On 5 November 2016, Georgian Dream member, Irakli Zarkua, stated: “In the previous years, the exchange rate of GEL with regard to USD varied from 1.67 to 1.68 and it was propped up by external debts, not the economy. We refused to use this faulty practice on purpose and one of the factors which determine the GEL exchange rate today is the fact that our government is actively repaying external debts. In 2012, the new government inherited external debts of over USD 14 billion and the exchange rate of GEL was strengthened by this money, not the Georgian economy.”
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A national currency’s exchange rate is formed as a result of simultaneous changes in numerous factors. Trade in goods and services, factor incomes and grants from abroad, foreign investments, external debt and repayment all influence a national currency’s exchange rate. At the same time, demand on national and foreign currencies as determined by the economic situation, the national currency’s supply volume, market actor expectations and so on also influence the exchange rate. Hence, explaining the exchange rate’s changes by taking any single factor is an incorrect approach.
A country’s external debt is the sum of the government and private sector’s external debts. As Chart 1 illustrates, the government’s external debt in 2012 was USD 4.25 billion whilst the overall external debt equaled USD 13.28 billion. According to the given structure of the debt, most of the financial burden was on the private sector. Hence, putting the blame for the overall amount of debt on the government is inappropriate.
Chart 1:
Georgia’s External Debt from 2010 to 2016 (USD Billion)
Source: National Bank of Georgia
According to the data of the first two quarters of 2016, Georgia’s overall external debt is USD 19 million less than it was at the end of 2015 and exceeds the amounts of the first two quarters of 2015 by USD 717 million.
The government’s debt, specifically, has increased by USD 298 million as compared to the first two quarters of 2015 and by USD 165 million as compared to the end of 2015. With regard to 2012, Georgia’s overall external debt has increased by USD 1.78 billion (13.39%) whilst the government’s external debt has increased by USD 304 million (7.16%).
The net currency flows connected to the government’s external debt, specifically (factual payments and transfers), which influence the formulation of the exchange rate are reflected in Table 1.
Table 1:
Net Financial Flows of the Government’s Debt (GEL Million)
| 2013 | 2014 | 2015 | 2016 Q II | |
| Overall State Debt | -402[1] | 271 | 474 | 23 |
| Government Debt | -7.8 | 394.1 | 522.5 | -4.8 |
As the table shows, the flows in terms of receiving and servicing the government’s debt from 2014 to the second quarter of 2016 are positive which means that more money was received than repaid. In the case of the government’s debt, specifically, the net flows in the first two quarters of 2016 are negative; however, the foreign currency equivalent of GEL 4.8 million is not the sum of money that could have caused the depreciation of GEL. It should be pointed out that the statistical data about the net flows in the third quarter of 2016 are not yet available. However, if we note that the government’s external debt in October was USD 4.45 billion (which is about USD 58 million more than in the second quarter) we can say that the difference between the government’s received and repaid debts from the end of June 2016 to October 2016 is about USD 58 million.
It should also be pointed out that the initial nine-month borrowing plan set out in the 2016 state budget has been implemented by just 60% and the shortfall is about USD 130 million. Receiving these sums of money would have a significant positive influence upon the GEL exchange rate.
As for the previous government’s tenure, the external debt started increasing sharply from 2008 which was mainly due to the Russia-Georgia war and the world financial crisis. The external debt increased by USD 5.6 billion from 2009 to 2012. Of this amount, USD 2.1 billion was the growth in the government’s external debt. In this period, external debts were definitely propping up the GEL exchange rate. However, is should also be noted that the growth of debts positively influences the exchange rate of the national currency today as well and the reason for the depreciation is not the repayment of the old debts but the decrease in exports, money transfers and the economic growth rate.
Conclusion
Several factors simultaneously influence the formation of the GEL exchange rate. Hence, taking only one of them to explain the changes in the exchange rate is inappropriate, even more so to put the responsibility for the overall state external debt upon the government. The overall external debt includes loans taken by the private sector, most of which are external deposits in local commercial banks and foreign direct investments in the form of loans, both of which have a positive influence upon our economy.
An important point to note is that Georgia borrowed USD 1.8 billion more than it repaid in the period from 2013 to 2016. Hence, in the past few years, the changes in external debt have had a positive influence upon the GEL exchange rate ̶ rather than negative ̶ and it cannot be seen as a factor contributing to the national currency’s depreciation. The depreciation of GEL is due to the decrease in exports, money transfers and the economic growth rate. Hence, FactCheck concludes that Irakli Zarkua’s statement is FALSE.[1] Determined by the National Bank of Georgia’s repaying external obligations
