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16ECONOMIC SCIENCES
THE PUBLIC DEBT SUSTAINABILITY OF REPUBLIC OF ARMENIA
Asatryan D.
Msc in Economics, master's student American University of Armenia Yerevan, Armenia
Erkoyan A. Msc in Economics, PhD student NAS RA, Institute of Economics Yerevan, Armenia
Abstract
A crucial issue associated with public debt occurred when the indebted countries could not meet their current financial obligations. This paper aims to present an overview for assessing public debt and, more generally, sus-tainability, briefly giving its contents and the main drawbacks and problems from its practical application in the Republic of Armenia. Based on time-series data for 2000-2020, research is done with using the OLS, IVREG and Newey-West models. According to our estimations, in the long run, that debt's primary balance in Armenia might change into a negative relationship. This can cause unsustainable debt, and Armenia should start looking for this not to face such a crisis shortly.
Keywords: Public Debt, Sustainability, Public debt to GDP ratio, Primary Balance, Augmented Dickey-Fuller test, Instrumental-variables regression, Newey-West test
Introduction
The concept of public debt sustainability has been thoroughly studied in the last decades. The difficulties of public debt sustainability have become highly important after the financial crisis, the consequences of which resulted in a significant increase in public debt. Public debt can positively and negatively impact economic growth, depending on its capacity, application, and specific country circumstances. The general logical hypothesis of public debt is that a reasonable public debt level affects economic growth. This opinion implies that the debt becomes unsustainable when it tops a certain point. According to the IMF, a country's public debt is considered sustainable if the government can meet all its current and future payment obligations without exceptional financial assistance or going into default1.
However, this does not mean that having debt or borrowing money is terrible, and you have to carry the burden of it until you collapse. Debt in itself is a crucial thing, and it has its benefits, such as; it is a way to increase your budget for development plan or help with the public spending and cover some gaps present in the budget2. But, the frightening aspect of it is the gathering of the growth of public debt. As the debt grows, it cre-
ates a route to huge problems such as lowering incomes, high-interest rates, lowing capabilities to counter a national problem, or facing issues during a crisis such as we saw it happen during the covid-19 pandemic or the 2007-2008 financials crisis.
As mentioned above, public debt is considered sustainable when the government can pay the borrowed money in the future. Countries' debt sustainability is usually measured by debt and debt service indicators estimated by appropriate payment quantityweights (GDP, exports, revenues). As a debt indictor, we consider the ratio of public debt to GDP since a steady debt-to-GDP balance usually confirms advancing the government's capacity to sustain its debt and measure the economy's load. A country with a high debt to GDP ratio typically has trouble paying off external debts.
Armenia, a country that is independent for just 30 years, is seeing accumulations in debt. Throughout the years, the government, population, and other shareholders of Armenia have debated whether Armenia will be able to cover its debt in the future or not. This topic is always looked at and discussed, especially among the business partners and future investors, to see if it is worth investing in Armenia and what to foresee in the long run.
1https://www.imf.org/en/Publications/Policy-Papers/Is-
sues/2016/12/31 /Assessing-Sustainability-PP 148
2https://www.imf.org/external/pubs/ft/fandd/2020/09/what-is-debt-sustainability-basics.htm
Chart 1. RA Public Debt and Public debt/GDP ratio dynamics for 2000-2019 (left axis-billion AMD, right axis
%Source: Armenian public debt reports
4500 4000 3500 3000 2500 2000 1500 1000 500 0
49,3
67
rC -,58,9 56,7 55,7
46,7 47
48,7
40,9
40,6 40 42,241,440,9
43,7
.1
32,6
24,4
19,2
16,416,4
509
550
641
664
621
549
509
516
585
1 271 383-
59
76
86 2
11
456
87
di
2803 34
3,5 3,5
513
164
80 70 60 50 40 30 20 10 0
# & # <$> # «$§» <$> ^ ^ <$>
RA Public debt, billion AMD
RA Public dept/GDP, % (right axis)
As can be seen from Chart 1, the total public debt sharply increased, and since 2008, there has been an increase in the debt to GDP ratio indicator. RA public debt amounted to USD 7,968.5 million (AMD 4,164.3 billion) regarding December 31, 2020, which grew by about 11% compared to the last year.There is a dip in the ratio in 2019. The balance announced 53.5%, decreasing by 2.2 percentage points against the same indicator in the former year. It is because of the nominal GDP's stable growth (9.2% against 4.9% growth of the public debt). During the mentioned period, RA's external public debt increased by USD 251.1 million in absolute terms or by 3.7%. Furthermore, the growth resulted from increased RA Government external debt by AMD 129.4 billion (USD 311.8 million) or by 5.4%.The situation made a significant rise in public debt and identified problems of debt sustainability.A dramatic increase in the debt can be explained by the consequences of the global economic crisis and internal political instability in the country, which led to the rise in government spending.
