The Influence of Covid-19 on the Public Debt Growth and Default
Risk: A Fiscal Sustainability Analysis
George Abuselidze
a
Batumi Shota Rustaveli State University, Ninoshvili street 35, Batumi, Georgia
Keywords: Public Debt, Sovereign Debt, Debt Management, Default Risk, Fiscal Sustainability.
Abstract: This topic is relevant due to the fact that Georgia's public debt is increasing from year to year, and there is a
lack of comprehensive research on the public debt management. The problem is how to assess whether or not
the public debt is managed properly. The purpose of this article is to analyse and evaluate the Georgia public
debt management by developing a public debt management assessment model. The paper deals improving
mechanisms of State Debt management and determining its importance for economic development of the
country. It is offered in the future decisions, related to Georgia public debt management, to take into account
the burden of public debt to future generations.
1 INTRODUCTION
The global financial crisis of 2007-2008 and global
pandeconomic crisis of 2019 (Abuselidze &
Mamaladze, 2020; Abuselidze & Slobodianyk, 2021)
made a negative impact on Georgia’s fiscal
sustainability, which reflected in state budget deficit
and large-scale growth of state debt levels. Although
the current level of state debt is in a reasonable
interval, considering sharp social orientation of fiscal
policy since 2012, planned rate of fiscal
consolidations and the fiscal limits determined by the
“Act of Economic Freedom”, independent
assessment and analysis of fiscal sustainability for
medium and short term periods gains special
importance. Fiscal or state finance stability is the
ability of the state to maintain its current expenses,
taxes and other economic policies in long term,
without risking state’s ability to pay debts, or to
refuse to pay certain liabilities and budget expenses
(incl. pensions, health care, etc.).
2 METHODOLOGICAL
FOUNDATIONS
Study was conducted by means of qualitative and
quantitative methods. The logic of theoretical
a
https://orcid.org/0000-0002-5834-1233
analysis consists on the systemization of scientific
literature on public debt management assessment
criteria, indicators and methods; as well as analysis
and synthesis of evaluation criteria and indicators.
Empirical research is based on information from the
Ministry of Finance (2020), the Ministry of Economy
and Sustainable Development (2020), the National
Bank (2020), the Parliament (2018; 2019) and the
Georgian Department of Statistics (2020). My
research shows that management of public debt in
2009-2019 years was as acceptable by public debt
structure, indicators and its compliance with the
thresholds, and by public debt growth rates. Issues of
State debt management were studied by economy
scientists, among them Alesina et al., (1992),
Bhandari, Evans (Bhandari et al., 2017), Denison and
Guo (2015), Di Bartolomeo and Di Gioacchino
(2008), Dunaev (2013), Dutta (2018), Faraglia et al.,
(2010), Fastenrath et al., (2017), Hackbart and
Denison (2014), Kim and Lim (2018), Livne and
Yonay (2016), Mareček and Machová (2017), Scott-
Clayton and Zafar (2019), Trampusch (2015), Werner
(2013; 2014) and others. In their scientific researches,
they have deeply disclosed issues of state long-term
debt, Management Challenges, theory of debt
management, Enhanced debt management,
sustainable financial architecture, defined problem
issues in this area, however, the impact of debt
Abuselidze, G.
The Influence of Covid-19 on the Public Debt Growth and Default Risk: A Fiscal Sustainability Analysis.
DOI: 10.5220/0010587501510159
In Proceedings of the International Scientific and Practical Conference on Sustainable Development of Regional Infrastructure (ISSDRI 2021), pages 151-159
ISBN: 978-989-758-519-7
Copyright
c
2021 by SCITEPRESS – Science and Technology Publications, Lda. All rights reserved
151
management on the economic and financial stability
requires continuous improvement and research.
3 RESULTS AND DISCUSSION
For the management and service of State Debt, its
quantitative calculation and reflection, it is necessary
to define what is actually a State Debt and which
major components are included in it.
With a State Debt definition, the WGPD
(Working Group on Public Debt) of the INTOSAL
(International Organization of Supreme Audit
Institutions) suggests, State Debt is defined as the
sum of optional and direct liabilities taken by state
institutions (INTOSAI-Public Debt Committee).
With the Definition provided by the International
Monetary Fund (IMF), the State Debt is defined as the
sum of debt of government sector and state
corporation, where the debt of the state sector
combines the unity of the debts of the country's
central, autonomous republics and local authorities,
and the state corporation's debt combines the debt of
financial and non-financial corporations and the
various financial institutions” (Definitions and
Accounting Principles, 2013).
