A chain of financial dependence has been formed. “Fact”

Recently, discussions about the state finances of Armenia focus more often on the indicators of the state debt and budget deficit, because they are the key macroeconomic factors that can determine the level of economic stability, development opportunities, state independence and financial security of the country in the long run.

At first glance, it may seem that Armenia’s financial situation in 2025 remains within control limits, as the public debt/GDP ratio has even decreased somewhat, from 47.7 percent to 47.2 percent, and the budget deficit, although it amounted to 418.8 billion drams, was significantly lower than the planned indicator. However, superficial estimates often do not reflect the deep risks that are hidden behind the numbers and that can gradually turn into serious economic and political challenges. The “Luys” Foundation also addressed this topic in detail in its latest analysis.

A government budget deficit essentially means that the government’s expenditures exceed its revenues, and the difference must be made up through borrowing or other financial sources. In 2025, the state budget of Armenia had a deficit of 418.8 billion drams, which is significantly higher than last year’s figure (376.1 billion drams). Although the ratio of deficit to GDP remained at the same level of 3.7 percent, this fact does not mean that the problem loses its relevance. Conversely, if the economy continues to operate under deficit financing, the government is forced to increase its debt obligations every year to maintain current expenditures, social programs, defense funding, and infrastructure projects.

It is noteworthy that the deficit in 2025 was lower than planned, not so much as a result of the exceptional efficiency of cost management, but as a result of the overachievement of revenues and the incomplete implementation of some expenses. This is an important circumstance, because if the under-execution of the expenditure is particularly related to capital projects, then short-term financial discipline can turn into long-term development problems. When investment projects in road construction, energy infrastructure, water systems, education or health facilities are not implemented at the intended volume, the state may seemingly improve the deficit index, but in reality loses the basis for future economic growth.

The increase in the budget deficit is also a signal that the state spending system is expanding faster than the revenue base. If economic growth slows, tax revenues decline, or the external economic environment worsens, maintaining the same level of public services and social obligations may require new debt. Thus, a chain of financial dependence is formed, where a part of the expenses of each subsequent year is financed not by current income, but by the continuation of the debt policy of previous years.

The structure of deficit financing is also an issue worthy of attention. In 2025, financing from internal sources amounted to 280.8 billion drams, and from external sources – 137.9 billion drams. This means that the Armenian government increasingly relies on the domestic financial market. On the one hand, this reduces external dependence and currency risks, but on the other hand, it creates additional pressure on the country’s financial system. When the government issues large volumes of bonds in the domestic market, it enters into competition with the private sector. Banks and investors often prefer to invest in government bonds because they are considered safer. As a result, access to credit resources for private businesses may be limited and interest rates may rise. In the economic literature, this phenomenon is known as “crowding out of private investment”, when government borrowing limits the investment activity of the private sector.

Arsen SAHAKYAN

Full article: of “Past” daily in today’s issue