During 2000-2008 RA public debt/GDP ratio had dropped from 49.3% to 16.4%. The explosion of public debt indicators in 2008 can be explained not only by large-scale borrowings from external sources, along with a decline of GDP by 14 percent, but also by a 23 percent devaluation of the national currency when public debt declined relative to GDP over 2004-2008. If the Armenian dram had not appreciated over 2002-2008, the drop of public debt relative to GDP would have been much smaller. As a consequence of the global financial crisis, RA public debt/GDP indicator had a drastic increase in 2009, amounting to 40.6% against 16.4% in 2008. The low-interest expense for Armenian external public debt before 2009 was mainly due to the concession of borrowed funds. Interest expense for national issuance was irrelevant mainly because of the
small size of the domestic debt. Since 2009 interest expense for external debt sharply increased because of increases in debt size and the absence of concession of newly hired funds. Domestic debt's interest expense increased since 2009 essentially because of the rise in government bonds' quantity.
The dynamic of RA public debt growth also quick-enedin 2014 due to AMD depreciation, external economic shock, and deficit net financing through borrowings. At the end of 2017 RA, the public debt/GDP indicator comprised 58.9%. The index gradually declined during 2018 and 2019 by 3.2 and 2.2 percentage points, respectively, and totaled 67% in 2020.
The Armenian economy in recent years has suffered from the economic slowdown. The paper aims to estimate the threshold for the Armenian economy where debt starts to influence growth negatively and consider whether it has a sustainable debt or not. It is a former Soviet Union country whose economy is considered transitional until it will have a sustainable economy with sustainable development.
The structure of the paper is organized as follows. The following section is devoted to reviewing the previous literature on debt sustainability.That section will introduce some of the articles that helped us reach a specific model or gave us some ideas on how the flow of the paper should be.The second section describes the methodology and data. That chapter provides a regressive approach to the different empirical investigation methods that the researchers used. In the third section, we tried to summarize the econometric background and the most notable studies for each model with the main interpretations. Then the conclusions are presented in the final chapter.
Literature Review
A considerable amount of literature is applied to public debt sustainability issues, in which the authors use various methodologies to estimate it. Since public
debt sustainability is a vast concept, debt sustainability is represented differently in multiple papers. It depends on the author's strategy and critical research issues.
In most studies, debt sustainability problems are discussed along with economic growth, and authors attempt to define the positive or negative consequences of public debt.The familiar, widespread assumption in such studies is a negative linear correlation between debt and economic development. Zouhaier and Fatma's investigation confirmed that debt negatively affects growth in 19 developing countries over 1999-2011.Be-sides, they found the same negative interaction between debt and investment3.Although, there are still consultations on debt levels that maximize growth. Pattillo, Ricci, and Poirson (2002) examined the nonlinear influence of debt on economic growth using panel data of 93 developing countries. This paper's main findings are that the average effect of debt on GDP growth becomes negative above 160-170% of exports and 35 -40 % of GDP4.