According to the Law of State Debt of Georgia
(Legislative Herald of Georgia, 2016), the State Debt
is defined as “The debt in national currency, taken by
other institutions with the name of Georgia and
guarantee of Ministry of Finance, also the debt taken
by Financial Ministry, with the name of Georgia,
using state securities in national or foreign currency,
in addition the State Debt includes total amount of
state domestic and foreign debt received from the
financial resources approved by the International
Monetary Fund" (Transparency International
Georgia, 2019).
The definitions that offer international financial
institutions are sharply different from the definition
provided by the Georgian legislation. In particular,
under the legislation of Georgia the state liabilities
portfolio does not take into account the state non-
financial corporations liabilities, also the credit
liabilities of enterprises created by the state share
participation is not considered as part of State Debt.
This is attached to the state sector liabilities by
definition of the International Monetary Fund. Under
the INTOSAI definition, it is a state obligation.
The funds attracted by the State Debt are an
important source of budget financing and at the initial
stage of the budget planning process, It is important
for the country to properly determine the debt needs
in order to avoid liquidity risk and paying extra
expenses due to large amounts of debt, as long as the
State Debt management process implies development
and implementation of debt management strategy.
Generally, the initiator of taking foreign debt, if it
is considered as a source of funding of the budget, is
the Ministry of Finance, and if it is taken for funding
some investment projects, the role of the initiator
becomes a specific spending institution.
According to the 6th chapter of the budget project of
2018, 86% of the debt, 1,074,800.0 GEL was
allocated to the Ministry of Regional Development
and Infrastructure of Georgia (this indicator is
1,062,680.0 GEL in 2019), taking into consideration
the funds allocated for the defense, education, energy
and agriculture ministries for infrastructural
development, Overall, 95% of the total volume of
debt is financed to cover the expenditure incurred in
this direction (Transparency International Georgia,
2019).
The total volume of State Debt in the current year
is 2.04, 2019 forecast for 2.3 billion GEL (State audit
office of Georgia 2014, 2015; Analytical portal of
state audit office of Georgia, 2020; Budget monitor,
2020; Legislative Herald of Georgia, 2018) this is 245
million GEL higher than the previous year's figure.
The trend of decrease is reflected in the volume of
credit supporting credits, but the share of long-term
and investment credits increases (Analytical portal of
state audit office of Georgia, 2020) (see Figure 1).
Figure 1: Dynamics of public debt, %
Source: Author calculation on base budget monitor (2020).
According to the 2018 Budget project law
(Legislative Herald of Georgia, 2018), 790 million
GEL is allocated for the reduction of State Debt,
which is approximately 18% higher than the same in
2017 (see Figure 2).
2015
2016
2017
2018
2019
2020
21,5
17,3
17,6
18,3
20,2
19,4
78,5
82,7
82,4
81,7
79,8
80,6
ExternalDebt DomesticDebt
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152
Figure 2: Public debt service, %
Source: author calculation on base budget monitor (2020).
Depending on the foregoing, even though the
volume of debt increases, the funds allocated for its
cover are increased. The increase in liabilities is due
to attract investment credits and according to the
budget classification, the share of debt taken to
finance current expenditures is minimal. It shows that
if the current expenditure will be planned effectively,
the government's savings will be increased and
converted into investments, as a result, the state will
need less debt to finance investment projects. There
is no connection between the State Debt and the
current expenses, but if the funds needed to finance
the projects defined by the budget classification could
not be obtained, it will be necessary to reduce the on-
going expenditures. One of the most important tasks
for Georgia is to increase the share of state budget
revenues and related expenditures in the overall
domestic product (Abuselidze, 2020).
With the mobilization of internal resources,
according to the 2019 budget draft law, tax revenues
are increased compared to the previous year (State
audit office of Georgia), while the share of grants is
characterized by a decrease in trend, State Debt levels
are still increasing 44.6% of GDP which is less than
60% of the level defined by the Organic Law on
Economic Freedom Act in Georgia and If we take
into account that the level of State Debt service is
proportional to debt, the country has the opportunity
to take additional debt over the next few years,
However, a change in the Law on Economic Freedom
must be taken into account which implies a abolition
30% margin for budget expenditures in respect of
GDP (Legislative Herald of Georgia, 2018), which
means the absence of another powerful control over
the efficient spending of funds (Fig. 3).
Figure 3: Dynamics of Public Debt, % GDP
Source: Author calculation on based of Ministry of Finance
of Georgia (2020).
