…BUT THE PARTY CAN’T LAST FOREVER.

Although the percentage of Armenia’s current account deficit financed by FDI has likely increased this year compared to last, it is doubtful that the share exceeds 60-65 percent, leaving foreign borrowing to finance a sizeable portion of the deficit. Over the past seven years, Armenia has borrowed heavily abroad to finance its large current account deficit. These deficits have contributed to sustained growth in aggregate demand during this period, but have also caused the country’s foreign debt to balloon to US$862 million in 1999, up from US$96 million in 1995 (Snark, February 18). The structure of Armenia’s debt is relatively favorable, consisting almost entirely of long-term debt. As a result, the country’s debt servicing burden is comparatively light at an estimated 8 percent of current account receipts in 1999, considerably lighter than the debt servicing burdens faced by many CIS countries.

Nevertheless, meeting debt servicing obligations, which are estimated at US$50-$100 million (7-15 percent of current account receipts) in 2000, could prove difficult. The government will be responsible for most of Armenia’s debt servicing payments this year as public and publicly-guaranteed debt account for roughly 90 percent of total debt. Complicating matters, delays in electricity sector privatization have stalled the government’s negotiations with the World Bank and the IMF regarding new loan packages. Armenia relies heavily on IMF and World Bank credits to meet debt servicing payments. The government hopes to obtain a US$45 million Structural Adjustment Credit (SAC-4) from the World Bank and a new IMF credit facility for balance-of-payments support. The IMF disbursed the final tranche from a three-year US$150 million Extended Structural Adjustment Facility in October 1999. If the government is unable to secure multilateral lending, it will be forced to run down official reserves to service the debt.

Despite the loss of multilateral financing, the risk of a default on Armenia’s foreign debt is very low this year in light of the country’s strong level of foreign reserves. At the end of June, foreign exchange reserves totaled US$286 million, sufficient to finance 4.8 months of imports. Armenia, however, cannot continue to meet debt servicing payments by running down official reserves over the forecast period. Securing multilateral financing will be critical if the government is to avoid a default on its foreign debt. In addition, the government and central bank will have to implement tight macroeconomic policies over the medium term in order to restrain personal consumption and reduce the current account deficit. While the Central Bank of Armenia has implemented relatively tight monetary policies over the past three years, fiscal policy has been looser, with budget deficits running 4-5 percent. Whether the government maintains the political will and parliamentary support necessary to pass sound fiscal policy and implement economic reforms required by the IMF and World Bank remains to be seen.

1″The two most important deals currently under negotiation involve India’s purchase of Russian T-90 tanks and MiG-29K jet fighters. According to the most recent reports describing the first agreement, New Delhi is to receive some 300 T-90s–124 by direct export from Russia and the remaining 186 in the form of kits which are to be assembled under license in India. Negotiations to finalize the tank deal have been long-lasting and difficult, with the Indians reportedly pushing for a price of US$2 million per unit and the Russians insisting on US$2.12.”

2″It should be noted, however, that the winners in the Onako tender were are something less than products of a genuine meritocracy: Yevrotek is controlled by TNK, which, in turn, is part of the Alfa Group, the holding headed by two of Russia’s most powerful Yeltsin-era oligarchs, Pyotr Aven and Mikhail Fridman.”

3″The shortfall was due largely to smaller-than-planned inflows of VAT taxes (8 percent under target) and of excise taxes (13 percent under target), as economic actors switch to less-taxed fuels. Additionally, officials apparently failed to appreciate the share of Lithuania’s foreign trade that takes place within free-trade agreements–customs duties were 24 percent less than planned.”

4″Although growth in exports of finished diamonds, Armenia’s primary export, sparked a 22.9 percent rise in exports, the merchandise trade deficit nonetheless rose to US$284 million in the first half, up 5.0 percent from the same period in 1999.”

5″Despite the loss of multilateral financing, the risk of a default on Armenia’s foreign debt is very low this year in light of the country’s strong level of foreign reserves.”

The Monitor is a publication of the Jamestown Foundation. It is researched and written under the direction of senior analysts Jonas Bernstein, Vladimir Socor, Stephen Foye, and analysts Ilya Malyakin, Oleg Varfolomeyev and Ilias Bogatyrev. If you have any questions regarding the content of the Monitor, please contact the foundation. If you would like information on subscribing to the Monitor, or have any comments, suggestions or questions, please contact us by e-mail at pubs@jamestown.org, by fax at 301-562-8021, or by postal mail at The Jamestown Foundation, 4516 43rd Street NW, Washington DC 20016. Unauthorized reproduction or redistribution of the Monitor is strictly prohibited by law. Copyright (c) 1983-2002 The Jamestown Foundation Site Maintenance by Johnny Flash Productions