Some papers that include post-soviet union countries analyze different countries' general financial sus-tainability and determine the debt threshold level where the growth and debt are negatively correlated. For example, Geithner uses data from 15 post-soviet union countries for debt sustainability studies from 1995 to 2001. The estimated start of a debt to GDP ratio is 44.7% which is very low, noting that most former Soviet Union countries had a higher indebtedness level. Nevertheless, Geithner shows that the estimated probability that a country with more than 40% debt to GDP ratio will not have a crisis is 80%5.
Reinhart and Rogoff (2010) practiced more current data to examine the regular correlation among debt, growth, and inflation. Generally, in developing countries with a high level of public debt, the inflation rate also significantly increases. The intuition behind it is. "The government takes more debt to reach debt sustain-ability and increase the taxes. The more the taxes are, the more the dead-weight loss of the economy6." Postsoviet Union country does not include the list of the countries. The paper obtains that the GDP growth is negative for the average country at the 90% level of debt to GDP ratio, and inflation is the highest recorded for that 20 countries (16.7%).
Some researchers (Ghosh, Kim, Mendoza, Ostry, & Qureshi, 2011) in their paper try to develop a model
to calculate and analyze debt sustainability in developed countries. The debt limit and sovereign debt are taken into account for making fiscal sustainability more possible. The most significant is their implementation of models. They applied the framework empirically to a sample of 23 advanced economies over 1970-2007. Specifically, they find that the primary balance response to lagged debt is nonlinear, remaining positive at moderate debt levels but starting to decline when debt reaches around 90-100% of GDP7.
Ogbefun and Shobande try to resolve the MIST (Mexico, Indonesia, South Korea, and Turkey) countries governments' reaction to debt accumulation and whether they take the proper steps to familiarize this issue. They examine if the fiscal policy follows a sustainable direction using panel data from 1990 to 2017.Having checked for the problem of cross-sectional dependence and heteroscedasticity, they obtained confirmation that fiscal policy is sustainable. The primary balance advances by about 0.005-0.013 for each one-unit rise in government debt.The political factor variable, an election year, has a substantial influence on the primary balance. A reasonable explanation is that the political candidates are mostly followed up, as the data reflect notable increases in the primary balances after election year across the countries. Their research concludes that MIST countries should bring up a policy that reduces the fiscal expenditures and the reinforcement on taxes (Ogbeifun&Shobande, 2020)8.
Beqiraj, Forte, and Fedeli consider some OECD countries to see the government's reaction to collecting debt and debt sustainability whether the fiscal policy of various OECD economies has been sustainable in both long and short terms. Their paper is designed by generating correlation test, unit root test, cointegration test, and finally developing an ECM regression and ECM regression with a robust test.They show a stable long-term relationship between debt and primary structural balance. Also, researchers referred their variables to potential output to avoid heteroscedasticity problems because of possible non-linearities of the fiscal policies and consider the heterogeneous responses to the country's governments' standard shocks. By showing the cointegration of primary surplus and debt to GDP ratios, they found out that the government's reaction in the long run for debt accumulation is adverse. (Beqiraj, Fedeli, & Forte, 2018)9.
3Zouhaier H., Fatma M. "Debt and Economic Growth". International Journal of Economics and Financial Issues, 4(2), 2014 p. 440 —
448.https://www.econjournals.com/index.php/ijefi/article/vi ew/759/pdf
4Pattillo, C., Poirson, H. and Ricci L. "External Debt and Growth". (IMF Working Papers, No. WP/02/69), 2002 https://www.imf.org/external/pubs/ft/wp/2002/wp0269.pdf
5 Geithner, T. "Assessing Sustainabilty". International Monetary Fund Working paper, 2002 https://www.imf.org/exter-nal/np/pdr/sus/2002/eng/052802.pdf
6 Reinhart, Carmen M. and Rogoff, Kenneth S. "Growth in a
Time of Debt," American Economic Review, American Eco-
nomic Association, vol. 100(2), 2010, p.573-78.
