On 7 May 2015, whilst discussing the government’s programme, the Minister of Finance of Georgia, Nodar Khaduri, said that the deficit spending of the state budget during the previous five months (December, January, February, March and April) did not affect the amount of money in circulation and the exchange rate of GEL. He also pointed out that there was a proficient spending from the state budget in this period.
FactCheckattempted to find out whether or not the state budget spending for the last five months caused GEL to depreciate.
GEL started to depreciate from November 2014. The depreciation of our national currency was mainly due to the decreased influx of USD and the decrease in exports, money transfers and revenues from tourism. The deficient state budget also facilitated the depreciation of GEL. It should be further noted that the expectations of the public influenced the exchange rate of GEL in the short run as well. If the expectations towards economic processes are negative, they cause the national currency to depreciate whilst we have a converse effect in the case of positive expectations.
The state budget is deficient when the state spends more money than it receives in the form of revenues. The budget deficit is financed from the savings (money saved by the state in the previous years) and by using domestic and external loans. Hence, the budget deficit increases the amount of money in the economy.
FactCheck wroteabout the GEL 264 million deficit spending of the state budget and its negative influence upon the exchange rate of GEL earlier in the year as well.
The overall state budget balance (which is considered as a budget deficit by Georgian law) was indeed proficient in the first quarter of 2015 (January to March). The overall balance amounted to GEL 144 million. The positive balance was mainly due to the 104.3% implementation of the revenue plans and the 97% implementation of the spending part of the budget. The overall balance was deficient by GEL 115 million in April and, as a result, the January to April positive balance decreased to GEL 29 million.
However, if we want to find out whether or not the state budget took more money out of the budget than it spent, we should look into the deficit by its traditional meaning which includes the changes in financial assets (excluding the savings) and not the overall state budget balance. The state budget was not deficient in the first quarter of 2015 even by its traditional meaning. The budget surplus amounted to GEL 73 million. However, the deficit in traditional terms amounted to GEL 126 million in April which put the state budget in a GEL 53 million deficit at the end of the January-April period.
The four-month state budget deficit is not a large enough sum to have influenced the exchange rate of GEL; however, there is another important point herein; namely, the distribution of the deficit by months. January and March saw proficient spending by GEL 39 million and GEL 160 million, respectively, whilst there was a deficit spending in February and April by GEL 125 million and GEL 126 million, respectively. In addition, the deficit in February and April was mainly covered at the expense of decreasing the savings. Savings decreased by GEL 25 million in February and GEL 88 million in April. The deposits of the government in the National Bank of Georgia decreased by GEL 138 million in February and GEL 156 million in April. All of this means that the deficit spending of the budget in the given months facilitated the growth of the amount of GEL in the economy. However, budget spending is not a sole factor which determines the amount of GEL in circulation. Hence, due to taking money from other sources the amount of GEL in the economy (M2 aggregate) increased by just GEL 39 million in February and GEL 81 million in April. In total, the amount of GEL in the economy decreased by 345 million in 2015.
The influence of the state budget on the exchange rate of GEL does not just manifest itself in whether or not the budget spending was deficient. Spending money from the state budget increases the domestic demand of the country which, on the one hand, is a positive occurrence for the economy; however, given the fact that 70% of the money spent on consumption in Georgia goes to imported goods and services, budget spending encourages the growth of imports. Decreasing imports is essential for the stability of GEL. The policies of the National Bank of Georgia are aimed at decreasing the amount of money in the economy which lessens the domestic demand and, therefore, imports as well. Hence, today’s budgetary policy is in collision with the monetary policy and the goal of stabilising the exchange rate of GEL.
In order to stabilise the exchange rate of GEL, members of the Cabinet announced at the end of February that a policy of tightening belts would be employed and the spending part of the budget would be revised with the aim of its decrease. Three months have passed since then and budget spending has not yet beenlowered. The decrease of state budget spending and the deficit was mainly due to the expectations of the decrease of budget revenues and the growth of the deficit and was not aimed at stabilising the exchange rate of GEL. Unplanned revenues to the budget (for example, the revenues from selling licenses for using the radio frequency spectrum amounted to GEL 45 million), an unexpectedly high rate of inflation and the depreciated GEL increased the budget revenues and hence, the government changed its mind on lowering spending.
Another channel by which the state budget influences the exchange rate of GEL is the stream of foreign currency connected with the budget. On the one hand, the state budget attracts foreign currency in the form of grants and loans whilst on the other hand, it repays the external loans of the previous years which are a source of outflow of foreign currency.
