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How Troublesome is the Size of the State Debt?

According to the latest indicators, Georgia’s state debts hit 17.539 billion GEL. This signifies obligation per capita in Georgia constitutes about 4700 GEL. If we exclude pensioners, socially vulnerable citizens and underage children, who do not pay taxes, then the liability per taxpayer will be about 9341 GEL, which is added the averaged weighed interest rate of 2.27% and its averaged weighed maturity is 22 years. Naturally, state debts are paid from the state budget, while taxes are key sources for replenishing the state budget.

Economic Nature of State Debts

The state debt is one of the important components for management of finances. Debts are mainly taken for funding budget plans and they enable Government to avoid suspension of various investments projects, growth in budget deficit, growth in tax rates, which would make negative effect on implementation of various social projects.

If the Government manages to spend loans reasonably and efficiently, economic growth is stimulated. In other case, if the state debts are managed inefficiently, the country may be led to economic crisis. Therefore, reasonable management of state debts is one of the key components for stable economic development.

The Economic Liberty Act determines that the state debt must not exceed 60% of the total GDP, however, there are a lot of countries worldwide, where state debts considerably exceed GDP, for example, the USA, Japan, Italy, Portugal, Greece and so on. However, when the country is solvent and its economy is developed, growth in internal and external liabilities cannot create any problems, because similar countries have already overcome such challenges as corruption, bureaucracy, the level of competence in government structures. Moreover, these countries have high-developed corporate culture.

Georgia’s state debts in 2018 constituted 44.6% in total GDP. The averaged size of Georgia’s state debt from 2004 to 2017 is 36% in GDP. The figure made up 44.6% in 2017, which is the highest indicator over the past 10 years, while the lowest figure was recorded in 2007 – 21.55%. The averaged state debt in EU countries totaled 81.60% in GDP in 2017. From 2002 to 2017, the state debt size in relation to GDP totaled 72.31% on average. The highest figure was recorded in 2014 – 86.50% and the lowest one was registered in 2007 – 57.5%. Among EU countries, the highest state debt in GDP was recorded in Italy (131.8%), Greece (178.6%) and Spain (98.3%), which amid the 2007-2008 global shocks, became one of the key factors  provoking economic crisis in these countries.

Despite the average annual indicator of growth in total foreign debts in GDP exceeds the averaged size of economic growth in the same period (3.4%), the indebtedness of the private business companies is employed for business development. Secondly, both the government and private corporations have long-term debts. Growing external debts within recommended limit should not be considered as negative macro factor.

On the contrary, developing economies like Georgia need to attract loans to fund investment projects. As a result, the existing current account deficit may become a source for higher growth, reduction in unemployment, stimulation of exports and making savings. In reality, neither external state debts nor external debts of the private sector comprises high risk-factors for Georgian economy. High dependence on external debts grows sensitivity to external shocks, but the alternative consists in developing the stock market.

State Debts Structure

The state debt consists of external and internal debts. The external debt balance is 13.789 billion GEL, which is 79% in total state debt. The majority of the mentioned crediting resources has been attracted from multilateral and bilateral donors and partner countries for funding priority infrastructural projects. The external state debt portfolio is preferential and mainly consists of long-term loans – the portfolio’s averaged weighed contractual maturity is 22 years, while the  averaged weighed maturity before payment is about 8.8 years and the averaged weighed interest rate on the state external debt is 2.27%.

As to multilateral creditors, Georgia owes major debts to the World Bank – 5.1 billion GEL, Asian Development Bank – 3.2 billion GEL and European Investment Bank – 1.59 billion GEL. As to bilateral creditors, Georgia owes major loan to Germany – 1.008 billion GEL, France – 653 000 GEL and Japan – 590 000 GEL.

As to internal debts, the highest ratio is recorded for Treasury Bonds issued by Ministry of Finance. As a result of the mentioned issuance, the Government’s obligations constituted 2.767 million GEL. Commercial banks are key buyers of Treasury Bonds and this signifies the Government’s internal debts comprise mainly liabilities before commercial banks.

Shota Gulbani, President of Association of Young Financiers and Businessmen