https://www.nber.org/system/files/working_pa-pers/w15639/w15639.pdf
7Ghosh, A., Kim, J., Mendoza, E., Ostry, J., & Qureshi, M. "Fiscal fatigue, fiscal space and debt sustainability in advanced economies" NATIONAL BUREAU OF ECONOMIC RESEARCH, Cambridge, MA 02138, 2011https://www.nber.org/system/files/working_papers/w16 782/w16782.pdf
8Ogbeifun, L., &Shobande, O. "Debt sustainability and the FISCAL reaction Function: Evidence from MIST countries." Future Business Journal,6(1) 2020
https://fbj.springeropen.com/articles/10.1186/s43093-020-00037-6
9Beqiraj, E., Fedeli, S., & Forte, F. "Public debt Sustainability: An empirical study on OECD countries." Journal of Macroeconomics^, 238-248, 2018 https://www.sciencedi-rect.com/science/article/pii/S0164070418302398
This review aimed to view how public debt sus-tainability is represented differently in various papers. It is clear from the research reviewed that the relationship between debt sustainability issues and public debt is different in developed, developing, and post-soviet Union countries. Based on these papers, we consider their assessment from the empirical study and duplicate it for Armenia.
Data Description and Empirical Methodology Applied Regression Methods An EvseyDomar's paper incorporates GDP growth in his model, relates it to interest rates, and clarifies it. "The interest rate for government loans should not exceed the economic growth rate of GDP10." This is a crucial point, and we take it into account in our analyses.
For creating the skeleton of our regression, the starting point is the present analysis of the relationship between public debt (PD) and primary balance (PB).
The government budget constraint is illustrated through the relation:
Dt= (1 + r)Dt-1 - St The size of public debt in the period of timet (Dt) is equal to the size of debt from a previous period (Dt-1) plus the interest amount and deducting the primary budget surplus (St )11.
By using the ratio with GDP (noted with Y) and knowing that:
Yt = (1 + g)Yt-i The equation may be expressed this way:
Dt = (1 + r)Dt-1 Yt (1 + g)Yt-i
St (1 + r) j
n " dt = (T+T)dt-1
Yt = U-! Yt_J* Yt * (
: i+Rt)
Where-^-1 = — is the reverse of the gross
Yt i+g b
growth rate.
After dividing the relation on the GDP figures, we get the model:
(1 + Rt) dt=li+g)(dt-1
st)
This relationship allows us to understand the evolution of a country's public indebtedness depending on the interest rate and GDP growth rate.
Constant overtime deficit and debt to GDP ratio ensure convergence of both the debt to GDP ratio and the interest to GDP ratio to finite values. Consequently, taxes needed to service interest payments converge to a limited value as a GDP share, making the debt sustainable.
The interest rate should also be applied to the primary balance figures, as mentioned by Bohn12. Government typically pay and collect interest payments on deficits and surpluses, respectively.
In any given period t, government budget constraint writes as follows:
Dt = (Dt-i-St-i)( 1+Rt)
Here Rt is the nominal interest rate.
Taking the debt and primary balance over GDP, this relation becomes:
The models above are the classical ones that have been used for a long time. However, a third model was used by Shobande and Ogbeifun13 that was developed by two econometrics papers done by Bohn14 and Blanchard et al15. For sustainability, they are looking at the public debt as the dependent variable. The formula is constructed as a primary balance as a percentage of GDP; the debt to GDP ratio is also considered here (Og-beifun&Shobande, 2020)16.
The formula is the following:
pbt = at + {9 *dt) + e
Where pbt is the primary balance as a percentage of GDP, dtis the government debt to GDP ratio, 9 shows the reaction of the primary balance to the debt ratio.
Shobande and Ogbeifun applied this model and included some extensions for the empirical research. Our paper would replicate the model and the extensions to research public debt sustainability for Armenia.As the extension model's variables can appear interest payment on public debt, year of the election, lagged versions of both the primary balance and debt, and current account balance.
Source of Data and the Measurement of Variables
Content analysis was used to examine the data which was gathered from different sources. We relied on numerous sources for public and government debt, GDP, current account balance, etc. For debt sustaina-bility, we use data from 2000-2020 (21 observations).
