Draft 2021 State Budget of Georgia: Brief Analysis and Recommendations - საერთაშორისო გამჭვირვალობა - საქართველო
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Draft 2021 State Budget of Georgia: Brief Analysis and Recommendations

27 October, 2020

 

The Government of Georgia (GoG) has submitted to the Parliament a draft law on the 2021 State Budget. Below you will find a brief evaluation of the draft and recommendations prepared by Transparency International Georgia. It should also be noted here that this 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 estimating economic trends, it cannot be ruled out that, in December, the Parliament will approve a budget that differs considerably from the current version.

Main Findings

  • According to the draft budget, the Georgian economy contracted by 4.9% in 2020 and will grow by 5% in 2021. Considering that the pandemic is highly likely to continue into next year, there are armed hostilities in the region, and the amount of investments in the country has decreased, we think that achieving an economic growth of 5% is quite an optimistic goal;
  • In 2021, the state budget receipts will amount to GEL 14.8bn, which is GEL 3.7bn less than the budget receipts in 2020. The decrease is conditioned by the fact that the government is borrowing GEL 8bn in 2020, while in 2021, it will borrow GEL 3.2bn;
  • The budget expenditures will decrease by GEL 1bn. The decrease is caused by the completion of the pandemic-related programmes. This mostly concerns subsidies and social programmes which are no longer envisaged by the 2021 budget;
  • The administrative expenses will decrease by GEL 99m and the total will amount to about GEL 3bn. The cut is caused by a decrease in the procurement of pandemic-related medical goods and services. However, GEL 210m more will be spent on administrative expenses compared to 2019;
  • The total number of employees in budgetary organisations will increase by 429 persons and reach 112,643. Of these, 227 persons are being added to the management of the public health programme. The number of employees will increase by 110 at the Ministry of Economy, specifically, in the agency that manages state property. The number of policemen will increase by 82;
  • From 1 January 2021, the pension of the pensioners younger than 70 years old will be increased by GEL 20 and amount to GEL 240, while for those aged 70 or more, the pension will be increased by GEL 25 and amount to 275. The increase in pensions causes the budget expenditures to grow by GEL 370m;
  • Four ministries will have their budgets increased the most: Ministry of Regional Development and Infrastructure – by GEL 601m; Ministry of Education, Science, Culture and Sport – by GEL 199m; Ministry of Defence – by GEL 95m; and Ministry of Internal Affairs – by GEL 30m;
  • The following three ministries will experience the biggest budget cuts: Ministry of Health – by GEL 663m; Ministry of Economy – by GEL 61m; and Ministry of Environmental Protection and Agriculture – by GEL 61m. In case of all three ministries, the reason for the reduction is the completion of programmes related to the COVID-19. Only the continuation of the programme covering the utility costs is envisaged for January-February next year;
  • The financing of the universal health care programme will be reduced by GEL 42m with GEL 760m allocated to this end, while GEL 795m from the universal health care programme has already been spent this year and the expenses will amount to GEL 900m by the end of the year;
  • There are no funds allocated in the 2021 budget for financing quarantine and other measures related to the COVID-19. However, it is clear that renting quarantine spaces will be necessary in the early 2021, too, and a significant amount will need to be allocated to this end;
  • The budget deficit will be GEL 2.8bn (5.2% of GDP), of which GEL 528m will be covered by taking a new loan, while GEL 2.3bn – by using a budget remainder;
  • In 2021, the government will take a loan of up to GEL 3.2bn but, at the same time, will repay GEL 2.6bn of previous loan. The government is planning to repay obligations worth EUR 500m issued in 2008. It will use international assistance received this year to repay the debts. Towards the end of 2021, the amount of debt will reach GEL 30.5bn which will constitute 56% of the projected GDP, approaching an acceptable threshold of 60%;
  • 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, which indicates an incorrect approach to programme budgeting. The current approach is maintained, according to which the main goal of the budgetary policy is to fulfil the plans and fully utilise the allocated funds.

