The impact of military expenditure on external debt in Armenia

Abstract

The paper explores the impact of military expenditure on external debt in Armenia using time series for 1994-2020. The purpose of this study was to verify the initial hypothesis that the main factor in the rise of Armenia’s external debt is the increase in military spending directed at paying for the import of military products. The study was conducted using Johansen’s cointegration and Granger’s causality tests. The results of Johansen’s cointegration test showed that there are long-term interdependencies between military expenditure and external debt, as well as between trade balance and external debt; meanwhile the long-term interdependence between non-military expenditures and external debt was not found. The results of Granger’s causality test showed that the military expenditure caused an increase in external debt with a two-year time lag, and a similar causal relationship was also found between the current account balance and external debt. But more remarkable is the fact that the current account balance also caused a change in military expenditure, while the reverse causality has not been established.