The main variables taken into account are debt indicators taken directly from the Ministry of Finance of the Republic of Armenia and The World bank. The macroeconomic indicators are taken from the National Statistical Service of the Republic of Armenia17. All the available information is only annually. The data was given in different currencies as they are taken from various international institutions or governments. Some of them are expressed by AMD, other in USD, so necessary variables that have the dram component in them were transformed to USD rates by dividing by the equal change rate.
t
10Evsey D. Domar, "The "Burden of the Debt" and the National Income" The American Economic Review, American Economic Association, Vol. 34, No. 4 p. 798-827, Dec. 1944
11 When primary balance is less than 0, we have deficit.
12Bohn, H. "The sustainability of budget deficits in a Stochastic Economy". Journal of Money, Credit and Banking,27(1), 257, 1995
13Ogbeifun, L., &Shobande, O. "Debt sustainability and the
FISCAL reaction Function: Evidence from MIST countries."
Future Business Journal,6(1)
2020https://fbj.springeropen.com/articles/10.1186/s43093-
020-00037-6
14Bohn, H. "The sustainability of budget deficits in a Stochastic Economy". Journal of Money, Credit and Banking,27(1), 257, 1995
15Blanchard et al, "The Sustainability of Fiscal Policy: New Answers to An Old Question" OECD Economic studies No. 15, Autumn 1990
16Ogbeifun, L., &Shobande, O. "Debt sustainability and the FISCAL reaction Function: Evidence from MIST countries." Future Business Journal,6(1) 2020
https://fbj.springeropen.com/articles/10.1186/s43093-020-00037-6
17 Appendix 1, Table 1. Source of Measurement of variables
There are two central variables for which we make estimates. Firstly, the Business cycle variable is obtained by applying Hodrick Prescott Filter twice on gross domestic product series. Secondly, our interest's initial variable is the debt to GDP ratio. A frequently used economic measure, the debt/GDP ratio, measures the debt level of a country against its Gross domestic product. This ratio is generally presented as a percentage and is an excellent indicator of how the government can compensate its debts.
The following formula is used to calculate the ratio:
PD Total Public Dept
- =---*100
GDP Total GDP of country
Put a different way, debt-to-GDP ratios measure public debt against yearly economic output. Countries with high debt-to-GDP ratios generally find it challenging to pay off debts. If a country has a very high debt-to-GDP ratio may find it difficult to borrow money at all.The exact estimation reasoning holds for the percentage of government debt.
Table 2. Max
Summary Statistics of the variables for 2000-2020 Variables Obs. Mean Std. Dev. Min
PB (Primary Balance %) 21 11.47 4.73 5.1 24.8
L.GD_GDP (Government Debt over GDP ) 20 0.35 0.12 0.14 0.54
INTP (Interest payment on the public debt) 21 4.94 3.21 1.47 11.62
CAB (Current Account Balance, % of GDP) 21 -7.61 4.68 -16.48 -1.02
PD_GDP (Public debt over GDP) 21 420.73 139.35 163.79 676.42
R (Nominal interest rate, %) 21 17.19 4.06 11.5 27.4
PUB_PRIM (The product of PB and PD_GDP) 21 5032.56 2759.71 1117.70 12260.10
Source: Authors' computation
Table 2 reports the descriptive statistics of the primary balance, government and public debt over GDP, Interest payment on the public debt, current account balance, nominal interest rate and the product of ratio and public debt relevant to the public debt sustainability analysis.The ratio of public debt to GDP's average value and related deviation stood at 420.73 (139.35), while for the first lag of Government Debt over GDP
ratio was 0.35 (0.12). The Primary Balance's average value was 11.47 (4.7). Interest payment on the public debt was 4.94 (3.21), while the nominal interest rate was 17.19 (4.06). The Current Account Balance was negative 7.61 (4.68), and the most important variable is the Government's reaction to debt, which was 5032.56(2759.7).
Table 3.