Recommendations

  • Against the background of the intensifying pandemic, armed hostilities in the region and a decrease in foreign investments, it would be more preferable if the government planned the budget based on a lower indicator of economic growth;
  • The failure to reflect in the budget expenditures the funds required to mitigate the damage caused by the COVID-19 renders the budget unrealistic. The government must include into the budget the increased medical expenses and financing quarantine and other measures;
  • Similar to previous and this year, an insufficient amount has been allocated for the universal health care programme. The Ministry must significantly increase the allocation for 2021, otherwise it will have to restrict the funding for medical services;
  • It is a welcome development that the government is planning to use part of the international assistance received this year to repay the existing external debt. In the future, this will reduce the burden of servicing this debt. Correspondingly, this approach must not change before the final budget is approved and, in the event, additional expenses need to be included, the resources must be allocated by making savings in the current and next year’s budget;
  • 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 2021 State Budget of Georgia, the government estimates that the economy will contract by 4.9% in 2020. Since the average rate of contraction of the economy in January-August was 5.6% and, at the same time, the contraction indicator in August fell to 5.3%, the estimated 4.9% annual contraction is a realistic one.

For 2021, the government estimates a 5% economic growth. In general, after a crisis year, it becomes easier to achieve economic growth since the economy is returning to its pre-crisis state. However, it is clear that the pandemic will remain a problem at least in the beginning of next year and the Georgian economy in the first quarter of 2021 will, in all likelihood, shrink. Added to this is a stricter monetary policy, decrease in foreign direct investment (FDI) and unstable political situation in the South Caucasus region. Correspondingly, achieving a 5% economic growth in 2021 is an optimistic projection.

According to the pessimistic scenario presented by the government in the annex to the budget, the Georgian economy will contract by 5.7% in 2020 and will have a 2% growth in 2021.

The tentative Georgian Lari to US Dollar exchange rate used for 2021 is 3.29. Income per capita in 2021 is expected to increase to USD 4,451, which is 7% less than in 2019. The expected annual inflation rate is 3%.

2. State Budget Receipts[1]

In 2021, the Georgian state budget receipts will amount to GEL 14.8bn, which is GEL 3.7bn (20%) less than the budget receipts in 2020. The decrease in receipts is caused by the fact that, in 2020, the government is borrowing GEL 8bn, while in 2021, it will borrow GEL 3.2bn.

The largest line of receipts – revenues – will amount GEL 11.3bn in 2021, which is GEL 1.1bn more than the estimated revenues for 2020. The revenues include tax revenues, grants and other income. The increase in the total amount of revenues is caused by the GEL 1.5bn increase in tax revenues. This includes the amount received as income tax which is expected to increase by GEL 610m, the income from VAT expected to increase by GEL 293m and from excise duty which is to increase by GEL 207m. Due to the economic crisis and tax relief[2] measures, the income from taxes in 2020 decreased by GEL 700m compared to 2019. The GEL 10.5bn in tax revenues estimated for 2021 is to be received as a result of economic growth and ending tax relief programmes.

The amount of grants to be received is decreased by GEL 273m, amounting to GEL 285m. The decrease is caused by the fact that the grants from international organisations increased during this year due to the pandemic.

Other income decreased by GEL 125m. The reduction was conditioned by the fact that the GEL 133.5m mobilized in the StopCov Fund was reflected in the 2020 budget. There are no plans to replenish this Fund with any income in 2021.

It is estimated that GEL 150m will be received from privatization (disposal of non-financial assets), which is GEL 60m more than projected for 2020.

The disposal of financial assets, which means repayment of loans issued in the past, will bring GEL 150m into the budget.


Data source: Ministry of Finance

3. Budget Expenditures[3]

In 2021, the state budget expenditures will amount to GEL 17.1bn, which is GEL 1.1bn (7.2%) more than the budget expenditures in 2020.

The biggest expenditure line – expenses – is cut by GEL 1bn. The reduction is caused by the completion of pandemic-related programmes. This mostly concerns subsidies and social programmes which are included in the 2020 budget but are not envisaged in the 2021 budget.

The administrative expenses are cut by GEL 99m, amounting to about GEL 3bn in total. The decrease is conditioned by cutting down the expenses for the procurement of goods and services by GEL 151m which, in turn, is linked to the decreased procurement of pandemic-related medical goods and services.

The second part of the administrative expenses – remuneration – is increased by GEL 53m. GEL 27m of these are allocated for the Ministry of Internal Affairs and GEL 13m – for the Ministry of Defence. The salary of policemen in 2021 will not be increased but the number of employees will grow larger. The remuneration fund is increased by GEL 3.6m for the Ministry of Environmental Protection and Agriculture (the management of protected areas and agricultural programmes accounts for the increase); by GEL 2.5m for the State Security Service; by GEL 2m for the Special State Protection Service; and by GEL 1.4m for the Ministry of Health.

