This paper contains a brief evaluation and recommendations prepared by Transparency International Georgia concerning the draft law on the 2022 State Budget that the Government of Georgia (GoG) has submitted to the Parliament. The draft considered here is an initial version of the budget which will be returned to the government for amendments twice before it is finally approved. Since the COVID-19 pandemic complicates the assessment of economic trends, it cannot be ruled out that, in December, the Parliament will approve a budget that considerably differs from the current version.

Key Findings

• According to the draft budget, the Georgian economy will grow by 9.5% in 2021 and by 6% in 2022. Since the economy grew by 12% in January-August, maintaining the annual growth rate of 9.5% seems realistic. The achievement of a 6% economic growth next year will first and foremost depend on stopping the pandemic or decreasing the number of infected, which can be achieved by increasing the pace of vaccination. Otherwise, the government may have to impose restrictions on economic activities, which will impede economic growth;
• The tentative Georgian Lari to US Dollar exchange rate used for 2022 is 3.12. The expected annual inflation rate is 2.5%.
• In 2022, the state budget receipts will amount to GEL 18.7bn, which exceeds the budget receipts in 2021 by GEL 751m (4.2%). The increase is conditioned by a GEL 2bn increase in tax revenues;
• The estimated amount of grants to be received in 2022 is decreased by GEL 198m compared to 2021 and amounts to GEL 189m. In the 2022 draft budget, grants are estimated at the lowest amount in the past eight years, both in terms of the total amount of grants and grants to be received from international organizations, including the EU;
• The expenditures of the 2022 state budget will amount to GEL 18.4bn, which is GEL 1.1bn (7.2%) less than the expenditures of the 2021 budget. The decrease is conditioned by lower debt repayment indicators;
• The largest line of expenditures – budget expenses – will decrease by GEL 84m and amount to GEL 13.8m. The decrease is mainly conditioned by the reduction of pandemic-related programme funding. This especially concerns subsidies and social programmes which are not envisaged in the 2022 budget;
• The allocation for remuneration is increased by GEL 17m and amounts to the total of GEL 1.65bn, while the number of employees of budgetary organizations is increased by 107 people and totals 112,712. The number of employees will be increased the most in common courts – by 79 people. Among the ministries, the staff of the Ministry for Environmental Protection and Agriculture will increase the most – by 53 people; the Ministry of Education and Science – by 23 people; while the Ministry of Justice – by 22 people;
• From 1 January 2022, the pension of pensioners aged under 70 years old will increase by GEL 20 and amount to GEL 260, while the pension of pensioners aged 70 and older will increase by GEL 25 and amount to GEL 300. The increase of pensions causes a GEL 285m increase in budget expenses;
• Three ministries will see the highest increase in their budgets: the Ministry of Regional Development and Infrastructure – by GEL 387m, the Ministry of Education and Science – by GEL 113m, the Ministry of Economy and Sustainable Development – by GEL 98m;
• Two ministries will experience the biggest cuts in their budgets: the Ministry of Internally Displaced Persons from Occupied Territories, Labour, Health and Social Affairs – by GEL 151m and the Ministry of Environmental Protection and Agriculture – by GEL 52m. In case of the Ministry of Internally Displaced Persons from Occupied Territories, Labour, Health and Social Affairs, the decrease is caused by the cuts in funding for the programmes related to the pandemic. The budget of the Ministry of Environmental Protection and Agriculture is cut due to the decrease of subsidy programmes;
• The budgetary programmes related to the pandemic are cut by GEL 758m and amount to GEL 500m. GEL 310m are cut from the healthcare costs, GEL 250m from social assistance, GEL 177m from subsidies to economic activities, and GEL 20m from funding quarantine and other measures;
• The budget deficit will be GEL 2.6bn (4% of GDP). In the 2021 budget, this indicator is 6.6% of GDP;
• In 2022, the government will borrow up to GEL 4.4bn but, at the same time, will repay GEL 1.2bn of previous debt. Out of the GEL 4.4bn of new debt, GEL 1.3bn is domestic and GEL 3.1bn is external debt. GEL 1.2bn of the new external loans are budget support, while GEL 1.9bn are long-term investment loans.
• This year, Georgia, due to its refusal to carry out judicial reforms, failed to receive a low-interest loan of EUR 75m (approximately GEL 270m) from the EU. The GoG could have deposited this amount and used it in 2022. As a result, it would have taken fewer high-interest loans this year. For example, the annual interest rate on the domestic loans taken in recent months exceeds 9%;
• By the end of 2022, the public debt will amount to GEL 33.7bn which will constitute 52.1% of estimated GDP;
• GEL 160m is allocated for the funding of projects selected within the framework of the Pilot Integrated Regional Development Programme; however, the annex to the programme budget does not contain a proper explanation as to what projects will be funded. Neither does it contain sub-programmes;
• The expected outcomes and indicators of the programmes envisaged by the budget are, once again, provided as an annex and are not included into the text of the law on the budget. It has been one of the recommendations of the State Audit Office for the past several years that the expected outcomes and indicators of programmes must be made part of the law.

