Government debt as an important factor for the economy growth (on the example of Georgia after 2000-s)

Abstract

Loan and debt – are the most important economic categories of market economy. By means of a selected loan, the resources of the economy and its individual segments are reconciled, on a principle of equilibrium, there are transfer of excessive resources to those areas and segments of the economy where their defi cits are observed. As a result, economic processes, growth dynamism and, ultimately, the well-being of the entire society will accelerate. As a rule, borrowed money from the state debt creates additional fi nancial resources, mainly covering the budget defi cit, improving municipal and road infrastructure, energy sector development, etc. Private sector loans serve to expand relevant business activity. Overall, both forms of lending – public and private –if they are eff ectively used, have a positive impact on the country’s economy, its individual sectors or regions, on macroeconomic growth and ultimately on the welfare of the population. Despite the widespread assumption, the growth of Georgia’s economy over the past two decades exceeds the growth dynamics of public debt. If the debt-to-GDP ratio was 66.7 percent in 2000, despite the fact, that currently Lari is devalued, and the large number of state debts (more than 4/5) present foreign debt, it doesn’t exceed 45 percent. This share of public debt isoriginally exogenous (foreign). The role of international fi nancial institutions and leading states in the institutional reforms and economic development of our country is invaluable. At the same time, thanks to the growth of the Georgian economy and the development of the banking sector, it is possible to mobilize the country’s internal resources in the form of domestic debt. In general, fi nancial and economic system of the modern world is built on the principles that it is not important the size of the debt, but the ability to repay it. Wealthy countries and their entities conduct their activities largely by credits.- Low interest rates on loans, a stable and predictable business environment, enables them to meet their current needs in the shortest possible time and with minimal losses. In developed market economy contries, in comparison with Georgia it is about 2.5 times lower (Georgia on average- 7.2%). But this principle also implies strict adherence to therepayment terms of the debts owed. As countries diff er in size, population and economic strength, they can only be compared against public debt by two criteria: A) The debt-to-GDP ratio of the country; B) The largest debt per capita population. Georgia’s public debt per capita at the end of 2018 reached to 5.0 thousand GEL and their volume increased by 5.4 times in the last two decades (2018 year% to 2000 = 543.7%). Taken into the consideration that the country’s nominal GDP was growing faster than the state debts, the latter’s ratio to the country’s economy decreased from 67.7 percent in 2000 to 45.1 percent in 2018, though Georgia has had periods in nearly two decades when the mentioned ratio was much lower (see Table below). The ratio of public debt according to developed countries is much higher, for which, as a rule, the ratio of state debt to the country’s annual economy is signifi cantly higher. The ratio of state debts to GDP in the developed countries was four times more than the same index of the post-Soviet countries. In year 2018 in comparison with the year 2000 Georgia’s gross domestic product (GDP) increased by 6.8 times in GEL and by 5.6 times in US dollars. At the same time, state debt increased: by 4.5 times in GEL denominated and by 3.5 times denominated in US dollars (by 5.4 times and by 4.2 times per capita, respectively). Predominant growth of state debt per capita in comparison with the increase of total debt is driven by a sharp 17.7 percent decline of Georgian population over this period. Of course, the economies of these countries are much larger and stronger than Georgia, but they are far ahead by debt burden per capita than by the produced GDP. Therefore, to determine the real burden of the debt, its value is compared with the country’s main macroeconomic indicator –to gross domestic product. By this fi gure, Georgia is ranked 36th place out of 188 countries in the world (110% of GDP), „somewhere„ between Slovenia and Bhutan. For mobilizing additional fi nancial resources by help of foreign and domestic debts, Georgiangovernment prefers foreign debt–because of the big amount they can get. The lenders for such loans are international fi nancial institutions (IMF, World Bank, European Investment Bank, European Bank for Reconstruction and Development, Asian Development Bank, etc.) or specifi c countries (US, Germany, Japan, Kuwait, Turkey, Kazakhstan, Azerbaijan, etc.). According to the latest data, 73.7% of foreign loans come from international fi nancial institutions, 17.0% from other countries and 9.2% from securities (so-called Eurobonds). The average contractual deadline of all external debt is 22.2 years, with an average preferential period (ie, the time when the debt is not covered) – 8.1 years, with the interest rate (2.20%) it is close to the infl ation rate of developed countries. For example, infl ation in the US from the past 18 years in the 21st century, it has been above 2.2% during the nine years. The 5% of GDP is considered to be as the marginal indicator of public debt coverage (currently by the data 2019it is around 2.2% in Georgia). By 2021, when the most „exotic„ foreign debt in the most recent history of Georgia must be covered–so calledEurobonds ( 500 million US dollars), the ratio of external debt coverage to state budget revenues will eventually double and reach 16.5% instead of 8.5% that was in year 2018. The Government of Georgia has issued 6- and 12-month Treasury Bills, 2-, 5- and 10-year Treasury Bonds. The annual average interest rate was 8.3% at the end of 2018, which is almost 3.8 times higher than the average annual interest rate on external debt (2.20%). Because of this in 2018, despite the relatively low share (less than 1/5) in total government debts, almost half (47.0%) of total debt payment was made on domestic debt service. Both foreign and domestic debt growth is projected to increase in the coming years due to the latter’s faster growth (external debt volume will increase by 56.9% in 2023 in comparison with the year 2016, while domestic debt will increase by 103.3%. As a result the share of external debt in the whole state debt, will maintain a leading role, though its share will be somewhat reduced –from 79.1 percent of the year 2016 to 74.8 percent by the year 2023).