The total number of employees of the budgetary organisations is increased by 429 people, reaching 112,643. The number of employees is increased the most at the Ministry of Health – by 251 people, 227 of whom are added to the management of the healthcare programme. At the Ministry of Economy, the number of employees is increased by 110, specifically, at the National Agency of State Property. The number of policemen is increased by 82. No significant changes are made in the number of employees in other agencies.

Despite the cuts, the largest amount – GEL 4.8bn (including healthcare expenses) is allocated for social expenses, which include pensions, healthcare and social assistance. The largest amount after the social expenses – GEL 3.4bn – is allocated for capital projects, which is GEL 420m more than in 2020. The capital expenses in the amount of GEL 3.4bn include a capital transfer of GEL 436m allocated for local governments.

The expenditures also include the repayment of the principal amount [of loans] which will amount to the record high in 2021 – GEL 2.6bn. Next year, the government is planning to repay the obligations issued in 2008 in the amount of EUR 500m.


Data source: Ministry of Finance

4. Budget Deficit and Public Debt

The total budget balance[4] of the state budget in 2021 is projected at the negative GEL 2.6bn, compared to GEL 4.3bn projected for 2020. Relative to GDP projected for 2021, the total budget balance will stand at 4.8%. This indicator for the 2020 budget is 8.5%.

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[5] rather than the state budget deficit. The total budget balance of the 2021 consolidated budget will be negative GEL 2.8bn which stands at 5.2% of the projected GDP and exceeds the acceptable ceiling.

Since the total budget balance of the consolidated budget is higher than 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 plan of parameter restoration must not exceed three years. This plan is laid out in the document of the key economic and financial indicators, according to which the 2022 consolidated budget deficit will stand at -4.1%, while the 2022 one at -3%.

Calculated using a traditional method,[6] the 2021 state budget deficit will be GEL 2.8bn (5.2% of GDP), of which GEL 528m will be covered by taking a new loan and GEL 2.3bn – by using the budget remainder. GEL 2.3bn is the amount of foreign finances received this year for mitigating the damage caused by the pandemic which the government is not spending fully this year. The 2020 budget deficit in a traditional sense is GEL 4.5bn (9% of GDP).


Data source: Ministry of Finance
* Estimated indicators are provided for 2020 and 2021

In 2021, the GoG will borrow up to GEL 3.2bn but, at the same time, will use GEL 2.6bn for servicing previous debt. As a result, the government’s debt will increase by GEL 528m. The increase will only concern domestic debt. In 2021, the government will repay more foreign debt than it will borrow anew. Next year, the government is planning to repay the obligations issued in 2008 in the amount of EUR 500m, which will cause foreign debt to decrease. Despite the fact that the new loan will be used to repay an old debt, this will reduce the burden of servicing the debt, since the interest rate on obligations is much higher than the interest rate on the preferential credits received this year.

By the end of 2021, the government’s debt will amount to GEL 30.5bn, which stands at 59% of estimated GDP. As of 31 August 2020, the debt of the GoG is GEL 27bn, which is 54% of GDP.

Up to 80% of Georgia’s public debt is foreign debt. For this reason, if GEL depreciates, foreign debt calculated in GEL and its ratio to GDP (which is an indicator of the debt burden for the economy) will increase. Correspondingly, the depreciation of GEL is one of the important risk factors in terms of debt burden. Along with the depreciation of GEL, an increased budget deficit causes the debt to increase.


Data source: Ministry of Finance
* Estimated indicators are provided for 2020 and 2021

 5. Agencies and programmes which will experience significant changes in their funding

According to the 2021 budget, compared to 2020, the Ministry of Regional Development and Infrastructure will have the largest increase in funding – GEL 601m, caused by the increase in expenses for the improvement of road infrastructure, restoration and rehabilitation of water supply infrastructure and construction and rehabilitation of educational infrastructure. GEL 451m more will be spent on the improvement of the road infrastructure in 2021. This includes the funding of the construction of highways which will increase by GEL 234m.

The budget of the Ministry of Education, Science, Culture and Sport will increase by GEL 199m, amounting to GEL 1.7bn. The increase mostly covers schools. The salary of teachers who have a certain rank will increase by GEL 100 starting January. The total of GEL 880m will be allocated for school funding. The funding allocated for the development and promotion of sport will increase by GEL 43m, although this increase will merely bring the programme back to the level of funding it had in 2019.

