A study of credit policy and external debt management in the republic of Armenia

Abstract

After the collapse of the Soviet Union, Armenia became independent with zero external debt. Still in a very short period of time it started to accumulate external debt in order to be able to cover the budget deficit and promote economic growth. From the very first years of independence the IMF and the World Bank were the main donors of Armenia. The global economic crisis of 2008 could not leave the economy of Armenia unaffected, as a result of the crisis the external debt of Armenia almost doubled in one year reaching from USD 1.5 billion in 2008 to USD 2.9 billion in 2009. Since 2008 the main borrowings of the government of RA were focused on mitigating the effects of the crisis and were directed to the state budget. Nevertheless, according to the reports undertaken by the IMF, despite the level of public debt, which nearly equals USD 4 billion as of December 2011, Armenia is still considered to be a country with medium indebtedness, according to the World Bank’s Debtor Reporting System (DRS). Currently RA takes safeguards in order to avoid the possibility of default, including the strategic program of the government aimed at managing the public debt, on-lending external borrowings to private sector, diversification of the sources of borrowing and the promulgation of the Law on Public Debt adopted in 2008. Despite the above mentioned, the paper suggests that an adequate external debt management mechanism is not enough to ease the burden of the external debt; for this reason certain reforms should be undertaken in the economic sphere as well in order for the state to be able to meet it external debt service obligations.