Georgia’s foreign debt is growing – a run down of who owes what

In 2019, Georgia’s foreign debt grew by $516 million, bringing the total to $18.8 billion, or 62 billion GEL. In 2020, because of the pandemic, the state decided to shoulder an additional $3 billion to meet the challenge of the coronavirus and mitigate the consequences. 

What does this large amount of foreign debt mean for the country’s economy? 

Below, JAMnews answers the most common questions about the country’s foreign debt.

What is national debt and what does it include?

National debt is the amount the government borrows to cover all necessary expenses or budget deficits.

There are two types of national debt — domestic and foreign.

Domestic debt is when money is borrowed from sources within the country, for instance, the pension fund, which can use the money that goes into the fund to buy state bonds. The government pays interest on the bonds and spends the money as needed.

What is foreign debt?

Aside from domestic debt, the government can borrow money from other countries or international organizations, for example, the International Monetary Fund.

Foreign debt includes not only debt accrued by the government, but also that of the residents of Georgia, in both the public and private sectors.

That is, foreign debt is the money borrowed from other countries by both the public and private sectors.

Public sector foreign debt includes the debts of the state, national bank and state companies. Private sector debt is the foreign debt of commercial banks and private companies.

► Of Georgia’s $18.8 billion in debt, $8.3 is from the public sector and $10.5 billion is from the private sector.

The public sector’s foreign debt can be broken down into the following:

The state has borrowed $6.2 billion

The national bank has borrowed $446 million

And state-owned companies have borrowed $1.7 billion. Among them, the biggest borrowers are the Georgian Railway with a debt of around $600 million and the Oil and Gas Corporation of around $300 million. 

As far as the private sector’s foreign debt, $4.4 billion is attributed to commercial banks, and $6.1 billion to other private companies.

What is the borrowed money spent on and why does this sum grow every year?

Both private and state-owned companies decide to take out new debts as needed. In the case of the government and the national bank, this need may arise due to the economic situation in the country and the budgetary expenditures.

The national bank’s foreign debt is mainly used to replenish dollar reserves, while the state uses the borrowed money to finance the budget deficit. That is, when the government has more budget expenditures than revenues, it borrows.

Foreign debt has increased by $516 million over the past year, as the country was significantly impacted by the coronavirus pandemic.

► From April-June alone, the debt increased by $435,000,000.

In the spring, the government announced that it had signed for an additional $3,000,000,000. By the end of the year, the government is expected to borrow $1,500,000,000 and the private sector—an additional $1,500,000,00.

Donors usually loan funds to the government for reforms and infrastructure projects.

The period during the coronavirus pandemic has been an exception, as the government has been forced to take out debt to cover increased social spending. Foreign debt is the main source of money going towards utilities payments for the citizens, financial aid for the unemployed, and payments of 200 lari (about $60) per child.

Which countries have loaned money to Georgia?

There is no information about which countries or companies Georgia’s private sector has borrowed from, but the Georgian government’s debts are public information.

► The state owes the most to the World Bank—up to $2,000,000,000.

After the World Bank, the government has the largest debt to the Asian Development Bank – $1.4 billion. 

Georgia owes the European Investment Bank $717 million and the IMF $210 million. 

Of states, Georgia owes the largest debt to France—$561 million. It owes $496 million  dollars to Germany, $214 million to Japan, $43 million to Russia.

How big is the burden of Georgia’s foreign debt?

If we want to determine how big the burden of this foreign debt is for the country’s economy,

we must look at the ratio of debt to GDP.

This ratio is a good indicator of what shape the government is in.

► As of June 30, 2020, Georgia’s foreign debt amounted to 115% of the country’s GDP. That is, the debt exceeded the volume of the economy by 1.15 times.

Nevertheless, in the opinion of international organizations, Georgia is not in danger of default (the official recognition that the country cannot pay its debts) and it is able to repay its debts.

There is no domestic or international regulation stipulating what the maximum percentage of GDP a country’s foreign debt can be. Overall, the World Bank estimates a country’s national debt becomes significant when it exceeds 77% of the annual GDP. However, it should be noted that not only Georgia, but also many other countries have passed this mark long ago.

There is a law in Georgia that sets the national debt ceiling at 60% of the GDP, but this law does not apply to private sector debt.

In addition to the ratio to GDP, the debt burden is also determined by how long a country has to pay it back.

The country may have a lot of debt, but payments are scheduled over decades

This is the case with Georgia.

► The maturity of Georgia’s debts ranges from 1 to 25 years. Including interest, Georgia pays about $1 billion in debt every quarter.

A billion dollars per quarter is a considerable amount, but Georgia borrows more money in order to cover these repayments.