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Armenian Opposition Debt Warning

But state says borrowing was needed to keep economy on an even keel.
By Sara Khojoyan
Armenia’s opposition parties fear the government has taken on too much debt in its efforts to support the economy through the global crisis.



Armenia has been hard hit by the downturn, and its economy shrank by about 15 per cent in 2009. The government says the collapse would have been still more dramatic had it not boosted spending by borrowing so heavily.



“When business is playing a passive role in the economy, the state must in turn take on the role of trying to maintain a level economy. If we had not done this, the situation would be a lot worse, qualitatively worse,” said Finance Minister Tigran Davtyan.



Around 90 per cent of the state debt is external debt. By the end of last year, the latter came to 36 per cent of gross domestic product, or around 2.5 billion US dollars.



Some 43 per cent of this debt is owed to the World Bank, and around 20 per cent of it to Russia. The International Monetary Fund is also a significant creditor. According to Dashnaktsutyun, an opposition party, external debt will rise to 3.5 billion dollars by the end of this year, and that will be 43 per cent of GDP.



Others are also forecasting an increasingly dangerous debt burden. Aristomene Varudakis, head of the Yerevan office of the World Bank, said by the end of 2011, external debt will equal 50 per cent of GDP, up from just 13 per cent in 2008.



Criticism has grown in recent months over the swelling debt levels, particularly a 500 million dollars credit from Russia which is not priced as aid but as a commercial transaction.



“Our dangerous debts are commercial. The debts of the International Monetary Fund and the World Bank are not big. You can take one billion dollars in debt, but servicing this debt can cost a tenth of the commercial debt that the state is taking out,” Hrant Bagratyan, a former prime minister turned opposition figure, said.



Although there are no official published figures, he is also critical of how expensive debt servicing is set to become.



“In 2008, Armenia paid eight million dollars to service its external debt, but in 2013 the sum to be paid will be 478 million dollars. That means in a few years time we will be spending twice as much on servicing debt as we spend on the army, which even now we can’t maintain,” he said.



The deputy head of the central bank, Vahce Gabrielyan, was one of many officials who tried to calm the critics.



“It is probable that we will restructure our external debt, but this does not mean we will end up with bad conditions or come under political pressure,” he said.



But Bagratyan was concerned about such “political pressure”. He worried that, having taken out these giant debts, Armenia might be forced to make concessions – such as in its stand-off with Azerbaijan over the status of Nagorny Karabakh - if it fails to be pay for them.



“The situation is just catastrophic. If this goes on, then in a year we will ourselves be asking for a solution to the Karabakh problem that we are currently rejecting,” he said.



Independent analyst Samvel Avagyan, a columnist on Capital Daily, a financial newspaper in Yerevan, said that a debt burden of a third of GDP was probably not something to worry about.



“In our credit history there have been years that have been worse when, as in 1999, the state debt of Armenia exceeded 50 per cent of GDP. However, the current tendency is such that the level of state debt in the future will inevitably exceed 50 per cent of GDP, and possibly, even 60 per cent,” he said.



Prime Minister Tigran Sargsyan declined to make any specific predictions on the level of the debt, but said it was not a problem.



“The credits taken in 2009 can be divided into two… [The first] are aimed at improving infrastructure and all their weight will fall on the state budget. The second part the state has offered or will offer as credit to entrepreneurs. In this case, the weight of repaying the credit will fall on the businesses, despite the fact that they are part of the state’s external debt,” he said.



The criticism he faces, though, is not only connected to the volume of the debt, but also to what it has been used for. Many economists – such as analyst Avagyan – say it has been spent unwisely.



Avagyan said the money has been channelled either as credit via banks; as direct credits to large companies; or as social payments to the unemployed and pensioners. But he said many small businesses had been unable to access this money from any of Armenia’s 20 commercial banks.



His opinion is widely held among economists, and even among government supporters, such as Vardan Bostanjyan, a parliament deputy from Prosperous Armenia, which is part of the government coalition.



“Among those to blame are the authorities themselves,” he said.



But his criticism was not as fierce as that of Bagratyan, the former prime minister, who was particularly unimpressed with the credits given directly by the government to big companies – such as the 40 million dollars loaned to Armrosgazprom, the local arm of Russian state gas company Gazprom.



And Ara Nranyan, an economist who is also a deputy for the opposition Dashnaktsutyun party, said the government needed to consider new measures to get results.



“Sadly, we have seen no actual steps to constructively change the situation,” he said.



“We have said many times that imports must be substituted with locally-produced goods. What have we done for local producers or to create jobs? Almost nothing. Those funds sourced from abroad must be sent to those areas that will help the development of the real economy and the creation of jobs,” Nranyan said.



Sara Khojoyan is a reporter for ArmeniaNow.

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