Recommendations

• It is a welcome development that the budget expenses and the budget deficit are decreasing, however, given the pace of vaccination, a two-fold reduction of the amount allocated for the treatment of COVID-19 patients in 2022 seems unrealistic. There is a high probability that hundreds of millions of lari more will be needed in this area in reality. To reduce fiscal risks, this circumstance must be envisaged in the budget;
• Also, given a low pace of vaccination, the 6% economic growth rate estimated for 2022 is quite optimistic. If the estimated growth is not achieved, the budget deficit will increase. Correspondingly, the operating balance should be higher than the one provided in the current budget draft;
• Despite the fact that the public debt to GDP ratio will decrease from 60% to 52%, the country’s fiscal stability requires a further decrease of the debt burden. When the debt is close to 60% of GDP, even a mild macroeconomic shock might cause it to exceed the acceptable 60% threshold. Especially given that the probability of a repeat macroeconomic shock in the conditions of a pandemic is high;
• The expected outcomes and indicators of the programmes envisaged by the budget, which are provided as an annex, must become part of the main text of the Law on State Budget.

1. Macroeconomic Environment

According to the draft 2022 State Budget of Georgia, the government forecasts a 9.5% economic growth for 2021. Since the economy grew by 12% in January-August, maintaining the annual growth rate of 9.5% seems realistic. The high economic growth recorded this year is conditioned by relaxing restrictions imposed on economic activities due to the pandemic, rapid restoration of exports, and an increase in budget expenses. In general, achieving economic growth after a crisis year becomes easier since the economy is returning to its pre-crisis state.

The government estimates a 6% economic growth for 2022. Achieving a 6% economic growth next year will be much more difficult than the 9.5% estimated for this year. The key challenge for economic growth in Georgia next year will be increasing the share of vaccinated population, restoring the inflow of foreign investments and significantly increasing the number of tourists. If the share of vaccinated population does not increase markedly, the government might have to impose certain restrictions which will slow down economic growth next year.

According to the pessimistic scenario provided by the government in the annex to the budget, Georgia’s economy will grow by 9% in 2021 and by 4.1% in 2022.

The tentative Georgian Lari to US Dollar exchange rate used for 2022 is 3.12. The expected annual inflation rate is 2.5.

2. State Budget Receipts

In 2022, the Georgian State Budget receipts will amount to GEL 18.7bn, which exceeds the 2021 budget receipts by GEL 751m (4.2%).

The biggest line of receipts – revenues – will amount to GEL 13.9bn in 2022, which is GEL 1.7bn more than the estimated revenues for 2021.

The revenues include tax revenues, grants and other revenues. An increase in total revenues is conditioned by a GEL 2bn increase in tax revenues. These include an expected GEL 857m increase in the amount received from income tax, a GEL 613m increase from VAT, and a GEL 408m increase from profit tax. Due to the economic crisis caused by the pandemic, temporary tax relief measures were in place in the first half of 2021. The tax income of GEL 13.1 estimated for 2022 will be achieved by terminating temporary tax relief measures and as a result of economic growth.

The amount of grants to be received is decreased by GEL 198m and is set at GEL 189m. The amount of grants to be received from international organisations is decreased (by GEL 120m) as well as the amount of grants to be received from the central government’s LEPL and N(N)LEs^[5] (by GEL 80m).^[6] The grants allocated by the EU are cut the most. The GoG will receive GEL 119m less in grants from the EU in 2022 compared to 2021; the total amount to be received is GEL 86m. It is also noteworthy that, in the 2022 draft budget, grants are at the lowest amount in the past eight years, both in terms of the total amount of grants and grants to be received from international organisations, including the EU (Figure 1).

