I.Executive Summary

• 6-month plans of the Receipts and Expenditure of the 2018 state budget have been fulfilled by 102.8% and 95.1%, respectively. Plans of Capital Expenses and Goods and Services were two categories of budget expenditure that had the lowest fulfillment rates;
• Receiving more revenues and spending less than planned led to reducing a budget deficit;
• Public debt to GDP ratio decreased from 44.7% to 41.1% that was stemmed from GDP growth and appreciation of GEL observed at the end of the previous year;
•  The following public institutions have the lowest rates of budget fulfillment:  the Government Administration (70%), the High Council of Justice (71%) and the Intelligence Service (73%). As for specific programs and subprograms, investment projects, especially energy and infrastructure projects, had the lowest fulfillment rates.  

II.Introduction

Fulfillment of state budget has become an interesting issue over last years. The history showed that a beginning of the year is characterized with low fulfillment rates. By the end of the year, certain legislative amendments are made to the budget and it manages to be fulfilled by having much higher expenses in the fourth quarter, compared to an average rate of the first three quarters. Increased fourth quarter spending leads to certain macroeconomic problems and bad spending practices, including speedy public procurement processes and frequent advance payments.

Therefore, it is important to pay proper attention to the fulfillment of the 6-month budget plan in order to avoid repeating the bad practices of the previous years.

Transparency International Georgia studied the basic features of the six-month progress report of the 2018 state budget and presented specific recommendations for remaining challenges. Taking these recommendations into account will make a budgetary policy more sustainable and effective. 

III.Budget Receipts^[1]

According to the Government forecasts, in 2018 nominal GDP of Georgia should grow by 8% (real GDP growth rate should be 4.5% and the inflation rate (GDP deflator) – 3.5%).

Preliminary data of the National Statistics Office of Georgia (GeoStat) shows that in the first half of this year real GDP grew by 5.7%, 1.2 percentage points faster than expected. In the first quarter of the year (second quarterly data has not published yet) GDP deflator stood at 4.3%, which is also higher than expected.

Due to a higher growth rate of nominal GDP, 2018 Georgia’s state budget received more money than expected. A 6-month plan of the Receipts was fulfilled by 102.8%, therefore, the state budget received additional GEL 152 million.

Source: Ministry of Finance of Georgia

A 6-month plan of Revenues was fulfilled by 105.5%, therefore, the state budget got GEL 249 more than expected. In addition, all subcategories of Revenues also had a surplus.

Source: Ministry of Finance of Georgia

Plans of all 5 tax revenues (except an excise tax) have been fulfilled with the surplus. If we take a percentage as a measurement unit, the imports tax revenues had the most significant surplus – 33%, if we focus on the nominal amount of money, the largest amount – GEL 116 million – came from Value-Added Tax (VAT). An excise tax revenues lacked GEL 21 million compared to the expected amount, the primary reason of which was a GEL 32 million decrease of revenues coming from imported cigarettes.

Source: State Treasury

The Grants’ plan was fulfilled by 130%, therefore, additional GEL 58 million went to the state budget. 70% of grants were received from international organizations, 18% - from other state governments, and 12% from Georgia’s central government’s LEPLs[2] and N(N)LEs[3]. 

126% fulfillment of Other Revenues’ plan was caused primarily of additional money coming from state-owned assets (interest, dividend), administrative duties and fines.

It was planned to get GEL 25 million through Disposal of Non-Financial Assets (privatization), however, it actually amounted to GEL 64 million, out of which GEL 59 million came from the selling of state-owned real estate.

GEL 37 million came from Decrease of Financial Assets, which is 113% fulfillment of a plan. GEL 36 million out of 37, was a returned loans.

An increase of Liabilities (public debt) - the last category of the Receipts – was fulfilled by 79%. The Government of Georgia took 12% (GEL 9 million) more domestic debt and 25% (GEL 146 million) less foreign debt than planned.  

There were two reasons of taking less foreign debt: 1. Due to a low pace of implementation of planned infrastructure projects, the Government could spend only 70% (GEL 108 million less) of money taken as concessional loans; 2. As the state budget got more money from revenues and disposal of non-financial assets, the Government decided to take only GEL 187 million (83% of the planned amount) instead of planned GEL 225 million as a loan for direct budgetary support.

IV.Budget Expenditure^[4]

In the reporting period, actual Expenditure of Georgia’s state budget was GEL 5.5 billion, which is 95.1% of the planned amount. Therefore, public institutions spent GEL 282 million less than expected.

Source: Ministry of Finance of Georgia

The Expenses - the largest category of the Expenditure – were fulfilled by 96.3%. Goods and Services – a subcategory of the Expenses – had the lowest fulfillment rate (90%). This subcategory includes purchasing of those goods and services that are necessary for daily work of public institutions (for instance, office equipment, furniture, fuel, etc.). The government could save GEL 62 million in this subcategory.

The plan of Remuneration of civil servants was fulfilled by 96.1% and saved GEL 27 million. In total, the Government could save GEL 89 million from administrative expenses.

Social Security expenses traditionally had the highest fulfillment rate (98.8%). It was not a surprise since this category includes such programs as Universal Healthcare, which, based on the practice of the previous years, usually, overspends the allocated money.

Source: Ministry of Finance of Georgia

The plan of Acquisition of Non-Financial Assets (also known as capital/infrastructure expenses) was fulfilled by 85.7% and GEL 98 million remained unspent.

The plan of Increase of Financial Assets (which mainly includes loans given from the state budget) was fulfilled by 89.3% and GEL 15 million remained unspent.

