On 23 July 2014, whilst discussing the Budget Implementation Report, the Parliamentary Minority MP, Zurab Japaridze, stated that the economic forecast concerning the external and domestic debts changed three times, worsening every time.

FactCheck

took interest in the domestic and external debts of the country and verified the accuracy of the aforementioned statement.

According to the data of the Ministry of Finance of Georgia, as of 31 December 2013, the public debt of Georgia was equal to GEL 9,313 million, the external debt constituting GEL 7,296 million and the domestic debt was at GEL 2,017 million. According to the budget approved at the beginning of 2013, the forecast index of public debt was as follows: the forecast index of the public debt of Georgia amounted to USD 4,747 million which was GEL 7,864 million whilst the expected amount of domestic debt was equal to GEL 2,120 million. The total forecast index of the public debt of 2014 amounted to GEL 9,984 million whilst the ratio of the public debt to the nominal GDP was 30.7%. It should also be pointed out that the expected growth of the nominal GDP was 12.4% whilst the expected real growth of GDP was equal to 6%.

Table 1: Forecast Index of Public Debt as of Beginning of 2013

External Debt (USD Million)	External Debt (GEL Million)	Domestic Debt (GEL Million)	Total Public Debt (GEL Million)	Net Increase in Liabilities (GEL Million)	External Debt to GDP	Domestic Debt to GDP	Public Debt to GDP
4,747	7,864	2,120	9,984	369	24.2%	6.5%	30.7%

Source: Ministry of Finance of Georgia

The 2014 budget project was first presented in September 2013. According to the document, the expected marginal amount of the external debt was equal to GEL 7,593 million whilst for domestic debt it amounted to GEL 2,384 million. The overall expected marginal amount of the public debt was equal to GEL 9,977 million. As for the changes in the liabilities, the net increase of the domestic debt was equal to GEL 400 million whilst the external debt was expected to grow by GEL 732 million. The overall expected net increase of the public debt amounted to GEL 1,132 million. In addition, the expected ratio of the public debt to nominal GDP was set at 32%, 24.4% of which was external and 7.7% domestic debt. It should also be pointed out that the GDP growth forecast of the beginning of 2013 changed and the expected growth of the nominal GDP amounted to 8.7% whilst the expected real growth of GDP was set at 5%.

The 2014 budget plan was presented for a second time in September 2013 and there were no changes in the public debt amount. The forecasts of both external and domestic debts remained the same. The third presentation was held in November 2013 and there were several changes in the public debt; namely, the expected net increase of liabilities was determined to be GEL 1,636 million, GEL 1,036 of which was external and GEL 600 million – domestic debt. The expected external debt of Georgia was GEL 7,826 million by the end of 2014 whilst domestic debt amounted to GEL 2,584 million which was more than the initial expected amount. The overall expected public debt by the end of 2014 was equal to GEL 10,410 million with no changes in the expected nominal growth of GDP and with the ratio of the public debt to nominal GDP amounting to 35.3%.

On 11 December 2013 the Government of Georgia adopted the law on the 2014 annual budget of Georgia and a document on the main data and directions of 2014-2017 of Georgia. The data and forecasts about the public debt presented in this document were similar to those of the budget plan presented in November 2013. The table below reflects the changes in the expected amounts of public debt in the 2014 annual budget plans.

Table 2: Changes in the Public Debt Forecast Index

Forecast (GEL Million)	Beginning of 2013	First Presentation	Second Presentation	Third Presentation	Approved Document
Net Increase of Liabilities	369	1,132	1,132	1,636	1,636
External	-	732	732	1,036	1,036
Domestic	-	400	400	600	600
Amount of Public Debt at the End of 2014	9,984	9,977	9,977	10,410	10,410
External	7,864	7,593	7,593	7,826	7,826
Domestic	2,120	2,384	2,384	2,584	2,584
Public Debt to Nominal GDP	30.7%	32%	32%	35%	35.3%

Source: Ministry of Finance of Georgia

As the table makes clear, the expected amounts of public debt change during 2013. The public debt growth is higher than initially expected. Hence, Mr Japaridze’s statement that the forecasts changed to the worse is true.

On 23 July 2014, a six-month implementation report of the 2014 annual budget was presented to the Parliament. According to the report, the public debt growth was lower than originally expected. The report said that the expected ratio of public debt to nominal GDP was 35.6% for 2014. It was 30.7% in 2013 and 35.3% according to the approved budget of 2014 which means that the forecast worsened yet another time. The forecast on the nominal and real growth of the GDP still remained the same.

