As part of its strategy to manage debt, the Government of Armenia has decided to increase the share of internal debt in the overall figure. We spoke with Samvel Khanvelyan, Head of the Public Debt Management Department at the Ministry of Finance of the Republic of Armenia, to gain further insights into this approach.
Text : Nazareth Seferian
Photo : RA Ministry of Finance, AMX
Just five years ago, around 80% of Armenia’s state debt portfolio was held in foreign currencies. Recognizing the risk that this presented, the Ministry of Finance embarked on a strategy to find better balance, while developing domestic markets at the same time. In purely technical terms, the Ministry categorizes debt as “foreign” or “internal” depending on the residency of the creditor, and while foreign debt consists mostly of foreign currency debt and internal is in Armenian Drams, they do not coincide completely.
Today, internal debt constitutes nearly 50% of the state debt portfolio. The main instrument the state has at its disposal on this front consists of government bonds. “Around 60% of our bonds in Armenian Drams are owned by the banking sector, while around 30% are held by other financial institutions like pension funds, investment companies, asset management companies, and so on. Another 7.5% or so are held by qualified institutional buyers that are non-residents,” says Samvel Khanvelyan, “This diversity is important. Around five years ago, we depended mainly on the banking sector—they held 80% of our bonds. We are happy to see others enter the market.”
Government savings bonds are still not a very popular choice when it comes to the general public. Today, the total amount held by individuals in Armenia as savings bonds comes to around 6.4 billion AMD, just a modest increase from the 5.7 billion AMD in 2021. Individual savings bonds form just a small percentage of the government debt that is sold as market bonds, which totals around 2.5 trillion AMD.
When asked how Armenia compares to other countries in the region, Samvel Khanvelyan says that direct comparisons do not make sense. “Each country builds their debt portfolio based on their own context, their own target markets, and so on. Our analysis showed that our state debt was more liable for currency exchange risks, so we restructured it. In Georgia, for example, I believe that internal debt is at 30% of total debt, but the right question to ask is whether any given country is attractive to investors, whether it has the right infrastructure in place, and so on. And this is one of our biggest objectives for the coming years – develop infrastructure, work with market players to further grow the domestic debt market, and be as transparent as possible,” Mr. Khanvelyan says.
Each country builds their debt portfolio based on their own context, their own target markets, and so on. Our analysis showed that our state debt was more liable for currency exchange risks, so we restructured it.
Debt is a crucial part of the Government’s plans when it comes to funding capital costs. The lion’s share of the funding that comes into the budget in the form of debt goes into large-scale projects that create value, like schools, hospitals, roads, bridges, and so on. This impacts citizens directly and lowers long-term costs for everyone. And there is a way for everyone to be part of this bigger picture.
“We want more people to buy government savings bonds,” Khanvelyan suggests, “But this is not about raising funds, we do not target our citizens as a means to fund our deficit. Buying bonds allows citizens to feel like a direct part of the country’s development, and help reinforce confidence in the Government as a debtor.” He acknowledged that past generations had lost their savings in state-sponsored savings programs, but points out that today’s bonds are considered risk-free, and there is no tax on any income made by individuals through government bonds. Additionally, buying government bonds is now easier than ever, thanks to the new platform launched by the Ministry of Finance and AMX.
“When we introduced the retail bond system in 1999, they could only be sold in special centers, and buyers had to be physically present. In 2017, we introduced an online system, but it was limited when it came to registration—only those with physical ID cards could use it. At the end of October 2024, we relaunched this system and can now confirm any user’s identity remotely and securely. At the same time, this means that anyone anywhere can now buy bonds from the Government of Armenia,” Mr. Khanvelyan states. According to him, there are plans for a major communications campaign in 2025 that will promote the platform and the benefits of investing in government bonds. This campaign will go beyond just the citizens of Armenia because the Diaspora presents a major potential market for these bonds. “People in the Diaspora have always told us that they would be interested in such an opportunity. It is great to be involved in the homeland by supporting charities and so on. But, through these bonds, our compatriots abroad can now invest directly in the development of our country’s infrastructure, and I would encourage them to engage in this way.” The Armenian government continues to encourage individuals to invest in government bonds by providing them with tax exemptions for all income from these sources. A similar privilege had been allowed for corporate bonds listed in the Armenian stock exchange and this was due to end by 2024, but the National Assembly seems ready to extend it for a few more years.“People should look at all their options when making investments. They should consider the risks, assess them, and make decisions that are in their own best interests, particularly in the long term,” says Mr. Khanvelyan.
Debt is a crucial part of the Government’s plans when it comes to funding capital costs. The lion’s share of the funding that comes into the budget in the form of debt goes into large-scale projects that create value, like schools, hospitals, roads, bridges, and so on.
In terms of future plans for debt management, the Ministry of Finance is constantly keeping its finger on the pulse. “Our debt management strategy has benchmark indicators for mitigating any risks,” Khanvelyan explains, “There are specific thresholds of the debt-to-GDP ratio that are key. Reaching 40% serves as a kind of ‘amber light’ that cautions us and serves as a signal that fiscal deficit must be less than capital expenditures. Once the level reaches 50%, i) all debt must go to capital expenses only, ii) growth rate of current primary expenditures is capped and iii) the Government must present debt reduction program in MTEF (Medium Term Expenditures Framework). The highest level we allow ourselves to reach is 60%, and in this case: i) growth rate of current primary expenditures is capped by average nominal GDP growth of previous 7 years reduced by 0.5, ii) current expenditures are capped by volume of taxes, iii) the Government should submit debt reduction program to the Parliament. “Escape clauses” defined by the Government when negative economic developments arise due to large-scale disasters, economic shock etc. and in these cases the above mentioned rules aren’t applying. We expect to end 2024 with a debt-to-GDP ratio of 49.8% and our forecast for 2025 is 54.3%.”
The Government of Armenia continues to have ambitious plans for infrastructure development, where debt is a key component of the funding. International partners like the World Bank Group, European Bank for Reconstruction and Development, Asian Development Bank, and others play a crucial role here. “They are not just our creditors, the capacity-building opportunities they offer are vital for our development. When it comes to debt management specifically, the MDB’s regularly provide us with technical assistance. This has allowed us to conduct serious reforms in this area as well as in the strategies that we pursue and the quality of our programs,” Khanvelyan explains.
At the end of the day, balancing the state’s debt portfolio and developing new markets for internal debt are all about one objective—building the Armenia of tomorrow. “Our citizens will see the infrastructure that is built through the capital expenses that we cover using this debt. We have more than 130 lines in the state budget with these expenses. All of them are aimed at improving the lives of our citizens and reducing costs for everyone in the long term,” Khanvelyan concludes.
Join us on Telegram