Home / Economy / Internal Debt – More Expensive than External Debt

Internal Debt – More Expensive than External Debt

State Budget Pays 0.5 bln GEL to commercial banks for Serving debts. Georgia’s state debts account for 13.8bln GEL as of May 2017, including external debts total 11.2 bln GEL, while internal debts account for 2.5bln GEL.

It is worth noting that over the past years  state debts comply with both international and domestic standards, however  internal debts volume is growing at high paces. According to the 2016 indicators, state debts in relation to GDP accounts for 4.6%. Notice that under Liberty Act, top margin of this indicator is 60%.

State budget started borrowing money from domestic market at the end of the 20th century. As a rule, Government used to place very short-term securities (7, 14, 21, 28 and so on) and interest rates ranged from 300% to 400%. Naturally, this practice would be impossible in case of valuable competition. There are serious doubts that in that period state securities were one of the sources of corruption. At the same time, in that period, this instruments was put into practice to make the country experienced of issuance and trade in  securities.

In 2005 the Government decided to close this corruption segment and ceased issuing securities for a certain period. However, starting 2009, when economic crisis broke out worldwide, the Authorities faced a lack of financial resources and restored practice of taking internal debts through securities. Over the past years the volume of internal debts has been growing.

As a rule, state securities are less risky and they have high liquidity level. As a result, rating companies give highest evaluation to state securities. At the same time, in the countries with developed financial markets issuance of securities gives additional benefits to economy. However, in Georgia, where securities market does not exist in practice, only a small part of entrepreneurs have access to state-issued T-bills and bonds, to be precise, only commercial banks enjoy such opportunity. Consequently, annual guaranteed revenues received from state securities are deposited on accounts of commercial banks.

Starting August 2009 to July 2017 the Government has sold 3.176bln GEL T-bills (6-month and one-year) with averaged 7.7% yield. Averaged yield for 6-month securities is around 7%, while yield on one-year T-bills ranges from 4% to 14% over the past 8 years.

As to bonds, starting February 2010 up to the third quarter of 2017, T-bills of 2.764bln GEL of 1-10 year maturity period were sold and their averaged interest rate totaled 9.7%. It is worth noting that the bond’s coupon is paid every six months. Coupon rate on 2, 5 and 10-year state bonds ranges from 5.2% to 15.5% due to years.

In 2009-2017 (the first quarter), 5.94 billion GEL state securities were sold. As of June 1, 2017 state internal debts constituted 2.655bln GEL, of which 2.159bln GEL is recorded for T-bills. This signifies 3.78 billion GEL has been already paid from 5.94 billion GEL issued over the past 8 years.

As of June 1, 86% of sold state securities are owned by commercial banks, while the remaining 14% belong to National  Bank of Georgia (NBG), resident and nonresident bodies. In 2011-2016 averaged weighed interest rate on T-bills ranged from 7.6% to 11.6%.  This signifies the owner of state securities used to receive 8.6% yield over the past 6 years.

It is worth noting that the state budget spends more and more resources on serving state securities. For example, in 2010 only 15 million GEL was spent on this direction, while the state budget paid 150 million GEL in 2016. In 2010-2017 (only the first quarter) the state budget has paid 584.4 million GEL interest rates for serving bonds and obligations. As a result, 4/5 of these payments have gone to commercial banks, because 86% of these securities are owned by commercial banks. This signifies over the past 8 years commercial banks have received about 502 million GEL revenues through crediting the state budget. It is impossible to provide precise calculation  based on the divulged information. To provide precise estimations, we need information on what volume of securities was taken by this or that institution in this or that year and what the maturity period of those securities were.

Despite external debts interest rates are lower, the Authorities have been enlarging issuance volume year to year. In 2011-2016 averaged weighed yield on T-bills was 8.6%, while external debt interest rate was 2%. For example, in 2013 annual averaged weighed interest rate on external debts was 1.92%. As of 2016, this indicator slightly rose  to 2.03%. This signifies the state budget has to pay fourfold more money to serve internal debts.

Despite Georgia’s total state debt stays far away from the critical margin, the internal debt amount, which has grown in record volumes, raises many questions, especially, when serving internal debt is 4 times expensive as compared to external debts. However, we should take into account that external debts, as a rule, have their purpose. This signifies the Government cannot spend it due to its will, while internal debts are able to cover liabilities.

It should be also noted that the Georgian legislation blocks access to T-bills and bonds for ordinary citizens. Any deal is available only through commercial banks, where minimum amount is 50 000 GEL for initial offer and 1 000 GEL for the second offer. Therefore, 85% of the state budget loans are owned by commercial banks. This money is ejected from the economy. This signifies in other  equal conditions, commercial banks would credit the real sector through these funds, but when they have chance to receive annual guaranteed 7-14% benefits from the state, they prefer to lend money to the state budget, not private entrepreneurs. Moreover, because of undeveloped securities market, T-bills and bonds market are monopolized in practice by the banking sector.

By Merab Janiashvili
Economic Analyst
More by By Merab Janiashvili