Source of data: Ministry of Finance

*Estimated indicators are provided for 2021 and 2022

In 2022, the Other Revenues budget line is decreased by GEL 130m. The decrease is conditioned by the reduction of revenues from state property. The revenues from interest and rent are decreased by GEL 50m each, while the dividends from the profits of enterprises in which the state is a shareholder are decreased by GEL 44m.

It is planned to receive GEL 200m from privatisation (disposal of non-financial assets), which is GEL 150m less than was planned for 2021. However, only GEL 162m was received by the budget in January-September of this year from privatisation.

The disposal of financial assets, which implies repayment of previously issued loans, will bring GEL 150m to the budget, which is GEL 60m less than the indicator planned for 2021.

Source of data: Ministry of Finance

3. Budget Expenditures^[7]

The State Budget expenditures in 2022 will amount to GEL 18.4bn, which is GEL 1.1bn (7.2%) less than the budget expenditures in 2021.

The largest line of expenditures – expenses – is cut by GEL 84m. The reduction is caused by the termination or decreased funding for the programmes related to the pandemic. This mainly concerns subsidies and social programmes which are envisaged by the 2021 budget but are not included in the 2022 budget.

The allocation for remuneration is increased by GEL 17m and amounts to the total of GEL 1.65bn. The allocations for remuneration are increased by GEL 6.2m for the Ministry of Defence, by GEL 5.8m for the Ministry of Internal Affairs, by GEL 5m for common courts, by GEL 4.9m for the Ministry of Justice, by GEL 4.4m for the Ministry of Culture, Sport and Youth Affairs, and by GEL 2.7m for the Ministry of Internally Displaced Persons from Occupied Territories, Labour, Health and Social Affairs. The biggest cuts in remuneration in the amount of GEL 22m will affect the Central Election Commission as, unlike 2021, no elections are scheduled in 2022.

The total number of those employed by the budgetary organisations will be increased by 107 people and reach 112,712. The number of common court employees will be increased the most – by 79 people. The number of employees at the Ministry of Environmental Protection and Agriculture will be increased by 53 people, specifically, these additions concern the staff of the programme of establishment and management of protected areas system. The staff of the State Inspector’s Service will be increased by 25 employees. The number of employees of the Ministry of Education and Science will be increased by 23 people and 22 new employees will join the Ministry of Justice. Eight employees will be added to the Administration of the President of Georgia. The staff of the Ministry of Economy and Sustainable Development will decrease by 16 employees and that of the Ministry of Culture, Sport and Youth Affairs – by 15.

The goods and services procurement expenses are decreased by GEL 255m and amount to the total of GEL 1.5bn. The cuts are conditioned by a decrease in the procurement of goods and services related to the pandemic.

The largest amount – GEL 5.8bn – are allocated for social expenses, which include pensions, healthcare and social assistance. Compared to 2021, this amount is increased by GEL 149m.

The second largest amount after the social expenses – GEL 3.7bn – is allocated for capital projects, which is GEL 422m more than the 2021 allocation. The capital expenses in the amount of GEL 3.7bn include GEL 735m of capital transfers allocated for local governments. Some 34% of capital expenses are financed by donors.

The expenditures also include the principal amount of loans taken by the state and the interest it pays on them, which will amount to GEL 2bn in 2022. This includes GEL 1.2bn of principal amount and GEL 0.8bn of interest. Compared to 2021, the government is going to spend GEL 1.5bn less on repayment of principal amount and interest payments in 2022. Precisely this circumstance conditions a decrease of the total expenditures by GEL 1.1bn. Such a big difference is caused by the refinancing of Euro-obligations. The government repaid USD 500m-worth of Euro-obligations and, at the same time, issued new obligations. The repayment of obligations was reflected in decreased expenditures.

Servicing public debt is quite a heavy burden for the State Budget. For example, servicing the principal and interest on loans exceeds the funding allocated in the budget for education and is twice as expensive as defense costs.

Source of data: Ministry of Finance

4. Budget Deficit and Public Debt

In 2022, the total negative budget balance^[8] will amount to GEL 2.6bn, while in 2021, it is estimated at GEL 3.8bn. The ratio to GDP of the total negative budget balance estimated for 2022 is 4%. This indicator for 2021 is 6.6%.