Knowing only the amount and dynamics of the public debt is not enough to assess its influence upon the economy of the country. It is also necessary to know the amount of the public debt to the nominal GDP; that is, the ratio of the public debt growth to the GDP growth which is used for assessing the solvency of the country.

According to the International Monetary Fund (IMF), the ratio of the public debt to the nominal GDP must not exceed 50% for developing countries. This limitation also applies to Georgia as it is among the list of developing countries. In 2011 Georgia adopted the Law on the Economic Freedom of Georgia which provides for the main parameters of its economic stability. The law determines that the ratio of public debt to the nominal GDP must not exceed 60%.

The chart below depicts the dynamics of the ratio of Georgian public debt to the nominal GDP.

Chart 1: Public Debt to Nominal GDP (%) from 2003 to 2013 Source: Ministry of Finance of Georgia, National Statistics Office of Georgia. 2014*- 2014 Forecast

As the chart shows, the ratio of the public debt of Georgia to nominal GDP had been reducing since 2003. From 2008, however, it began to grow again which was partly due to the Eurobonds issued by the Government of Georgia. The ratio decreased again from 2010 and has been varying from 35% to 37% which fits within the limits of both the International Monetary Fund and the Law on the Economic Freedom of Georgia.

As for the domestic debt, its forecast also changed in 2014, increasing from GEL 400 million to GEL 600 million. It should be pointed out that according to the Law of Georgia on the Domestic Debt the funds received from the domestic debt are used to cover the budget deficit. The negative effect of the domestic debt is that it is mainly received from Georgian commercial banks, leaving lower resources for the private sector. Thus, the money which should have been spent on the development of the business sector is used to cover the budget deficit and this can possibly be assessed as an obstacle to the development of the economy. Hence, the part of the statement of the MP about the worsened forecasts of the domestic debt is also true. However, it should also be noted that the GEL 200 million of the 2014 domestic debt was allocated for financing the long-term credit sources for the commercial banks. FactCheck wrote

about this issue earlier in the year as well. According to the Ministry of Finance of Georgia, GEL 172.8 million has already been used to provide the commercial banks with long-term financial resources.

According to the budget plan of the first six months of 2014, the expected net increase of the financial liabilities was equal to GEL 350.5 million whilst the actual growth amounted to GEL 212.3 million. Accordingly, the implementation of the budget in the field of financial liability changes was 60.6%. The increase of the external and domestic debt was lower than initially planned. The growth of the domestic debt constituted 95% (GEL 346.7 million) of the initial plan whilst for the external debt it was 53% (GEL 147 million) of the original amount. It should be noted that the lower growth of the external debt means that the government could not implement all of the planned infrastructural projects.

As for the reduction of the liabilities, the result here is satisfactory as the actual reduction of the domestic liabilities constituted 84.8% of the plan whilst the reduction of external liabilities was 98.5%. This means that the country is successfully servicing its debts.

Conclusion

According to the forecast of the beginning of 2013, the total forecast index of the public debt of 2014 amounted to GEL 9,984 whilst the ratio of the public debt to the nominal GDP was 30.7%. These figures increased several times during 2013.

The overall expected marginal amount of the public debt was equal to GEL 9,977 million as of the first presentation of the 2014 budget. In addition, the expected ratio of the public debt to nominal GDP was set at 32%. The overall expected public debt by the end of 2014 was equal to GEL 10,410 million with the ratio of the public debt to nominal GDP amounting to 35.3%. The expected amount of the new loans increased from GEL 1,132 million to GEL 1,636 million. Hence, the MP’s statement that the forecasts changed to the worse is true.

In addition, according to the Budget Implementation Report, the growth of the financial liabilities in the first six months of 2014 was lower than initially planned. However, this reduction was mainly due to the reduction of the external debt. Given the fact that by increasing the domestic debt the state significantly reduces the financial resource for the private sector directing it for covering the budget deficit instead, we can say that the growth of the public debt has a negative influence upon the development of the Georgian economy.

FactCheck concludes that Zurab Japaridze’s statement: “We had two economic forecasts regarding the external and domestic debts. The first one was at the beginning of 2013 whilst another was at the beginning of 2014. Now we have a third one, following this report. These forecasts keep getting worse,” is TRUE.