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Armenia: Foreign Debt Approaches Dangerous Limit

By Atom Markarian

Yerevan, 14 January 1999 (RFE/RL) -- Heavily dependent on external borrowing, Armenia will find it increasingly difficult to cope with its foreign debt this year.

Currently standing at $740 million, the debt is expected to rise by 12 percent to $847 million by the end of 1999.

The total amount of money owed by the Armenian government to foreign states and financial institutions does not seem too high in relation to the country's GDP and population. But the scale of the debt can only be considered normal for a country with a functioning and healthy economy, which Armenia does not have.

This year, government spending on foreign debt servicing is expected to jump to $108 million from last year's $65 million and $33 million in 1997. This will roughly equal the amount of loans the government expects to receive from external sources. It can be said that Armenia's foreign debt is approaching a dangerous limit where new loans extended to the state indirectly go to finance its existing obligations to creditors.

One or two years from now, debt servicing will be an even heavier burden on the state budget as the government will start repaying not only interest on the loans but also portions of the base sum. Some symptoms of forthcoming difficulties were already seen last year with the signing of debt rescheduling agreements with the European Union, Russia, and Turkmenistan. For potential foreign investors, this is a sign of government insolvency not conducive to investments in Armenia's economy.

Particularly worrying is the continuing huge foreign trade deficit. With net annual imports three and a half times higher than exports, there seems little hope for the influx of foreign exchange the Armenian economy needs for repaying external debt.

Economists and government officials say the liberal trade regime and the relative strength of the dram, the national currency, are among the reasons for the trade deficit.

Stepan Mnatsakanian, the Minister of Statistics, says the Armenian economy is "fairly open" to the outside world by virtue of a high percentage of foreign trade compared to GDP. The trade imbalance, he says, is a negative side effect of that openness. It also means a high budget deficit that Mnatsakanian says will be "impossible to cover by our internal resources" in the near future. Also alarming, albeit to a lesser degree, is the situation with Armenia's internal debt incurred through the issuance of short-term government bonds. Yields on treasury bills rose to about 60 percent in December, reflecting weaker demand mainly caused by the flight of Russian capital. Sales of T-bills have not been a major source of covering the budget deficit in Armenia.

Drawing lessons from the Russian crisis, the Armenian government has further cut the volume of bills issued since August. This year it will issue T-bills worth only 3,500 million drams ($7 million), after issuing 8,000 million drams worth last year. However, the high yields are hardly a sign of financial stability. They will only encourage short-term speculative investments in state securities, diverting much needed capital from the real sector of the economy.

(Atom Markarian is a Yerevan-based contributor for RFE/RL.)