A total of GEL 44.6 million in grants and GEL 110 million in loans were to be attracted by the state budget in the first quarter of 2015. The 2015 state budget was planned on the GEL exchange rate of 1.8. Hence, the initially planned amount of grants was USD 25 million and USD 61 million for credits. A total of GEL 58 million in grants (131% implementation) and GEL 81 million in loans (74% implementation) were attracted by the state budget in the first quarter of 2015. Given the fact that the average exchange rate of GEL with regard to USD amounted to 2.07, a total of USD 28 million in grants (112% of the initial plan) and USD 40 million in loans (65% of the initial plan) have been transferred. The government failed to use about USD 20 million in loans. The plan for servicing the external debt has been implemented by 100% and the transfers amounted to USD 63 million. As of April 2015, the overall amount of attracted grants and loans equalled USD 92 million and a total of USD 73 million was spent on servicing the external debt. As we can see, the state budget attracted more foreign currency than it spent; however, the plan to use up the external loans is being implemented with certain setbacks. In the case of the full implementation of the plan, our country could have additionally attracted tens of millions of dollars.
The National Bank of Georgia is often criticised for the depreciation of GEL. Namely, the major complaint is that the National Bank should have conducted a stricter monetary policy, including a decrease in refinancing loans. Refinancing loans are those loans taken from the National Bank of Georgia by commercial banks and which are aimed at providing them with short-term liquidity. Among other instruments, commercial banks can use state (treasury) bonds in order to obtain refinancing loans. Hence, the amount of domestic debt taken by the state by issuing the state bonds also has a certain influence upon the amount of refinancing loans. In that way, the state borrowed about GEL 600 million in 2014 and plans to borrow the same amount in 2015 as well. The amount of domestic debt attracted using state bonds reached GEL 1.55 billion at the end of April 2015. Therefore, the necessity of refinancing loans will be lowered by decreasing the amount of domestic debt. The lowering of the domestic debt has other positive results as well; that is, it facilitates a decrease in interest rates on loans and boosts fiscal stability.
In general, if we assess the country’s fiscal policy it becomes evident that it is not characterised by stability. The budget plans were being implemented with certain setbacks both in 2013 and 2014 and a large amount of money was being spent at the end of each year which was a major factor for the depreciation of GEL in 2013 and one of the factors in 2014. The 2015 state budget is planned on 5% economic growth. The growth of the first quarter of the year reached just 3.2%. International organisations have lowered their economic growth forecasts for Georgia to 2%. Despite this, the Government of Georgia has not changed the Law on Budget as of yet. In fact, it appears at this stage that spending more money and facilitating economic growth is more of a priority for the government than the stability of GEL. This kind of policy contains significant risks. In the case of the currency crisis continuing, the stimulating effect of spending from the state budget will probably fail to outweigh the negative effects of such a crisis. In this case, the country might fall into recession which means a shrinking economy and a decrease in jobs.
The 2015 state budget was planned on a high amount of deficit from the very start. The amount of the planned deficit is GEL 1.2 billion (3% of the GDP). The spending part of the budget (running costs and financial assets) was implemented by 96.6% in the first quarter of 2015. Given these rates, spending at the end of the year will once again be more than was initially planned. This is the period when Georgia’s revenues from tourism decrease and the sharp growth of the amount of GEL in the economy poses significant threats to the stability of its exchange rate.
It should be noted, however, that the stability of the exchange rate of GEL is not the responsibility of the Ministry of Finance of Georgia or the Government of Georgia, in general. However, fiscal policies can have a significant influence upon the exchange rate of the national currency.
Conclusion
The state budget deficit amounted to GEL 125 million and GEL 126 million in February and April 2015, respectively. The deficit was partly due to the usage of the budget deposits which increases the amount of money in circulation. The state budget had a total of a GEL 53 million deficit from January to April 2015.
The government has not yet begun fulfilling its promise to decrease administrative spending by 12%. Budget spending encourages import which negatively influences the exchange rate of GEL. Furthermore, conducting a fiscal policy aimed at encouraging demand as the National Bank of Georgia tightens its monetary policy to lower overall demand (and imports as well) is quite contradictory. A more sensible fiscal policy at this stage would be to encourage businesses by lessening regulations and lowering taxes.
The state budget attracted about USD 92 million from January to April 2015 and spent USD 73 million in servicing the external debt. However, the external loan debt of the first quarter of 2015 was implemented by just 74%. About USD 20 million less money was attracted due to this shortfall.
In general, Georgia’s fiscal policy is characterised by instability, both in the terms of the implementation of plans and uneven spending as well as in terms of the budget deficit. The deficit is mainly financed using domestic loans. The growth of the domestic debt, on the other hand, is one of the reasons for the growth of the refinancing loans.
FactCheck concludes that the statement of the Minister of Finance of Georgia that the current fiscal policy has no negative influence upon the exchange rate of GEL is MOSTLY FALSE.
