Irakli Gharibashvili: “Since 2020, the government debt to the GDP ratio dropped from 60% to 38%.”

Verdict: FactCheck concludes that Irakli Gharibashvili’s statement is HALF TRUE.

Resume: Government debt is measured by two parameters – these are the absolute indicator in numbers and the debt to the GDP ratio. The second parameter is more important since the service of one and the same amount of debt which could be a great burden for Georgia could be insignificant for China, for example.

In 2022, the government debt to the GDP ratio reached 60.2% which decreased to 49.7% in 2021 and to a further 39.8% in 2022. Literally speaking, the Prime Minister is right, although there is one significant circumstance which substantially alters the context.

The year 2020 was an exception. In 2011-2019, the government debt to the GDP ratio fluctuated within the margins of 28%-40%. In 2020, Georgia’s economy contracted by 6.8% with the government simultaneously taking additional loans to cope with the pandemic and the economic crisis alongside a sharp depreciation of GEL.

In 2021, the volume of the government debt did not change significantly (it increased by a mere 0.5% - GEL 137 million). However, the debt to the GDP ratio decreased significantly by 10.5 percentage points. The reason for this was economic growth, including the recovery of the previously stalled economy. This tendency also continued to persist in 2022.

Most countries ended 2020 with a record economic downturn and experienced record high economic growth in 2021. If the absolute figure of the debt were kept unchanged, the debt to the GDP ratio would have increased first and decreased afterwards.

The reduction of the government debt was further accelerated by GEL appreciation since the debt value in GEL is affected by the exchange rate used to convert the foreign debt since foreign debt is denominated in foreign currency. In turn, one of the reasons for GEL appreciation was the increased migration and cash flow from Russia.

Analysis

On 15 September 2023, the Prime Minister of Georgia, Irakli Gharibashvili, spoke about the trends of the reduction of the government debt at the session of the Government of Georgia. In particular, he stated: (from 10:08): “Government debt has been reduced. Two years ago, the government debt to the GDP ratio was above 60%. We started this process very robustly, we started the reduction process and the government debt has been lowered to almost 38%.”

If we understand the statement literally, “two years ago” said in 2023 means the reference is made to 2021. However, as the current year is not yet over and it is impossible to say what the debt to the GDP ratio would be at the end of 2023 and also because the debt to the GDP ratio exceeded 60% in 2020, Irakli Gharibashvili most likely meant 2020 instead of 2021. Therefore, FactCheck verified the Prime Minister's statement under such an assumption.

Monetarily, if we do not count individual exceptions, the government's debt increases every year but this is not necessarily a bad thing. It is important, however, that the country can service its debt without any problems. If we take the example of an individual who has a GEL 5,000 salary, it is acceptable for him to spend GEL 2,000 per month to cover a loan whilst the same is technically impossible for a person whose salary is GEL 1,000. Moreover, for a person with a low income, the limit of the loan repayment amount is even lower in percentage. Content-wise, there is a similar approach in regard to countries. Japan and Singapore can service a larger debt vis-à-vis their economies both in terms of the amount and the percentage as compared to Georgia or Moldova, for example.

As of 31 December 2012, the government debt was GEL 7.852 billion which constituted 28.8% of the GDP. Prior to the pandemic, the absolute figure of the debt increased by 154% to GEL 19.957 billion in 2019, although the growth amounted to merely 11.6% in terms of the economy and the debt to the GDP ratio increased by 40.4%. Growth has not been equal as the debt to the GDP ratio reached 40.3% as early as in 2016.

The 2020 budget was planned on an estimated 5% economic growth rate, although in fact it decreased by 6.8% as well as tax revenues also decreasing. In order to pay obligations, cover medical expenses and disburse compensations for those affected by the COVID regulation, it was necessary to borrow additional sums. The foreign debt increased by USD 1.670 billion to USD 7.162 billion whilst internal debt increased by GEL 2 billion to GEL 6.2 billion. The currency depreciation happened on top of the growth of the nominal debt. In 2019, the GEL to the USD average exchange rate was 2.84 and it was 3.14 in 2020. Since 79% of the debt was denominated in foreign currency, the GEL depreciation further contributed to the debt growth. In total, the government debt reached GEL 29.668 billion – some 60.2% of the GDP as of 31 December 2020.

Graph 1: Government Debt in Absolute Figures and Government Debt to GDP Ratio

Source: Ministry of Finance of Georgia

The Economic Liberty Act which was adopted in 2011, aiming to provide guarantees of economic freedom to the population, imposes a number of restrictions on the government, including a debt limit. It is prohibited that the government debt to the GDP ratio exceed 60%. However, this organic law also allows for two exceptions: the declaration of a state of emergency or martial law, and a two percent decrease in the economic growth rate for two consecutive quarters compared to the same quarters of the previous year. Since the economy decreased and a state of emergency was declared in 2020, the law was not violated.

In 2021, most of the COVID-regulations were lifted and the economy which had been artificially paused continued operation with the GDP growth hitting 10.5%. There was no need for additional loans, the debt denominated in foreign currency increased by USD 575 million whilst the debt in the national currency decreased by GEL 363 million. This trend continued in 2022 and the GDP increased by 10.1%. This time growth was significantly affected by migration from Russia as cash flows jumped up by 400%. In 2021, the government to the GDP ratio decreased first to 49.7% and then to a further 39.8% in 2022. In 2022, foreign currency denominated loans increased by USD 180 million and the national currency denominated debt rose by GEL 1.331 billion. However, the total debt decreased by GEL 1.244 billion to GEL 28.561 billion because of the change in the currency rate. In 2021, the USD average value was GEL 3.22 and in 2022 it dropped to 2.91.

Theoretically, based on hard numbers alone, the Prime Minister’s statement is true. The government debt to the GDP ratio has indeed decreased from 60% to 40% from 2020 to 2022. However, failure to take the context into account changes the reality and shows a false picture. Any comparison with 2020, irrespective of the GDP growth, the government debt to the GDP ratio or tourism revenues is manipulative. In 2020, the economy shrank, the nominal debt figure increased and there was a depreciation of the national currency. Under these circumstances, the growth of the debt to the GDP ratio was natural. Prior to 2020, the government debt to the GDP ratio has never been above 40.4%, let alone 60% either under the Georgian Dream or the United National Movement’s rule. If we take 2019 as a base period, it will turn out that the government debt has basically not changed and the 40.4% decreased to 39.8%. Given the provided figures and the incorrectly named base period, FactCheck concludes that Irakli Gharibashvili’s statement is HALF TRUE.