Interest payments on government debt rose by 80 percent in the Eastern Europe and Central Asia region, but health care costs rose by just 14 percent. In the Eastern Europe and Central Asia region, development spending exceeds public debt payments Economic Development
Russia accounts for more than half of all government debt in the Eastern Europe and Central Asia region, according to a new report from the United Nations Conference on Trade and Development (UNCTAD). The national debt of the Russian Federation in 2022 amounted to $434 billion, and the total regional debt was $789 billion.
Between 2010 and 2022, the stock of public debt in Eastern Europe and Central Asia increased 2.5 times, increasing at 8 percent per year. At the same time, regional GDP grew over the same period by only 1.4 times. The fastest growth in debt was observed in Uzbekistan, but at the beginning of this period the country had a very low level of public debt.
In many countries, debt temporarily peaked in 2014 amid a significant deterioration in economic performance. After years of decline followed by relative stability, government debt began to rise rapidly again as the COVID-19 pandemic led to a significant increase in government spending.
War in Ukraine has created new spending needs and reduced revenues in countries directly affected by the conflict. But even if we exclude these factors, public debt continued to grow in the post-pandemic period, although at a slower pace. GDP
Such an important indicator as the ratio of a country’s public debt to its GDP increased sharply in 2020 due to the economic shock of the pandemic. This trend was reversed in 2021 and 2022, thanks to a combination of faster GDP growth, fiscal consolidation and, in some cases, currency appreciation.
In Armenia and Kyrgyzstan, public debt approached or even exceeded 60 percent of GDP during the pandemic. Despite the subsequent decline in debt, amid rapid economic growth and currency appreciation, the debt burden in these two countries remains elevated.
In Tajikistan, the public debt-to-GDP ratio peaked in 50 percent in 2020, but subsequently fell rapidly due to GDP growth, but the risk of a debt crisis is still assessed as high.
The war in Ukraine has led to a sharp deterioration in the country’s public finances as output plummeted and spending needs increased. The government debt-to-GDP ratio, which was less than 50 percent during the post-pandemic recovery, soared to 82 percent in 2022, double the level in 2010.
External debt
The increase in external public debt is closely related to the increase in total public debt across the region over the past decade. However, while in some countries, such as Belarus, Bosnia and Herzegovina and Georgia, the growth of external debt exceeded the increase in total debt over the period from 2010 to 2021, in the Russian Federation internal debt almost entirely accounted for the total increase in debt. Dependence on external debt is especially high in small countries in the region.
The pandemic was associated with a relatively small increase in external debt, given the difficulties in accessing external financing during this period. Overall, despite the recent decline, the median share of external debt as a share of total debt hovers around 70 percent. This large ratio means that countries in the region are highly exposed to currency fluctuations and external shocks. However, in 2022, exchange rate appreciation had a favorable impact on government debt ratios in some Caucasus and Central Asian countries.
Interest payments and development expenses
Despite the overall moderate burden of net interest payments relative to income, the growth of interest payments correlates unfavorably with the dynamics of development expenses. Thus, while interest payments increased by 80 percent between 2010 and 2021, health care costs increased by only 14 percent, and education costs decreased by 22 percent.
At the same time, total development expenses in the region remain at a level exceeding the volume of interest payments. Only in Armenia were health care costs lower than net interest payments in the period 2019-2021.
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