The budget of the Ministry of Defence will increase by GEL 95m, amounting to GEL 900m, which is the largest annual amount allocated for defence since 2008.

The budget of the Ministry of Internal Affairs will increase by GEL 30m, amounting to GEL 790m. The increase is caused by hiring 82 additional policemen and increasing the salary of firefighters-rescuers, policemen and equal-status persons by GEL 125 starting from 1 July 2020. They will receive the increased salary for 12 months in 2021 and for six months in 2020, which causes an increase in the remuneration funds.

Three ministries will experience the largest budget cuts: Ministry of Health – by GEL 663m; Ministry of Economy – by GEL 466m; and Ministry of Environmental Protection and Agriculture – by GEL 61m. In case of all three ministries, the reason for the cuts is the completion of COVID-19-related programmes. Next year, it is planned to continue only the programme of covering utility expenses in January-February with GEL 60m allocated to this end.

The expenses of the Ministry of Health are decreased by GEL 720m due to the completion of the COVID-19-related social programmes. There are no programmes planned for 2021 such as a GEL 200 assistance per child, GEL 200-300 assistance for newly unemployed, additional financial assistance for socially vulnerable and so on. No funding is allocated for managing the ailments caused by the COVID-19, for which GEL 239m is allocated in this year’s budget. The expenses on the programme of rehabilitation and equipment for medical institutions are cut by GEL 55m.

The funding of the universal health care programme is cut by GEL 42m: there is GEL 802m allocated for it in 2020 and GEL 760m in 2021, however, as of 20 October 2020, GEL 795m has already been spent by the universal health care programme and GEL 802m is not enough to last until the end of the year.

The largest increase in the budget of the Ministry of Health is that of pension expenses – GEL 370m. Starting from 1 January 2021, the pensions of pensioners under the age of 70 will increase by GEL 20, amounting to GEL 240, while the pensions of those aged 70 and older will increase by GEL 25 and amount to GEL 275.

The budget of the Ministry of Economy and Sustainable Development will be cut by GEL 466m. The decrease is unequivocally linked to the reduction to zero of the expenses related to the COVID-19. In the 2020 budget, there is GEL 330m allocated for the loan and guarantee facility, which is not envisaged in the 2021 budget. Also, no funds are allocated for such large-scale programmes as support for small, medium and family-run hotels (allocation of GEL 70m in this year’s budget) and financing quarantine and other measures related to the COVID-19 (allocation of GEL 45m in this year’s budget). However, it is clear that renting spaces for quarantine will also be necessary in the early 2021 and a significant amount will need to be allocated to this end.

The budget of the Ministry of Environmental Protection and Agriculture will be cut by GEL 61m. This year, GEL 40m is allocated for the support to the owners of land plots (assistance in the amount of GEL 200), which is not envisaged in the 2021 budget. Also, GEL 20m is allocated for various measures to support agriculture on account of the COVID-19, which is no longer envisaged either. There is a GEL 18m cut in financing the programme of vineyard and winemaking development which mainly concerns price subsidies and purchase of grapes by the state.


Data source: Ministry of Finance

Similar to previous years, in 2021 too, there is an incorrect approach to programme budgeting, which is demonstrated by the fact that the expected outcomes and indicators of the programmes envisaged by the budget are once again provided in the annex to the budget and is not part of the text of the law on the 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.

 


[1] Receipts are the sum of revenue, disposal of non-financial and financial assets, and newly taken loans. It includes all kinds of funds that go into the budget, while revenues include only tax revenues, grants and income received from other specific sources.

[2] Due to the crisis caused by the pandemic, the government offered businesses a temporary tax relief for their income tax, VAT and other types of taxes.

[3] Expenditures are the sum of expenses, increase of non-financial and financial assets and repayments of previously taken loans. It includes any funds that go out of the budget, while the expenses include only funds spent for specific purposes, such as administrative, social, education, etc.

[4] Total budget balance does not include changes in financial assets. According to the Budget Code of Georgia, if the total budget balance is negative, the budget is deficient; if it is positive – the budget surplus occurs.

[5] Consolidated budget is a sum of the central (state) budget, the consolidated republican budgets of the autonomous republics and the consolidated municipal budget of the local self-governing entities.

[6] Since the total budget balance does not fully include all kinds of budget revenues and expenses, the budget deficit in a traditional sense looks at how big a shortage of money there was in the budget which was covered by taking a new loan and using the budget remainder.

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