On 30 September 2015, at the session of the Parliament of Georgia, a member of the United National Movement, Zurab Melikishvili, stated that the government debt has increased by more than 3 billion in the last three years. The domestic debt, which has a high interest rate and at the same time hampers the development of business, has also increased significantly.

verified the accuracy of the MP’s statement.

As of 31 August 2015, Georgia’s total government debt was GEL 12.7 billion. In 2012, Georgia’s government debt stood at GEL 9.6 billion. This means that in the last three years, Georgia’s government debt has increased by GEL 3.6 billion.

The government debt consists of foreign and domestic debts. At the present moment, 23% (GEL 2.9 billion) of Georgia’s total government debt is domestic debt whilst 77% (GEL 9.8 billion) is foreign debt.

 Georgia’s Domestic and Foreign Debts in GEL Million

The significant increase in the government debt in the last few years has been caused by the depreciation of GEL and the growth of the domestic debt. As the foreign debt is in foreign currency, the depreciation of GEL causes the growth of GEL denominated foreign debt. If we take a look at the changes in the foreign debt in USD we will see that on 30 September 2012 the foreign debt was USD 4.3 billion whilst on 31 August 2015 it was USD 4.2 billion. The decrease in the debt was caused by the decision of the National Bank of Georgia to pay a significant portion of its debt. As of 30 September 2012, the debt of the National Bank of Georgia was USD 429 million whilst at the present moment that number equals USD 28 million. At the same time, the Government of Georgia’s foreign debt has increased by USD 240 million. Consequently, due to the depreciation of GEL, the foreign debt (denominated in GEL) increased by GEL 2.6 billion (in September 2012, the USD to GEL exchange rate was 1 to 1.66 whilst nowadays it is 1 to 2.4).

If the growth of the foreign debt is largely caused by the depreciation of GEL, the growth of the domestic debt (it is in GEL) is caused by the taking of new debts. Of the total domestic debt (GEL 2.9 billion), GEL 2.2 billion is a debt taken by selling government bonds whilst GEL 700 million is a so-called historical debt which was accumulated throughout the 1990s. The Government of Georgia started to take domestic debts in 2009 when the global economic crisis resulted in a widening of the budget deficit. The borrowing pace has been on the decline in the following years. The new government has significantly increased the volume of borrowing since 2013 and took GEL 1 billion of new debt in total.

Domestic Borrowing

The interest rates for domestic debt have always been higher than the interest rates for foreign debt because the amount of foreign funds attracted by Georgia is largely assistance. The average annual interest rate for foreign debt is 2% whilst the interest rate for domestic debt has been fluctuating from 4% to 14% (see Graph 2) in the last years, depending upon the duration of the loan. Against the backdrop of the depreciation of GEL and rising inflation, interest rates for domestic debt have registered a significant growth throughout 2015 and have almost doubled.

 Government Bond Yields (%)

The Government of Georgia justifies the domestic borrowing with the aim of gradually decreasing its dependency upon foreign funding. Additionally, government representatives assert that a deficit budget spurs economic growth. This approach is known in economic theory as Keynesianism which means the increase of government spending to artificially boost domestic demand and, therefore, facilitate production. However, it is also known that this approach is only effective in the short-term perspective whilst economic growth in the long-term perspective can only happen in the case of growing investments, technological development and the upgrading of employee qualification. Additionally, if domestic borrowing results in an increased amount of money in circulation (especially if a country has a low economic growth) this will give a negative impact upon the prices of production and the exchange rate. Moreover, domestic borrowing increases demand upon credit resources which, all things being equal, causes a surge of interest rates and limits the borrowing opportunities for the private sector. That was the case in the last few months when the interest rates for domestic borrowing increased significantly. In January-August 2015, the amount of loans issued by Georgia’s commercial banks increased by GEL 476 million. Of these, the Government of Georgia has borrowed GEL 305 million (64%).

However, it seems that at least at the present moment, the Government of Georgia has acknowledged that domestic borrowing has had a negative impact upon the GEL exchange rate. Therefore, it was decided to drop the amount of domestic borrowing by GEL 100 million (instead of GEL 600 million, the Government of Georgia will borrow GEL 500 million) this year whilst according to the 2016 budget project the government will borrow GEL 200 million.

When we analyse the volume of the government debt and its weight, it is necessary to look at the relative indicators instead of the nominal volume of the debt. The indicator of the weight of the debt shows the debt to GDP ratio. The bigger a country’s economy (GDP) is, the larger volume of debt it can serve. The law in Georgia regulates that the debt to GDP ratio should not exceed 60%. Georgia’s government debt has not yet reached the 60% mark. However, due to the increase in the domestic debt and the depreciation of GEL, the government debt has been increasing rapidly (see Graph 3). As of August 2015, Georgia’s debt to GDP ratio was 42% whilst at the end of 2015 (if GEL does not depreciate any more) it will reach 43%.

 Government of Georgia Debt (GEL billion)

Georgia’s total government debt has increased by GEL 3.6 billion in the last three years. Of this, GEL 1 billion was borrowed as a domestic debt whilst GEL 2.6 billion is due to the growth of the foreign debt. The growth of the GEL denominated foreign debt was caused by the depreciation of GEL. The USD denominated debt remains practically the same.

The indicator of the weight of the government debt has increased significantly. In the last three years, the debt to GDP ratio increased by seven percentage points and reached 42%.

The interest rates for the domestic debt have increased considerably in 2015. The interest rates for the domestic debt are approximately seven times higher as compared to the interest rates for the foreign debt. Additionally, domestic borrowing has a negative impact upon prices, the GEL exchange rate and the interest rates for GEL denominated loans. The Government of Georgia has acknowledged this fact and decreased the planned amount of domestic borrowing by GEL 100 million whilst according to the project of the 2016 state budget, domestic borrowing will be decreased even further by GEL 300 million for the next year.