and financial mechanisms in order to promote and encourage the development of the system.