On 12 December 2014, during the presentation of the state budget project at a plenary session of the Parliament of Georgia, Nodar Khaduri declared that Georgia’s state debt does not pose a danger for the macroeconomic stability of the country. He also added that Georgia has one of the lowest debtsin terms of percentage and ranked only after Estonia, Azerbaijan and Russia.

FactCheck

verified the accuracy of the statement.

Georgia’s state debt is GEL 10,393 billion in total. The foreign debt constitutes GEL 7,827 million and domestic debt equals GEL 2,566 million. In the 2014 period, state debt increased by GEL 1,010 million. Calculations are that domestic debt increased by GEL 517 million whilst foreign debt increased by GEL 493 million.

According to the state budget plan for 2015, the government plans to borrow an additional GEL 1,610 million. Approximately GEL 600 million will be attracted from domestic sources and GEL 1,010 million will be borrowed from foreign sources.

To analyse the expediency of the state debt, its structure is far more important than the volume of the debt. Of importance, therefore, are the sources from which the state borrows money and how these financial resources are spent. The state accumulates both domestic and foreign debt in order to fund the budget deficit. Before 2012, the budget deficit was mostly funded through money borrowed abroad (see Graph 1) but in 2013, 40% of the total budget deficit was funded through domestic borrowings. Developing countries are discouraged from funding their budget deficits through domestic debt as it makes the state a competitor of the private sector by consuming the credit resources available in the country. The share of money lent to the state, in the total amount of loans issued by commercial banks in 2014, was 32% whilst in 2012 that number was only 6%.

Graph 1:

Sources to Fund the Budget Deficit in GEL million

Source: Ministry of Finance of Georgia

Interest rate fluctuations and changes in currency exchange rates also have an impact upon the burden of the foreign debt. According to the Ministry of Finance of Georgia, 72% of the total foreign debt is borrowed at fixed interest rates which reduces the negative impact of interest rate fluctuation. However, there are no safeguards against the fluctuation of the currency exchange rate.

It is interesting to analyse how the borrowed money is spent. With this aim in mind, we need to analyse how the budget expenditures are divided (see Table 1). In 2012 and 2013, the operative balance of the budget was positive and, therefore, the government did not have to borrow in order to fund the current expenses (that does not include the funding of infrastructural projects). In 2014, the deficit of the operative balance was GEL 45.5 million. Therefore, current expenses were funded through borrowing.

Infrastructure expenditures dropped in the period of 2012-2014, however the accumulated state debt increased. Part of the debt was spent on infrastructural projects and part of it was spent to buy financial actives.

Table 1:

State Budget Expenditures

GEL million	2010	2011	2012	2013	2014	2015
Operative Balance	-44.9	618.5	549	293.8	-45.5	84.5
Increase of Non-Financial Actives	1,020	1,039	729	768	617	853
Increase of Financial Actives	334	430	377	283	272	597
Increase of State Debt	1,447	735	748	738	1,570	1,610

Source: Ministry of Finance of Georgia

Georgia’s total state debt should not exceed 60% of the total volume of the Gross Domestic Product of the country as foreseen by the Economic Liberty Act.

The International Monetary Fund recommends that developing countries maintain a 50% debt to GDP ratio. In 2014, Georgia’s debt to GDP ratio was 35.6% with calculations showing that it will reach 36.3% this year.

The Minister is wrong to assert that Georgia has one of the lowest debt to GDP ratios after Estonia, Azerbaijan and Russia. He did not make a clarification in his statement as to what group of states he used for the comparison. FactCheck studied several rankings. According to the International Monetary Fund, Georgia, with its 32% debt to GDP ratio,^[1] is ranked 61^st in the world, 9^th among members of the Commonwealth of Independent States and 11^th

in the wider region of Eastern Europe and Central Asia. Therefore, apart from the countries named by the Minister, Georgia is outperformed by other countries as well.

Table 2:

Countries According to Debt to GDP Ratio

	Countries of Eastern Europe and Central Asia			Countries with Developed Economies
1	Uzbekistan	8.6%	1	Estonia	10.3%	1
2	Estonia	10.2%	2	Luxembourg	24.2%	2
3	Kazakhstan	13.7%	3	Norway	29.5%	3
4	Russia	15.7%	4	Australia	30.6%	4
5	Turkmenistan	15.8%	5	Georgia	33.9%	5
6	Azerbaijan	15.9%	6			6
7	Bulgaria	25.2%				7
8	Moldova	25.4%				8
9	Tajikistan	28.8%				9
10	Turkey	33.6%
11	Georgia	33.9%

Source: International Monetary Fund

Conclusion

Georgia’s total debt to GDP ratio is calculated to be 36.3% in 2015 which is allowed by the Economic Liberty Act and is within the limits recommended by the International Monetary Fund. It must be added that the slow economic growth rates of 2013-2014, decreased exports and the depreciated GEL contribute to the growth of the state debt which might be a threat for the country’s economic stability in the future. The fact that the state debt rose by GEL 1.3 billion in 2013-2014 and now constitutes 35.6% of the GDP, instead of the previous 34.8%, needs to be mentioned as well.

The other part of the Minister’s statement, that Georgia has the lowest debt after Estonia, Azerbaijan and Russia, is not accurate. There are 60 other countries in the world which have lower debt to GDP ratios than Georgia. Georgia occupies the 9^th position among members of the CIS and is ranked 11^th

in the region of Eastern Europe and Central Asia.

Considering the abovementioned information, Nodar Khaduri’s statement: "Georgia has one of the lowest debts in terms of percentage. Only Estonia, Azerbaijan and Russia are before us," is HALF TRUE.