Support Program for Unreliable Borrowers: A Populist Move or an Economic Necessity?

A Populist Move or an Economic Necessity?

On December 12, 2024, the Government adopted a decision regarding the forgiveness of the loans of a portion of citizens with non-performing loans. At first glance, this is a positive measure, but the problem is deeper, as the volume of consumer loans has tripled since 2018, and 49 percent of those loans are non-performing. Armenia is currently facing a serious problem with revenue collection. Due to flawed fiscal policy, the taxes collected during the first 9 months of 2024 are 8 percent less than the planned figure. This is the first time in the last 20 years that collected taxes have been 8 percent below the target for three consecutive quarters. Under these conditions, such a policy creates an additional burden on the budget.

Chart 1

The Government’s Proposal

The Government proposes that around 220 thousand citizens with a non-performing loan of up to 1 million AMD exit the shadow economy and register as legal workers. In return, they will receive two types of support:

• Loan repayment from income tax (20%)
• Collection of an additional 20% from the salary for loan repayment
• Forgiveness of up to 80% of penalties and fines by banks

It is noteworthy that the program coincides with the termination of the income tax refund for mortgage loans in Yerevan starting from January 2025. Note that during the last 3 years, thanks to this law, funds taken out of Russia were mainly invested in construction, as the loan interest rate in this sector was practically zero. This led to the construction of new buildings, especially in Yerevan, which were primarily intended for people with middle-to-high incomes. Since an outflow of capital, as well as relocants from Russia, is currently being observed in Armenia, questions arise regarding the future demand for those apartments.

Chart 2

Interests of the Banking System

The banking system benefits first and foremost from this decision. The termination of the income tax refund for mortgage loans in Yerevan from January 2025 may negatively affect developers and, consequently, the banking system, since the funds that entered the banking system in 2022 were mostly invested in the construction sector.

Dynamics of the Loan Burden

As of October 1, 2024, the number of individual borrowers with non-performing loans was about 341 thousand, and their loan burden was about 642 billion AMD. As of April 2023, that burden was 525 billion AMD. The working-age population of Armenia is 2.2 million people. In other words, 15.5 percent of the working-age population currently has a non-performing loan that they cannot service, and this indicator continues to grow.

Chart 3.

In April 2023, the volume of consumer loans was 929 billion AMD, of which 525 billion, or 55.9 percent, was considered non-performing. As of October 2024, 48.9 percent of consumer loans were already considered non-performing. According to the latest data, consumer loans amount to 1.312 trillion AMD, of which 48.9 percent are considered non-performing. It is worth noting that 12.5 percent of all loans in the banking system are non-performing. This attests to both key social problems, where a significant segment of the population cannot meet their daily needs, and the growing riskiness in the banking system.

Chart 4.

Lending Trends 2018-2024

Since 2018, mortgage and consumer loans have recorded sharp growth, almost tripling. Mortgage loans issued in AMD exceeded 1.2 trillion AMD as of December 2024. As of the end of 2023, this figure was 951 billion AMD. In fact, the mortgage loan-to-GDP ratio already stands at 12 percent and has a clear growth trend compared to 2018, when this indicator was 2.5 percent. As shown in the chart, the consumer loan-to-GDP ratio also has a growth trend.

A similar picture is observed in the case of consumer loans. The burden of these loans eased somewhat for the population from 2020 to the end of 2022, but starting from 2023 it has grown significantly. If at the end of 2021 consumer loans amounted to 716 billion AMD, they now exceed 1.2 trillion AMD. In fact, consumer loans grew by 67 percent in 3 years.

The next chart shows the specific weight of bank loans by sector. In 2018, 20.3 percent of total loans were provided to industry, 17.1 percent to trade. In October 2024, the specific weight of these indicators decreased, reaching 11.8 and 12.1 percent respectively. Instead, the specific weight of consumer and mortgage loans has increased. In 2018, mortgage loans accounted for 10 percent of total loans, and in October 2024, already 25.7 percent. Together, these two loan types accounted for 37.5 percent of total loans in 2018, and in October 2024, already 51.3 percent, and this figure continues to grow.

Socio-Economic Consequences

As we have noted in our previous analyses, the real economy of Armenia is not in good condition at this moment, which is evidenced by both the under-collection of taxes and the reduction in exports to the EAEU and the EU by 17 and 25 percent respectively. The money for servicing the debt burden of non-performing borrowers must come from some source, so as to also service the banking system in the uncertain conditions of 2025. Most of it will come from employers in the form of an additional tax burden. This could be problematic, since the real economy is not in good condition at this moment. Besides, the participation of 220 thousand unreliable borrowers in the program is questionable, as they are mostly low-income or unemployed individuals.

Systemic Problems and Prospects

The problem is deep-rooted; it is not out of a good life that people have become non-performing borrowers. Over the last 6 years, consumer loans have grown 3 times and currently make up 25.7 percent of total loans. We are currently talking about 220 thousand non-performing borrowers, whose loan does not exceed one million AMD. This also testifies to the fact that Armenia’s social policy has problems.

Conclusion

The proposed loan forgiveness program cannot be a complete solution to the systemic problems. It is rather a temporary measure aimed at mitigating social tension. Instead, the following steps are necessary:

• Fundamental revision of social policy
• Development of programs for raising wages and expanding employment
• Comprehensive measures to increase financial literacy
• Introduction of new regulatory mechanisms for the consumer lending sector

Without these systemic reforms, the number of non-performing loans and the specific weight of consumer loans will continue to grow, deepening the existing socio-economic problems.

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