Correlation of the variables for 2000-2020 PB PD GDP CAB INTP L.GD GDP
PUB PRIM R
PB 1
PD GDP 0.34 1
CAB -0.26 0.14 1
INTP -0.12 0.83 0.27 1
First Lag of GD_GDP 0.23 0.88 0.38 0.86 1
PUB PRIM 0.88 -0.74 -0.04 0.33 0.61 1
R 0.66 -0.33 -0.26 -0.71 -0.38 0.29 1
Source: Authors' computation
The correlation results presented in Table 3 show that multicollinearity is not a problem in this case as all the regressors are not strongly correlated. The table represents the ratio of public debt, the first lag of government debt ratio, the nominal interest rate, the interaction term of primary balance, and the public debt ratio are positively correlated with primary balance at 34%, 23%, 66%, and 88%. In contrast, interest payment and current account balance negatively correlate with the primary balance at 12% and 26%.
Estimations: Main Results and Analysis
Several regression models, such as OLS or instrumental variables, and some tests, like Newey-West or Augmented Dickey-Fuller, were evaluated to establish the relationship between public debt and primary balance.
OLS models show a linear relationship between public debt and primary balance based on available data and calculations. It is confirmed that some regressions ran during the research contained insignificant variables. The difference between R-squared and adjusted
R-squared was noticeable, telling us adjustments could reach better models18.For fixing the problem, we remove some variables, such as the business cycle and the Government debt at period t. The models became better in terms of the independent variables' significance. However, the R-square's value dropped, giving us room to make more improvements to the model.
Optimally, some variables, such as election year, could also be used to improve the model. However, in Armenia's case, it caused insignificance in the other variable, telling us that it is irrelevant in Armenia's case.
Source: Authors' computation
reject the null hypothesis. So we don't have an issue related to heteroscedasticity19.
In econometrics, endogeneity broadly applies to circumstances in which an explanatory variable is correlated with the error term. To avoid endogeneity problems, we ran a regression using iv-regression using instrumental variables. The instrumental variables were GDP & YVAR, which gave similar results as the OLS regression. We conducted an Endogeneity test on our IV regression to see whether the strict exogeneity assumption is being violated. Wu-Hausman and Durbin tests were conducted, with both of them having the null
18 Appendix 2, Table 4. Estimated results with Simple OLS (1-5 Models)
19Appendix 3, Table 6. Test Results for Heteroscedasticity
and Endogeneity
To capture the government's reaction to the debt increase in the past ten years, we performed an interaction variable for public debt and primary balance (PUB_PRIM). The OLS regression results from table 5 gave us the most reliable results regarding significance and R-square values.
On the First model in the table, we did a hetero-scedasticity test to see whether our regression has a constant variance or not. Breusch-Pagan/Cook-Weis-berg Test was conducted with a null hypothesis of constant variance. The P-value of the test was approximately 0.51, assuming that we fail to
hypothesis as our variables are exogenous. Durbin test had a P-value of 0.37, and Wu-Hausman has a P-value of 0.58. They led to the failure to reject the null hypothesis and trust that they are indeed exogenous varia-
bles20.
At first sight, looking at a regression makes us think that something spurious and accidental. R-square with 99.4% makes us believe that something strange. For that, we were predicting residuals and check for cointegration with the Augmented Dickey-Fuller test21. The results tell us we have cointegration as we have a
20Appendix 3, Table 6. Test Results for Heteroscedasticity and Endogeneity
21Appendix 5, Table 8. Augmented Dickey-Fuller test's results for Cointegration
Table 5.