It is noteworthy that the Organic Law of Georgia on Economic Freedom implies that the 3% ceiling of the budget deficit is the negative total budget balance (deficit, according to the Budget Code) of the consolidated budget^[9] rather than the state budget deficit. The total negative budget balance in 2022 will be GEL 2.8bn, which stands at 4.3% of the projected GDP and exceeds the acceptable threshold.

Since the total budget balance of the consolidated budget exceeds 3% of GDP, the government is under the obligation to present to the Parliament a plan of restoring the parameters determined by the law. The duration of the parameter restoration plan must not be more than three years. Given that the budget deficit exceeded the established parameters starting from 2020, it must be restored to the maximum of the 3% threshold by 2023. The budget deficit reduction plan is presented in the document of the key economic and financial indicators, according to which the consolidated budget deficit in 2023 will stand at -2.8% of GDP.

In 2022, the GoG will borrow GEL 4.4bn but will, at the same time, repay GEL 1.2bn of previous debt. As a result, the amount of public debt will increase by GEL 3.2bn. Of the newly borrowed GEL 4.4bn, domestic loans make up GEL 1.3bn, while GEL 3.1bn is a foreign debt. GEL 1.2bn of the new external loans are budget support, while GEL 1.9bn are long-term investment loans.

Interest rates on domestic loans are much higher than on external loans. For example, the annual interest rate on treasury obligations issued in recent months is over 9%. At the same time, because of the refusal to carry out reforms in the judicial system, Georgia failed to receive a low-interest loan of EUR 75m (approximately GEL 270m) from the EU.^[10] The government could have deposited this amount and used it in 2022. As a result, it would have borrowed less in high interest loans and would have increased the country’s foreign exchange reserves.

By late 2022, Georgia’s public debt will amount to GEL 33.7bn, which stands at 52.1% of estimated GDP. As of 31 August 2021, Georgia’s public debt is GEL 29.1bn, which stands at approximately 52% of GDP

Despite the fact that the strengthening of the Georgian Lari and the reduction of the budget deficit in the second half of this year^[11] has reduced the public debt to GDP ratio from 60% to 52%, it is our opinion that the debt burden needs to be reduced further in order to achieve fiscal stability in the country. When the debt is close to 60% of GDP, even a mild macroeconomic shock might cause it to exceed the 60% threshold allowed by the Organic Law of Georgia on Economic Freedom. Especially given that the probability of a repeat macroeconomic shock in the conditions of a pandemic is high, be that an increase of budget deficit, depreciation of the lari, or a combined shock when both parameters worsen simultaneously. This is precisely the kind of a macroeconomic shock that Georgia experienced between March 2020 and March 2021.

Source of data: Ministry of Finance

*Estimated indicators are provided for 2021 and 2022

5. Agencies and Programmes Which Will Experience Significant Changes in Their Funding

According to the 2022 budget, the funding of the Ministry of Regional Development and Infrastructure will increase the most compared to 2021 – by GEL 387m. This is mainly caused by an increase in the expenses for the construction of high-speed motorways and rehabilitation of municipal infrastructure. Additional GEL 347m will be spent on the construction of motorways, amounting to the total of GEL 1.2bn. As for the rehabilitation of municipal infrastructure, GEL 130m more will be spent on this, amounting to the total of GEL 464m. There are significant cuts in the allocations for the construction and rehabilitation of school infrastructure: GEL 89m less is allocated compared to last year, the total amount that will be spent on it is GEL 75m.

The funding for the projects selected within the framework of the Pilot Integrated Regional Development Programme in municipalities is increased by GEL 130m and amounts to the total of GEL 160m. This programme is implemented by the Finance Ministry. Four pilot regions have been selected: Kakheti, Imereti, Guria and Racha-Lechkhumi-Kvemo Svaneti, where investments will be made into public infrastructure, tourism, production, human capital and improving the quality of public service provision.

The budget of the Ministry of Education and Science is increased by GEL 113m and amounts to GEL 1.6bn. The increase mainly concerns schools. The salaries of schoolteachers who have a certain status will be increased by GEL 100 starting from January. The total funding of schools will amount to GEL 975m.

