The methodology of accounting of the public debt fails to comply with international standards
Issues related to state-owned enterprises and the increase of the public debt have aroused the interest of a certain segment of the public for a long time. A lot of organizations, including TI Georgia, have already written about the shortcomings in the database of state-owned enterprises, their financial reporting, and the legislation regulating these enterprises, as well as about political influences on the management of the enterprises. As for the public debt, its volume and management, as well as the rates of its annual growth, have recently assumed particular importance for a certain segment of the public.
In the present blog post, we will look at the public debt, its volume, and significant shortcomings in how it is defined and accounted with regard to liabilities of state-owned enterprises.
As we have found out in our study, the definition of the public debt used in Georgia does not correspond with the definition adopted by international financial institutions. According to the definition of these institutions, the public debt includes credit liabilities of state-owned enterprises, which are included in the debt as implicit contingent liabilities. These are not liabilities that the State has taken by an agreement, but if a state-owned enterprise becomes insolvent or defaults on its liabilities, the State will have to cover them. The debts of state-owned enterprises are not included in Georgia’s public debt. Whereas the public debt excluding the debts of state-owned enterprises amounts to 42% of the GDP, the same figure including the debts of such enterprises already equals 54% of the GDP, which already exceeds some critical limits of the public debt indicators.
The risk of the State covering the debts of state-owned enterprises increases further against the background of a lot of questions and problems related to state-owned enterprises, such as follows: 38% of 65 state-owned enterprises are risky and their loan liabilities amount to more than 9% of the GDP; it is impossible to obtain financial information on more than half of the enterprises; the law does not set the criteria and goals of founding state-owned enterprises; there is no unified system for ensuring transparency and accountability of state-owned enterprises; etc.
As a result, if we include the debts of state-owned enterprises in the public debt, the indicators of the public debt will increase considerably, which might, to some extent, decrease the amounts of loans allocated to the country by creditors. And this can be regarded as the main reason why the Government of Georgia is unwilling to include the debts of state-owned enterprises in the public debt.