Estimated result's with OLS, IVREG and Newey-West Models_
Four Different Models
OLS IVREG Newey-West
VARIABLES PB PB PB
PD GDP -0.0152*** -0.0143*** -0.0152***
(0.00211) (0.00276) (0.00171)
CAB -0.122*** -0.152*** -0.122***
(0.0230) (0.0340) (0.0173)
INTP -0.287** -0.346*** -0.287**
(0.108) (0.121) (0.107)
L.GD GDP 5.558** 7.553*** 5.558**
(2.274) (2.927) (2.126)
PUB PRIM 0.00213*** 0.00203*** 0.00213***
(0.000100) (0.000178) (0.000114)
R -0.103* -0.0968* -0.103*
(0.0530) (0.0526) (0.0508)
Constant 7.523*** 6.834*** 7.523***
(0.985) (1.363) (0.956)
Observations 20 19 20
R-squared 0.994 0.992 -
Standard errors in parentheses
*** p<0.01, ** p<0.05, * p<0.1
more considerable Z value in absolute terms. The second issue is adding the lag creating a problem of serial correlation. It occurs in time series when the errors associated with a given period carry over into future periods. So, for checking whether we have a problem or not, we run the same regression, including the first lag of the error term, and do the test. As a result, the p-value is very big, so we fail to reject the Null hypothesis, which implies that we don't have such a problem22.
Even though we check for serial correlation, as our data is time series and there may be highly correlated variables, we decided to run a regression with the Newey-West test to fix auto-correlation.
So, the three models (OLS, IV-regression, and Newey-West) have similar coefficients, R-square values, and standard deviations.
Interpretation of the OLS results goes as the following:
PD_GDP: one unit increase in the public debt will decrease the Primary balance by 0.015 units.
CAB: one unit increase in the current account balance will decrease the Primary balance by 0.122 units.
INTP: one unit increase in the public debt's Interest rate will decrease the Primary balance by 0.287 units.
L.GD_GDP: one unit increase in Government debt in period t-1 will increase the Primary balance by 5.56 units.
R: one unit increase in the nominal Interest will decrease the Primary balance by 0.103 units.
PUB_PRIM: The government's reaction will be positive if the debt increases concerning the primary balance.
Interpretation of the iv-regression results goes as the following:
PD_GDP: one unit increase in the public debt will decrease the Primary balance by 0.014 units.
CAB: one unit increase in the current account balance will decrease the Primary balance by 0.152 units.
INTP: one unit increase in the Interest rate of the public debt will decrease the Primary balance by 0.346 units.
L.GD_GDP: one unit increase in Government debt in period t-1 will increase the Primary balance by
7.55 units.
R: one unit increase in the nominal Interest will decrease the Primary balance by 0.096 units.
PUB_PRIM: The government's reaction will be positive if the debt increases concerning the primary balance.
Interpretation of Newey-West regression:
PD_GDP: one unit increase in the public debt will decrease the Primary balance by 0.015 units.
CAB: one unit increase in the current account balance will decrease the Primary balance by 0.122 units.
INTP: one unit increase in the public debt's Interest rate will decrease the Primary balance by 0.287 units.
L.GD_GDP: one unit increase in Government debt in period t-1 will increase the Primary balance by
5.56 units.
R: one unit increase in the nominal Interest will decrease the Primary balance by 0.103 units.
PUB_PRIM: The government's reaction will be positive if the debt increases for the primary balance.
Summary and Conclusion Remarks
Despite the presence of various debt sustainability hypotheses, according to our results, this study supports the linear relationship between public debt and primary balance. In particular, we found that most of the coefficients causing a decrease in the primary balance, other than the government debt's lag term. The government's reaction to the debt is positive but with a small number that may or may not be significant in the long run.
As the government's reaction is positive when there is an increase in the public debt, the short-term effect of this debt may not significantly affect Armenia's economy.
Until now, the debt of Armenia is balanced and could be considered to be sustainable for now.How-ever, as the reaction's coefficient is really small, and most of the coefficients are negative in terms of their effect on the public debt, we strongly believe that in the long run, if debt's amount increases continuously and not introduce any new fiscal policy, the sustainability of the debt may reverse by causing an economic crisis in the country.
This study encourages Armenia's government to be more cautious and introduce a policy that will strengthen the foreigner, especially the Armenian Diaspora, to invest in Armenia to increase the GDP.
Furthermore, we believe that Armenia should concentrate more on its manufacturing capabilities and less on hospitality, and do so, the government's support is a must.As Armenia is not economically well and faces many issues on its border, its attractiveness is not high and sustainable. So, if some of these policies gave an excellent payoff to the foreign power, we would receive the investment needed and start depending on more than one sector, as we saw after the pandemic. The absence of the tourist caused much tension in the economy of Armenia.