The budget of the Ministry of Economy and Sustainable Development is increased by GEL 98m and amount to GEL 741m. The funding of LEPL National Agency of State Property, which is part of the Ministry’s system, is increased by GEL 149m. The funding of LEPL Produce in Georgia sub-programme to support entrepreneurship development is increased by GEL 81m and amounts to GEL 270m. The funding of the ministry’s coronavirus-related quarantine and economic support measures is cut by GEL 186m.

The budget of the Ministry of Internal Affairs is increased by GEL 20m and amounts to GEL 800m. The number of the ministry employees is not increased, however, the allocation for their remuneration is increased by GEL 5.8m.

The budgetary funding of the Georgian Public Broadcaster (GPB) is increased by GEL 12.6m, amounting to GEL 81.8m. The increase in the GPB budget is in line with the Law on Broadcasting, according to which the budgetary funding of GPB should amount to at least 0.14% of the country’s GDP. Based on the 2021 GDP, in 2022, GPB should receive at least GEL 81.8m.

Two ministries will experience the biggest cuts in their budgets: the Ministry of Internally Displaced Persons from Occupied Territories, Labour, Health and Social Affairs – by GEL 151m and the Ministry of Environmental Protection and Agriculture – by GEL 52m.

The expenses of the Ministry of Internally Displaced Persons from Occupied Territories, Labour, Health and Social Affairs are decreased on account of termination or reduction of the programmes related to the pandemic. Such programmes as GEL 200-300 assistance to newly unemployed, covering the utility costs, additional monetary assistance to socially vulnerable persons and so on are not envisaged in 2022. In 2021, GEL 250m was spent on this kind of programmes. The amount allocated for the management of diseases caused by the novel coronavirus (treatment of COVID-19 patients) is decreased by GEL 310m; the total of GEL 500m will be spent for this purpose. The expenses for the programme of rehabilitation and equipment of medical institutions are cut by GEL 27m.

At the same time, the allocation for pensions from the budget of the Ministry of Internally Displaced Persons from Occupied Territories, Labour, Health and Social Affairs is increased by GEL 285m. Starting from 1 January 2022, the pension of pensioners aged under 70 years old will increase by GEL 20 and amount GEL 260, while the pension of pensioners aged 70 and older will increase by GEL 25 and amount to GEL 300. The amount allocated for targeted social assistance to the population increases by GEL 92m. The increase is caused by an increase in assistance to socially vulnerable children from GEL 50 to GEL 100 from 1 July 2021 and by an increase of the number of recipients of subsistence aid by 126,000 in the past year.

The Ministry of Environmental Protection and Agriculture has its budget cut by GEL 52m. The funding for the programme of viticulture and winemaking development, which mainly implies subsidising the price of grapes and the state purchasing grapes, is cut by GEL 68m. This year, GEL 153m is being spent on this. The programme of preferential agrocredits is cut by GEL 32m, however, the costs remain high at GEL 121m. The co-funding of agricultural mechanisation from this ministry budget also increases by GEL 40m: up to 4,000 beneficiaries will receive 30-35% co-funding from the state for purchasing agricultural equipment.

The funding of budgetary programmes related to the pandemic is cut by GEL 758m in 2022 compared to 2021. Healthcare funding cuts account for GEL 310m of this amount. GEL 250m is cut from social assistance, GEL 177m from subsidising economic activities, and GEL 20m from the funding of quarantine and other measures.

As Georgia’s economy in 2021-2022 will grow and it is unlikely that the country will experience a serious economic crisis, we believe that it is logical to terminate economic subsidy programmes and social assistance related to the pandemic. However, a severe reduction by GEL 310m of the programme of  treatment of COVID-19 patients appears unrealistic. In 2021, GEL 810m is allocated to this end and GEL 834m is already spent as of 20 October. By the end of the year, these costs are likely to exceed GEL 1bn. Given the existing pace of vaccination, it is unlikely that the GEL 500m allocated for treating COVID-19 patients in 2022 will be sufficient, which represents a significant fiscal risk.

Source of data: Ministry of Finance

Similar to previous years, the expected outcomes and indicators of the programmes envisaged by the budget are once again provided in the annex to the budget and are not part of the text of the Law on the State Budget. For the past several years, one of the recommendations made by the State Audit Office of Georgia has been precisely to make the expected outcomes and indicators of programmes part of the document containing the law, which will strengthen a goal-oriented budgetary policy, instead of the current approach, whereby the main goal of the budgetary policy is to fulfil plans and fully utilise the allocated funds.