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Marina MuchiashviliZAMIRA SHONIA


The effectiveness of a fiscal policy is a major factor in determining macroeconomic performance of the country. The Georgian government has sought to use its taxation, spending and borrowing powers to manage the allocation of scare resources to achieve economic stability and growth.Despite this impressive goals, the results of the fiscal policy in our country are far from favorable. Georgia nowadays is facing serious problems in this sphere.

Decrease of the economic growth rates in Georgia and increased fiscal deficit and public debt (both foreign and internal) since 2012 year, especially in 2020 2021 years,  have made it actual to assess government debt sustainability in Georgia in medium and long terms.

Following the present level of the public debt of Georgia, the work considers theevaluation of the fiscal sustainability of the country and identification and control of macroeconomic and fiscal risks influencing the fiscal sustainability, as one of the main factor determining macroeconomic stability of the country.

The fiscal sustainability of the country is estimated by considering the following indicators:

  1. Change of the public debt /GDP ratio under the influence of different shocks.
  2. Public debt structure (in relation to foreign and domestic debt) and its dynamics.

The paper studies the impact of various factors on fiscal sustainability of Georgia.

Fiscal sustainability implies fiscal policy consistent with stability and growth. In general, fiscal sustainability is characterized low inflation, low real interest rate, high private sector investment and high real growth rates. In 2020-2021years our economy was characterized by high inflation, high real interest rate and low investments. So, these undermine fiscal sustainability of Georgia.

At present, the public debt of Georgia exceeds 32, 2 billion GEL. Since 2012 year to present, the public debt to GDP ratio increased from 30% to 51,1%. The significant increase of social expenditures and subsides were the main reasons of the increased budget deficits, which is not part of the economic growth oriented policy.

In order to insure the debt sustainability and economic growth in the long run, it is necessary to change the direction of the debt to GDP ratio trend and reduce the level of this indicator gradually. In addition, it is necessary to reduce this indicator to the level which allows keeping the conditions of creditability and liquidity of the country.

For MAC the main debt burden indicators are:

Government debt/GDP<60%.

Gross public sector financing requirements/GDP<15%.

External financing / GDP <20%

Foreign debt/ total debt<75%.

Annual change in the share of Short-term public debt at originammaturity1.5.

Fiscal sustainability is capability of the government to maintain its current expenditures and taxes in medium  and long term periods without creation of danger to payment capacity of the government, or without  denying its obligations or specific types of expenses(including pensions and other social expenses, health care, education , and others), considered by the budget.

Public debt is sustainable, when government can continue serving it without requiring an unrealistically large adjustment to its future revenues or expenses.

Public debt can be regarded as sustainable, when the primary balance needed to at least stabilize debt under the baseline sock scenario is economically feasible, such that the level of debt is consistent with an acceptably low rollover risk and with preserving potential growth at a satisfactory level (IMF, 2013).

In practice fiscal sustainability is assessed by checking whether debt is on a declining path while remaining below certain thresholds. Related concepts are solvency -the current debt stock isfully covered by the present discounted value of all expected future primary balances, and liquidity-ability to meet maturing obligations.

The statistical analysis of the debt sustainability of Georgia’s public debt   is based on the baseline scenario of MOF Georgia and assumption of a realistic macroeconomic shock tests, when one of macroeconomic or fiscal indicator worsen. Public debt sustainability is examined based on (IMF DSA) (4, 5, 6).

The analysis evidenced that despite the cocid-19, by the 2022 all indicators of the debt sustainability (public debt /GDP, Public debt/budget revenue, public debt export) are below thresholds.  Nevertheless, even according realistic scenario a shock tests indicate that debt sustainability is vulnerable to all shock tests. The analysis showed, in order to maintain low risk for debt sustainability, GDP growth rate should by higher than 5,5  %   in the medium term, and the budget deficit should be below 3%of GDP for the same period.

We must also note that in estimating the debt sustainability, the MAC DSA methodology consider the data only about the government debt and does not consider the information about the debt of corporations or legal entities of public law(LEPLs).However, in reality, LEPLs are corporations financed through the state budget. Consequently, the consideration of their debt in the public debt statistics will further increase the level of debt and will complicate ensuring the sustainability of the public debt.

When estimating the sustainability of the public debt of Georgia, the peculiarity of its structure should be considered too. The share  of foreign debt in government debt is 80% and is above the upper limit(75%) fixed by the IMF for Market Access Countries.

The analysis has made it clear that by 2021, such indicators of government debt sustainability as the government debt to GDP,government debtto the budget revenues, and public debt to export remain below the limits. Nevertheless, shock tests indicate that debt sustainability of the country is vulnerable to all kinds of shocks even according the baseline scenario. Without timely adjustment of fiscal policy, meaning using budgetary resources to finance predominantly the fields supporting the economic growth, such as education and science, targeted (rather than general)healthcare programsand infrastructural projects,  reducing the administration costs and subsidies, and identifying and managing fiscal risks, to finance debt obligations in medium-and long-term periods,the country may face the need for a significant reduction of budget expenditure (for example, in education, in social spare and others ).

Key words: Fiscal sustainability, Public debt sustainability, macroeconomic stability.