External debt of Georgia in the conditions of globalization

Dr. Tamaz Maglakelidze

The world economy met the XXI century with a high mobilization scale, on the one hand, unequal economic development and budget deficit in most countries, on the other one.

This circumstance promoted the increase of both external and internal debts that acquired a regular feature. The problem of external debt is especially a vexed one. It acquires extensive scale in the conditions of the liberalization of financial market and, on the basis of the Y1997 data, it made up 6 trillion US dollars. Though, in 1998 the total indebtedness of the world countries made up 4 trillion 140 million US dollars.
The process of financial globalization deepens in the conditions of interdependence of national economies. The internationalization of capital acquired new features. The external debt became an integral part of the functioning of modern world economy. Similar to denomination assets of foreign governments and institutions of commercial crediting, it offers much greater possibilities for these countries than the economy can permit.
During the attraction of external debt countries are guided by the following factors: 1. What amount of foreign capital can each country receive? 2) What amount of debt can it have without any risk? Loans, in their turn, can be divided into the following financial categories. They can be formed by international, government organizations, they can be unilateral, multilateral, etc.
Different indices are used during the assessment of creditworthiness and determination of external debt rate. The following ones are quite popular: 1. Comparison of external debt with gross domestic product; 2. Comparison of external debt with export; 3. Correlation of total amount of money designed for the external debt with export and national income. 4. The external debt ratio for the budget financing. Therefore, external debt must meet the parameters of definite criteria.
In reality, all countries as well as developed ones have external debts. Judging from the current tax balance, the following countries have a chronic deficit – Australia, Great Britain, New Zealand, Federative Republic of Germany (1991-1997), Sweden (1994-1997), etc. At the beginning of 1998, the US external debt made up 862 billion US dollars. This country has the largest debt in the world.
The external debt plays an important role in the economy of developing countries. It has grown and has won a greater place in the international system of crediting since the 70-th. In the 80th as a result of the exacerbation of debt crisis a number of major Western-European banks were confronted with a grand danger. Reemerge of the crisis in the 80-th accelerated relations between two countries – creditors and debtors. This circumstance necessitated the regulation of their relations and transition from confrontation to a dialogue. The system for the reduction of external debt and for the lightening of payment conditions was developed. It promoted the structural transformation and program realization aimed at the achievement of macroeconomic stability.
Post socialist countries were confronted with major economic problems resulting from the 90th years’ events that were connected with the conversion of economy of socialist countries and change in their economic system. On the basis of IMF data, the external debt of post Soviet Republics made up 95,3 billion US dollars. Because of this debt Russia found itself in a difficult state. According to the Y1997 indices, the total debt of most republics amounted to 282,0 billion US dollars. This problem was settled by the IMF and London and Paris clubs. Credits for extraordinary long-term measures controlled by IMF were obtained in exchange for certain obligations. It is a warrant of the following trench. These measures aimed at the adaptation of economy to market environment provides for the macroeconomic stability and structural changes as well as promotes economic growth, preservation of economic balance, etc. Therefore, operations are performed for the improvement of debt service and payments conditions in less developed countries (765 dollars equivalent GDP per head) and in the countries with large debt as well as in the states where GDP is between 766 – 3035 dollars. The so-called ” Houston conditions”, ” Toronto conditions”, ” London conditions”, “Naples conditions”, “Lyons conditions” IMF and the World Bank initiatives, and etc. started functioning to regulate the following processes. Countries with low incomes act in accordance with ” Houston conditions” that function since September 1990. They do not envisage for the debt reduction but imply benefit conditions.
“Houston” conditions envisage for the repayment of credit during 15 years with 8 year benefits. As for non-profit making credits, according to “Houston conditions”, the repayment term makes up 20 years.
According to the “Toronto conditions” (1988-1991) the debt reduced by 30-33%, according to the “London conditions this debt reduced by 50% (1991-1994), according to the “Lyon conditions” – by 80%. In 1996 IMF and the World Bank developed initiatives that provided for the debt reduction.
