An increase in Armenia’s public debt does not, by itself, mean the country is facing a debt crisis. Economist Karen Sargsyan says the real risks should be assessed by looking beyond the debt-to-GDP ratio. The purpose of borrowing and the government’s ability to service its debt also matter. If borrowed funds cover current expenses without creating additional value, the burden of debt service on the budget grows. If the funds are invested in economic and infrastructure development, they may generate future income and help repay the debt.
The public debt-to-GDP ratio is rising
According to Sargsyan, the draft 2027 state budget envisages an increase of around 0.7 percentage points in the external debt indicator compared with 2026. He says the external debt-to-GDP ratio will reach around 47.2% in 2027, up from approximately 46.5% in 2026.
The economist notes that the external debt-to-GDP ratio is one of the main indicators used to assess debt. But that figure alone cannot show whether the debt situation is good or bad. How the debt is managed, why funds are borrowed and whether the country can meet its obligations are also important.
Sargsyan says debt burdens have grown in many countries in recent years. One reason was the COVID-19 pandemic, which forced governments to make large, unplanned expenditures, mainly financed through external funds. Capital investment, state participation in various programs and other financial commitments have also contributed to rising debt.
In the context of this global trend, the economist says Armenia’s debt should be assessed more broadly, taking account of the country’s economic capacity and how effectively its debt is managed.
Borrowed funds should not be used for current expenses
Sargsyan identifies the central question raised by growing public debt: what are the borrowed funds spent on?
If borrowed money goes toward current expenses, he says, it is consumed without creating additional value for the economy. The government must still service the debt, but the borrowing creates no new source of income or means of recouping the expenditure.
Investment in productive capacity and infrastructure, by contrast, can create new value. The economic returns from such investment may later help repay the debt.
The economist does not suggest that, when a budget runs a deficit, individual borrowed funds can always be separated out and assessed on their own. Revenues do not cover all planned expenditures, he explains, so governments often have to borrow. The whole budget structure must therefore be examined to understand how overall spending is allocated.
Sargsyan also draws attention to whether tax revenue forecasts are realistic. Projecting higher revenues in a draft budget does not mean all of that money will be collected. This matters when assessing how the deficit arises and which financial sources will cover it.
Inflation could make debt service more expensive
Sargsyan identifies several external risks for Armenia’s public debt. One is stronger inflationary pressure caused by geopolitical developments.
If inflation rises, he says, central banks in the United States and other major economies may raise interest rates. Borrowing would become more expensive, forcing governments to spend more on debt service. Budget funds intended for other purposes might instead go toward interest payments.
The economist also cites a possible increase in gas prices as a risk. He says more expensive gas could have a knock-on effect, raising prices for goods and services and affecting the cost of other energy sources.
In that situation, the Central Bank might raise its interest rate to restrain inflation. Sargsyan stresses, however, that doing so would not reverse an increase in the price of gas or of goods that had already become more expensive as a result. It could only limit further inflation by reducing incentives to borrow and spend.
According to the economist, higher interest rates would do little for citizens already struggling with a 20–30% increase in heating costs. The burden would affect a wider section of the population than low-income households alone.
Under these conditions, Sargsyan says, the government would have to consider ways to offset citizens’ additional costs. One option could be to temporarily stop collecting value-added tax on gas consumption; another would be subsidies. Either approach would add to the budget burden through lower revenue or higher expenditure.
The government might consequently have to borrow more or cut other spending. In other words, a rise in gas prices could simultaneously increase inflationary pressure, the need for social support and the risks associated with servicing public debt.
👉 Economy