The last category of the Expenditure is Decrease of Liabilities that covers state liabilities coming from the loans taken in previous years. The plan of this category was fulfilled by 99.8%, thus GEL 348 million of debt (GEL 331 million foreign debt and GEL 17 million domestic debt) has been paid back.

V.Budget Deficit and Public Debt

GEL 315 million of the budget deficit was planned for the first half of the year. However, this number amounted to GEL 178 million. It was caused of the above-mentioned reasons – the plan of budget Receipts was fulfilled with the surplus (102.8%), while the plan of Expenditure was not fully accomplished (95.1%). Therefore, the state budget received more money and spent less than planned.

For this year the budget deficit is planned to be GEL 1,227 million, therefore, in case of 100% fulfillment of the expenditure plan for the second half of the year, the deficit will be much higher than it was in the first half. Ceteris paribus this can cause certain macroeconomic instability similar to the previous years.  

As of December 31, 2017, Georgia’s public debt amounted to GEL 17 billion that was 44.7% of the previous year’s GDP. As of June 30, 2018, Georgia’s public debt was GEL 16.3 billion which is 41.1% of the previous year’s GDP. Appreciation of GEL caused a reduction of public debt. By the end of 2017, Georgia’s foreign public debt was USD 5.18 billion, which was GEL 13.4 billion calculated by that time’s exchange rate (2.6). As of June 30 of this year, Georgia’s foreign public debt was USD 5.19 billion, but it was only GEL 12.7 billion because of appreciation of Georgian currency. 

Source: Ministry of Finance of Georgia

VI.Public institutions and programs with the lowest fulfillment rates

The Government Administration was a public institution, which spent the smallest share (70%) of its planned budget. Among other expenses of this institution purchasing of goods and services had the worst spending rate (64%). With this regard, the Ministry of Economy and Sustainable Development (82%), as well as the Ministry of Culture and Sports (85%) were worth mentioning since they are quite big spenders.

Source: Ministry of Finance of Georgia

Those programs and subprograms that had budget fulfillment rates less than 50% are given in table 5. The Purchase of Medicines for Chronic Diseases was a subprogram that had the lowest fulfillment rate. GEL 2 million was allocated for this subprogram, but only GEL 103 thousand was spent.

The program named Rehabilitation and Equipment of Medical Institutions was fulfilled only by 10%, as for another subprogram – Immunization – it was fulfilled by 13%.

Although certain healthcare subprograms have very low fulfillment rates, there are other healthcare subprograms, which overspent the allocated money. It shows that certain public institutions have improper budget planning practices. For instance, the Universal Healthcare Program spent 2% more (GEL 7.4 million) than planned. 34% (GEL 2.5 million) more was spent on the program named Management of Tuberculosis. 155% (GEL 4.7 million) more was spent on AIDS Management program,

Source: Ministry of Finance of Georgia

GEL 526 million was allocated from the state budget for investment projects in the first half of 2018, but, in fact, GEL 105 million remained unspent, which means that the plan was fulfilled only by 80%.

Table 6 provides more information on those projects that have less than 75% fulfillment rates. In total GEL 96 million remained unspent on investment projects. Money allocated for two investment projects – Waste Management in Adjara and Batumi Buses – remained absolutely unspent as of August 10, 2018.

Source: Ministry of Finance of Georgia

VII.Conclusion

The 6-month plan of the budget Receipts was fulfilled with 2.8% surplus, which was caused by higher than expected economic growth, more grants and income from privatization.

The 6-month plan of the budget Expenditure was fulfilled by 95.1%. Two categories of Expenditure – Capital Expenses and Purchase of Goods and Services – had the lowest fulfillment rates, 85.7%, and 90%, respectively.

The state budget deficit decreased since the income was higher and spending was lower than planned. However, it is important that the money saved in the first half of the year is not fully spent in the second half (especially during the last months). We had such examples in previous years when the uneven distribution of budget spending and deficit led to serious challenges for the inflation rate and exchange rate of the national currency.

Public debt to GDP ratio decreased from 44.7% to 41.1% (as of June 30, 2018), that was caused by faster GDP growth and appreciation of the national currency compared to the end of last year.

The Government Administration, the High Council of Justice and the Intelligence Service had the lowest spending fulfillment rates.

Programs and subprograms of the Ministry of Internally Displaced Persons from the Occupied Territories, Labor, Health and Social Affairs were distinct with both the highest and lowest spending fulfillment rates. The same practice has also been observed during the last years. Therefore, proper budget planning remains a problem for this institution.

A couple of investment projects in Adjara, as well as, certain energy and infrastructure projects had especially low fulfillment rates. The project named Building of Highways was worth mentioning since it was behind its schedule and GEL 46 million remained unspent.

VIII.Recommendations

• The surplus in budget Receipts and underspending in budget Expenditure allowed the Government to save a certain amount of money, which should not be fully spent during the second half of the year. The Government should keep the budget deficit low since it is important for a stability of inflation rate and GEL exchange rate;
• Despite the fact that public debt to GDP ratio decreased, it still remains higher than the target value (40%) given in Georgia’s Socio-Economic Development Strategy (Georgia 2020). The Government should have a clear strategy of how it plans to reach the target and maintain it. The debt burden heavily depends on an exchange rate of the national currency;
• A special attention should be paid to such programs and projects that are important for the country’s socio-economic development but stay behind their implementation schedules. With this regard, the Healthcare Protection subprogram and infrastructure projects are worth mentioning.