Armenia will have trouble servicing its increased external debt in the next few years unless its government changes the existing “crony capitalist” system and embarks on genuine democratic reforms, a Washington-based Armenian advocacy group said on Monday.
“Unless drastic changes in the economic policy direction and political-economy landscape are carried out, we estimate the likelihood of a large devaluation of the dram and/or debt default within the next 3 years to be very high,” Policy Forum Armenia (PFA) claimed in a special report.
PFA also accused the authorities in Yerevan of failing to learn lessons from the 2008-2009 global financial crisis that hit the Armenian economy hard. “The elements of the same crony capitalist practices -- where a select few have used their disproportionate access to power and influence over economic decision-making for their personal gain -- have been reinforced, at the expense of growth, public health, education, and national security,” it charged.
Armenian officials, notably Prime Minister Tigran Sarkisian, have repeatedly claimed the opposite. They say that economic growth in the country is not dependent on a single sector in contrast to the pre-crisis years that saw a construction boom fuelled by mounting remittances and other cash inflows from abroad.
A dramatic fall in construction was the main reason why the Armenian economy contracted by over 14 percent in 2009 after a decade of rapid growth. The Armenian government and Central Bank scrambled to cushion the impact of the recession with large-scale emergency loans from multilateral institutions like the International Monetary Fund and the World Bank as well as Russia. The anti-crisis borrowing enabled the government to avoid major spending cuts.
But it has also caused Armenia’s external debt to more than double to $3.8 billion since late 2008. The overall public debt was projected to reach $4.3 billion at the end of last year. The figure is equivalent to 41.3 percent of Gross Domestic Product.
Opposition politicians and some economic analysts have expressed serious concern about the much heavier debt burden, questioning the authorities’ ability to manage it in the medium term. Both the government and the Central Bank have dismissed those concerns.
The IMF has also expressed confidence about the authorities’ debt servicing capacity. “Standard stress tests show that Armenia’s public external debt remains sustainable,” the IMF said in a December 2010 report.
In its debt management strategy approved last June, the government forecast that the Armenian debt will exceed $5 billion by 2015. But the debt’s ratio to GDP is projected fall to roughly 38 percent thanks continued economic growth.
PFA, which comprises more than 50 Armenian-born and Diaspora Armenian professionals mostly working in the United States, came up with a far more pessimistic scenario. It said that the deteriorating external environment may well plunge the Armenian economy into renewed recession that would reflect negatively on the country’s balance of payments.
“According to our simulations, a moderate decline in GDP in 2012 may drive debt-to-GDP ratio above 50 percent,” reads the PFA report. “Given the fact that almost 90 percent of Armenia’s debt is in foreign currency, the outlook will be much worse if the dram is abruptly devalued.”
“In the case of 30 percent devaluation, Armenia’s debt-to-GDP ratio will reach 60 percent. A combined shock -- with GDP decline and devaluation taken together -- will drive the debt-to-GDP ratio well over 70 percent,” it claims, accusing the authorities of keeping the dram’s value artificially high with hard currency injections into the local banking sector.
A senior IMF official suggested late last year that the Armenian currency is overvalued by 10-15 percent. The authorities maintain in public, however, that the dram’s exchange rate is market-based.
According to government projections made in 2011, the Armenian economy will grow by 4 percent this year. Officials in Yerevan have acknowledged in recent weeks that growth could be slower because of fallout from Europe’s sovereign debt crisis. But neither they nor IMF officials expect the economy to contract in 2012.
Echoing IMF recommendations, PFA said the authorities should radically improve tax administration, create a level playing field for all businesses, strengthen the rule of law and crack down on widespread government corruption in earnest. The Diaspora organization also stressed the importance of Armenia’s democratization and the proper conduct of the May parliamentary elections in particular.
“Allowing people to exercise their free will and creating a sense of moral justice would enhance the public buy-in and -- all other things being equal -- would make policy measures more effective,” says the PFA report. “On the contrary, yet another fraudulent election will undoubtedly lead to more political tension, social upheavals, and more challenges to be tackled down the road.”
Sarkisian’s government has repeatedly pledged to improve the domestic business environment. The Armenian premier said late last year that it will significantly accelerate the implementation of relevant reforms in 2012. He also declared that the May elections will be the most democratic in the country’s history.