We concluded that Armenia, as of today, has more or less sustainable public debt. However, in the long run, we think that debt's primary balance may change into a negative relationship. This can cause unsustainable debt, and Armenia should start looking for this from now in order not to face such a crisis soon.
REFERENCES:
1. Beqiraj, E., Fedeli, S., & Forte, F. "Public debt Sustainability: An empirical study on OECD countries." Journal of Macroeconomics,58, 238-248, 2018 https://www.sciencedirect.com/science/arti-cle/pii/S0164070418302398
2. Blanchard et al, "The Sustainability of Fiscal Policy: New Answers to An Old Question" OECD Economic studies No. 15, Autumn 1990
3. Bohn, H. "The sustainability of budget deficits in a Stochastic Economy". Journal of Money, Credit and Banking,27(1), 257, 1995
22Appendix 4, Table 7. Serial Correlation
4. Evsey D. Domar, "The "Burden of the Debt" and the National Income" The American Economic Review, American Economic Association, Vol. 34, No. 4 p. 798-827, Dec. 1944
5. Geithner, T. "Assessing Sustainabilty". International Monetary Fund Working paper, 2002 https://www.imf.org/exter-nal/np/pdr/sus/2002/eng/052802.pdf
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ECONOMICAL AND MORAL-ETHICAL RATIO
Nikolaishvili E.
Lecturer of Gelati Theological Academy Babunashvili E.
Associate Professor of Kutaisi University
Abstract
The main goal of the sciences and scientists from time immemorial and in modern times has been to care for the salvation of mankind, to improve their living standards. Considering the basic credo - to be able to subdue the visible world and nature.
Keywords: Economic problems, morality, ethics, ways of solving.
The main goal of the sciences and scientists from time immemorial and in modern times has been to care for the salvation of mankind, to improve their living standards. Considering the basic credo - to be able to subdue the visible world and nature.
Economists look at our perspective and perceive the introduction of methods to solve these life problems. In our view, solving the economic triad will lead to the survival of humanity, their well-being. The economic triad, the main essence of which is based on the vision of making pure material profit. On the increase of material income, on which, unfortunately, a person becomes dependent to the end with his taste preferences in the Minute world.
Economists explain the economic triad as follows: 1) What to produce? Which depends on the rarity of resources, 2) How to produce? Which derives from its dependence on technological processes and 3) For whom should we produce? In particular, who will be its users, which ethnic group of humanity, which differentiates the nomenclature and quality of the manufactured product types at the time of delivery.
The analysis, calculation and realization of all the above-mentioned sequential cycles are calculated solely and exclusively taking into account only the way of obtaining the benefit, material gain. Modern economics attaches great importance to marketing and its entire sphere in solving this triad. In particular, the market with its mechanisms and constituent elements,
which is mainly dominated by two parties: Suppliers (one part of humanity) who, based on those rare, absolute or relatively superior resources, deliver the product obtained by the use of modern technological processes to the customer (the other part of humanity) in order to make a total profit.
The modern world market is characterized by quite a variety of suppliers and consumers, which leads to fierce competition with each other in terms of achieving a rigid goal. There is a segmentation of the market, which is mostly operated by unhealthy methods. Countries maintain a prevailing monopoly position at the expense of each other's expansion, which will grow into oligopoly and megapoly. And the latter leads to unequal and irregular distribution of profits, both to suppliers and consumers, which causes chaos. Methods of solving the triad in a similar way in any field of economics have unfortunately draw the following real picture in today's world. Against the background of civilization, the achievements of modern scientific and technical progress have solved the ways of overcoming the triad without any problems, life seemed to be simplified, diversified, people's labor was saved in time, the standard of living increased, which was followed by economic growth, but did all this bring happiness to mankind? Has poverty, illness decreased? Has life become cheaper, easy, more joyful? Has the grief of the people disappeared? - no. The well-being of life has created a great arena for the
