The researcher studies the Armenian experience of funding public budget deficit and the potential for borrowing more in the domestic market instead of borrowing internationally on commercial and concessional terms. Originally the intention was only to reveal the potential that the Armenian domestic financial market has from public debt management standpoint (how much can the Government of Armenia borrow in the domestic market). However, as the financial and economic crisis unfolded (as of the end of the third quarter of 2009 Armenian GDP decline reached 18.5 percent), the government faced problems with collecting revenues, it became obvious that it will need to borrow more to support expenditures and stimulate the economy at crisis times.

The study revealed that there are huge volumes of savings and excess reserves in the hands of population and in financial system – comparable to amounts borrowed internationally – that are not channeled neither to government securities market nor to financial sector or to real economy. Moreover, there is a huge potential to increase long term savings if the government of Armenia goes ahead with pension and insurance reforms (the implementation of pension reform was postponed twice from January 1, 2009 to January 1, 2011 although the legal act necessary to start it are mostly drafted.

Finally, the fellow presented recommendations on how to improve domestic debt management capabilities and rely more on domestic financial market. Policy options include develop debt management strategy, implementing pension system reforms, broadening relations with primary dealers, broadening the role of monetary authority in the secondary market of government securities and standardizing the instruments and issuance calendar, ensuring that the behavior of the issuer is transparent but the issuance program is volatile.