In line with the assumed impact of GDP growth
on declining public debt to GDP ratio, the scatter
diagram indicates that the decrease of public debt to
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
66
65,9
60,3
57,2
59,2
33
38,7
35,1
31,2
29,1
34
34,1
39,7
42,8
40,8
67
61,3
64,9
68,8
70,9
DomesticDebt ExternalDebt
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
30,8
33,6
29,7
30
31,4
33
39,2
42,5
42,8
42,9
41,2
61,1
25,3
28,1
24,8
25,3
26,4
26,6
32,4
35,1
32,9
32,6
32,9
37,5
ExternalDebt,%GDP PublicDebt,%GDP
The Influence of Covid-19 on the Public Debt Growth and Default Risk: A Fiscal Sustainability Analysis
153
GDP ratio is only possible through increase in
investment activity. The primary budget deficit did
not have significant influence on public debt in New
Member States countries (EU). The external debt
positively influenced public debt taking into account
large capital inflows before the crisis (Pecaric et al.,
2018).
Optimal amount of debt needs and optimal ratio
with GDP should be determined correctly so that it is
necessary to maintain the data base of the State Debt
for the current and previous years, to get detailed
information about the priorities and needs of a
particular field of economy.
The procedure for determining debt needs is
desirable to be regulated by special rules, in order to
ensure transparency of the process, but the most
important is the establishment of the State Debt
definition clearly and its compliance with
international standards, the fact that the debt of non-
financial corporations and enterprises, created by the
State's participation, does not take into account the
total amount of the State Debt, creates a threat to
poorly evaluated debt sustainability.
After the study of existing literature about
sustainable development (Dodds, 2008; Bell &
Morse, 2004; Logar, 2010), it is considered that there
is no universally accepted definition of sustainability.
However, according to Blanchard’s definition
(Blanchard, 1985; 1990), sustainability is achieved
when the government avoids accumulating large
volume debts based on current policy, more
specifically, sustainable fiscal policy implies
returning Debt ∕ GDP ratio to its initial level.
In our opinion, Blanchard’s (Blanchard, 1985;
1990; 2019) definition is inaccurate due to the
following circumstances: first of all, there is no
theoretical and practical reason why Debt ∕ GDP
ration should return to its initial level or any other
stable level, that will be lower or higher compared to
initial level. Second, the policy on the first stage may
consider increasing debt ratio to a level that can
actually be evaluated as an overly high and on next
step reducing debt level and returning to “safe” level.
For assessing fiscal challenges in medium term is
used indicator, based on which existing budget deficit
(structural initial balance) correction level is
calculated, that is necessary to achieve the desired
level of state debt at certain time. Hereby, the best
way to get rid from this is taking new loan that
exceeds amount repayment of principal and interest
of the credit, as well as other forms of capital outflow
from the country, that can be presented with the
following formula:
RT=L-S+O (1)
Where:
L - Volume of new credits;
S - Amount paid for credits;
O - Flow of capital from debtor country.
If RT>0, then volume of new credits, that debtor
is taking, exceeds the payments and there is a
resource outflow. When RT<0, it means recently
received credits don’t cover principal of credit and
service costs, i.e. there is a capital outflow from
debtor countries.
The debtor country will not refuse returning loan,
until receiving resources from creditors (e.g. Greece),
i.e. until RT>0. The debtor will always fulfill the
contract of returning principal and service costs, if
receives new loans from creditor.
Based on practices used by European
Commission (2009; 2012) fiscal sustainability based
on calculation of indicator is assessed as following: 1.
If the value of indicator is lower than 20, the country
is rated as low risk. 2. If indicator value is between 20
and 60, the country is rated as medium risk. 3. If
indicator value is more than 60, the country is rated
as high risk.
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Figure 4: Fiscal sustainability based on calculation of indicator
According to the data of 2019, percentage of
government debt to GDP ratio was 42.6%, of which
32.8% was foreign debt. The results of the shocks
used to assess sustainability analysis based on actual
and forecast data on government debt for 2012-2028
give a satisfactory picture (see Figure 4). According
to all scenarios, government debt to GDP is growing,
but steadily maintains a declining trend. It should be
noted that in the case of any scenario, the
government's debt to GDP does not reach the critical
limit. However, the country is rated as medium risk
(see Figure 5).
