Armenia’s State Debt Snowball: A Slow-Acting Bomb
Yerevan, January 29 – Armenia’s state debt has become a critical economic issue, posing a significant threat to the country’s economic stability and future development prospects. By the end of December 2025, the state debt had reached $14.5 billion, encompassing both external and internal debt. This figure represents a 13.1 percent increase, or approximately $1.7 billion, compared to the previous year, and has nearly doubled since 2018.
Internal Debt Drives Recent Growth
The increase in 2024 was primarily driven by a sharp rise in internal debt, which stood at $7.5 billion by year-end, an increase of $1.1 billion or 17.3 percent from the beginning of the year. The majority of this internal debt is generated through government treasury bonds acquired by residents.
Simultaneously, the state is compelled to repay old debts. The year 2025 proved particularly challenging in this regard. In March, Armenia issued $750 million worth of Eurobonds on the international capital market. These new, more expensive debts have increased the burden on the external debt structure. The issuance of these Eurobonds forced the government to undertake obligations at higher interest rates, leading to an overall increase in the debt burden.
The Ministry of Finance’s published borrowing plan for 2026 indicates a budget deficit of 537 billion drams, to be financed by 210 billion from internal sources and 327 billion from external sources. The debt-to-GDP ratio is projected to increase by 3.3 percentage points. These figures clearly illustrate the unstable dynamics of debt growth, with the government continuing to rely on debt financing without securing sufficient means to stabilize the budget or increase revenues.
Highest Debt-to-GDP Ratio in the South Caucasus
Armenia’s debt situation is particularly unfavorable in a regional context, as it possesses the highest debt-to-GDP ratio among the South Caucasus countries. According to IMF data, this ratio stands at 53.4 percent, significantly exceeding that of its neighbors. For instance, Georgia’s ratio is 34.2 percent, Iran’s 35.6 percent, Russia’s a mere 23.1 percent, and Turkey and Azerbaijan’s are 24.3 and 22.4 percent, respectively. This implies that Armenia is burdened with twice, even thrice, as much debt as its neighbors, placing it at a considerable disadvantage in terms of economic competitiveness and financial stability. This comparison not only highlights the shortcomings of the government’s financial policy but also underscores how the debt burden impedes regional trade, investment, and economic integration.
High Debt Service Costs and Future Risks
This high level of debt means that nearly 14 percent of taxes collected from the economy are spent solely on interest payments. In recent years, debt servicing costs have reached $1 billion annually, a figure that was two to three times lower previously. If the debt-to-GDP ratio were 25-26 percent, these costs would be at least halved, freeing up resources for social, infrastructure, and defense programs. However, the increasing debt burden and the rise of debt from $6.7 billion to $14.5 billion in seven years demonstrate the authorities’ insatiable appetite for debt, which they now even attempt to present as an “advantage” or “opportunity,” despite it being a serious cause for concern.
The dangers of increasing debt are multifaceted and could lead to severe consequences if timely measures are not taken. A high debt burden limits budgetary flexibility, forcing the government to prioritize debt servicing, which in turn sacrifices funding for education, healthcare, and defense. Should a global economic crisis occur, interest rates sharply rise, or foreign currencies (in which Armenia must fulfill its debt payment obligations) become more expensive, servicing costs could immediately increase, leading to a budgetary crisis, tax hikes, or a cyclical chain of new debts, undermining investor confidence and limiting economic growth.
Historically, high debt levels have often led to sovereign debt crises, such as in Greece in the 2010s or Argentina, where exceeding a 50 percent debt-to-GDP ratio triggered a process of severe destabilization. In Armenia’s case, this could be even more severe, given its dependence on foreign aid, remittances, and other factors.
Furthermore, while the growth of internal debt may seem “safe,” it is actually risky because it relies on local banks and residents. However, interest rates sometimes encourage capital outflow and inflationary pressures. If the local market begins to stagnate, the government will be forced to turn to external markets with higher risks. In terms of regional comparison, it is noteworthy that Azerbaijan’s and Turkey’s low debts allow them to allocate more resources to military strengthening and infrastructure development, while Georgia, with its low debt, more easily attracts foreign investment. All of this creates an imbalance that is not to Armenia’s advantage.
The government’s justification that debt is an “opportunity” for infrastructure and social programs ignores the fact that without effective use, it becomes a heavy chain that limits fiscal policy flexibility, encourages corruption, and leads to economic slowdown. Keeping the country in debt regarding Armenia’s economic future could become a slow-acting bomb. To curb the rapid growth of state debt, the government is obliged to immediately adopt strict fiscal policies, reduce inefficient expenditures, stimulate the tax base without raising rates, and encourage private investment.