‐10
0
10
20
30
40
50
60
2012
2013
2014
2015
2016
2017
2018
2019
20202021
2022
2023
2024
2025
2026
2027
2028
Governmentdebt primarydeficit
automaticdebtdynamics otheridentifiedcomponentsofdebtgrowth
realinterestrateshock shockofrealGDPgrowth
primarydeficitshock nominalexchangerateshock
combinedshock conditionalobligationsshock
The Influence of Covid-19 on the Public Debt Growth and Default Risk: A Fiscal Sustainability Analysis
155
Figure 5: State Debt Management
Source: Author calculation on based Ministry of Finance of Georgia (2020)
While fiscal sustainability analysis, inter-temporal
budget restriction or intermediate equilibrium
condition determines equivalence between initial
debt level and present value of primary proficiencies
of future period budgets’. This condition was
presented by Bohn (2005) with the following
formula:
𝐵
∑
1 𝑟
𝑃𝐵
(2)
Where:
𝐵
- state debt/ GDP,
r - real interest rate.
𝑃𝐵
- Primary Balance, that represents difference
between state revenues and expenditures (excluding
interest expenses).
Studies to assess sustainability in the fiscal policy
is mainly based on assessing the necessary level of
reduction in the budget deficit to ensure sustainability
in fiscal policy, based on fiscal gap indicator
calculation.
Sustainability indicator calculates the difference
between the current state of the budget deficit (initial
structural balance) and budget initial balance for debt
level stabilization, for ensuring fiscal sustainability in
long-term period. Sustainability indicator can be
determined by the following formula:
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"𝐼𝑇𝐺𝐴𝑃
" "𝑅𝑒𝑎𝑙 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑟𝑎𝑡𝑒
𝑅𝑒𝑎𝑙 𝐺𝐷𝑃 𝑔𝑟𝑜𝑤𝑡ℎ 𝑟𝑎𝑡𝑒" " " ∑_"𝑖
1" ^"∞" ▒"1 𝑅𝑒𝑎𝑙 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑟𝑎𝑡𝑒" ^"
𝑖" "𝑃𝑟𝑖𝑚𝑎𝑟𝑦 𝐵𝑎𝑙𝑎𝑛𝑐𝑒 " ∑_"𝑖
1" ^"∞" ▒"1 𝑅𝑒𝑎𝑙 𝐺𝐷𝑃 𝑔𝑟𝑜𝑤𝑡ℎ 𝑟𝑎𝑡𝑒" /"1
𝑅𝑒𝑎𝑙 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑟𝑎𝑡𝑒" "𝑖𝑃𝑟𝑖𝑚𝑎𝑟𝑦 𝐵𝑎𝑙𝑎𝑛𝑐𝑒"
/"1 𝑅𝑒𝑎𝑙 𝐺𝐷𝑃 𝑔𝑟𝑜𝑤𝑡ℎ 𝑟𝑎𝑡𝑒"
However, corrective measures to achieve fiscal
sustainability can be done in various ways. In
particular, by increasing the tax revenues (typically
on the basis of optimal tax pressure formations)
(Abuselidze, 2020), or/and by efficiencies social or
infrastructural expenses (Abuselidze, & Mamuladze,
2020; Abuselidze, Surmanidze, 2020; Abuselidze,
2019, 2021). When choosing policy, we should keep
into consideration its potential impact on economic or
fiscal sustainability. Causality between public debt
and economic growth can only be explained by
understanding the process of creation and change in
private debt. Keen provides theoretical framework,
concluding that private debt change influences
employment, whereby the crisis begins when private
debt to GDP starts declining, i.e. when private sector
starts deleveraging and public debt starts growing as
a response to rising unemployment (Pecaric et al.,
2018). According to Cecchetti et al., (2011) hold that
the high indebtedness may significantly increase the
risk premium influencing the future financing
activities. Kumar and Woo (2010) concluded that the
negative influence of high government indebtedness
can be linked to the decline in work productivity due
to the decline of investment activities, i.e. the
accumulation of fixed capital. In our opinion, for
overcoming the fiscal breakdown and decrease
deficit, more increase of tax burden can cause
slowdown in economic growth, which will have
negative impact on medium and long-term
sustainability. In our opinion, we can consider
optimal tax burden such conditions when favourable
economic environment is achieved for the best
functioning of economy and business building, i.e.
tax shall be optimal both for the state in whole and for
certain businessmen. Such level is the state of
simultaneous growth of budget revenues and output
and we consider, it is possible at 38.2% tax burden.
4 CONCLUSIONS
The budget planning is a complex process,
determining the State Debt forecast parameters and
maintaining them, helps with achieving a set of
macroeconomic indicators. It is an important
precondition for maintaining taken political course.
In the light of all above, the executive authorities
of the country must address the debt only if the
priority directions of the country are required to
finance and if the mobilization of tax revenue is not
sufficient for adequate financing of programs, sub-
programs and measures. In addition, due to the
specifics of the program budget, the operational
balance of the state budget of the country is negative
because of the need to first of all expenditures. This,
in turn, requires mobilization of sources of financing,
including taking a debt.
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