Since 1998 it was easier to obtain a credit in the countries with low income.
Along with the above-mentioned measures special attention was paid to the purposeful increase of the financial resources flow in developing countries.
In 1990-1996 it increased by 5,14 times running into 235,2 billion US dollars of which 40% was granted free of government bonds.
In 1990-1996 136 countries have received 569,6 billion dollars. In spite of it, there is a difficult situation in the sphere of external debts. Debitor countries find it difficult to fulfill debt instruments. The problem of external debt became an important factor for the deterioration of their social-economic situation. The debt crisis turned into a chronic one and included the post Soviet countries as well as the whole Eastern Europe. Acquisition of budget revenues is one of the most difficult problems in the developing countries . Therefore, the solution of fiscal problems in these countries is largely dependent on external debts. These debts serve as a source of financing public funds. However, external debt poses a grand problem for debitor countries at the time of its maturity. Therefore, there is a need for the restructuring of external debt. London and Paris clubs have the same purpose.
A country that is unable to develop its own economy will never become competitive so that the repayment of debt would be a great problem. Unfortunately, Georgia is one of these countries; it received the status of a developing country and thus joined the countries of the “third world”.
The increase of external debt in Georgia has reached a climax, which results in the economic and political dependence of the country. It poses a grand problem for the national economy. By the end of 1994, the external debt of Georgia made up 1 billion US dollars resulting from the slump of production, increase of price and demand. 16, 22 % of all foreign loans was assigned for the stabilization of financial system and preservation of stable exchange rate. Besides, a significant part of credits were assigned for the import of foodstuff and medical supplies as well as for the purchase of natural gas and fuel for the population. In 1994, a sum of 150 million US dollars was assigned for the repayment of external debts, which equaled 31% of export. The repayment of external debts is a great burden for the state budget, which entails the reduction of public funds for social needs. For the nine months of the Y2000, Georgia has paid 316 million US dollars of which 113,1 million were designed for the repayment of principal tax; the rest 203 were used to cover the interest.
Proceeding from the law on state debt, the external debts of Georgia are divided into several groups:
– Indebtedness to CIS countries (Russia, Ukraine, Uzbekistan, Azerbaijan, Armenia, etc.)
– Credits granted by foreign states (China, Turkey, Austria, Germany, USA, Japan, etc.)
– Credits granted by international financial organizations.
Foreign credits can, in their turn, be divided into two groups: loans for the years 1992-1994 (China, Turkey, Austria, Iran) and grants since the Y1995 (Germany, USA, Japan).
China granted credit for the acquisition of agricultural technique; the credit from Turkey was designed for the commodity production, that from Austria – for the construction of hotels that meet the international standards. These credits were restructured in 1997-1998. The second group of credits is considered to be a governmental one. It is designed for the rehabilitation of separate branches.
Credits from international organizations, IMF and the World Bank as well as from the Euro union , bank of restructuring and development of Europe must be used for the suppression of hyperinflation, performance of finance-and-credit policy, price liberalization, creation of legal framework, etc.
Foreign ” injections” in Georgia were used to cover budget deficit. Besides, their major part was used for the financing of non-paying projects and consumer goods import, which served to produce a negative effect. No conditions were singled out for the attraction of external debts. This is why there arose the problem of correct regulation of external debt in Georgia. This factor can become both a warrant of political and economic stability and a mechanism for the enslavement of future generations. Let us see table N 1 that will give us some notion about the external debt of Georgia and the expenditures for its repayment.
As far as we see from table N1, a tendency of the increase of external debt is observed in Georgia. This process can be shown as follows: see diagram N1
Proceeding from this situation, the issue about the restructuring of external debt was put on the agenda by the end of 1995. This process went on till 1997. The grant-element must not exceed 35%, which, in its turn, implied repayment of credit in the course of 10 years. The benefit period for it lasts for 5 years and the annual interest rate makes up 4%. Due to this mechanism, Georgi was able to suspend the repayment of restructuring debts till 2000. As a result of restructuring, the external debt of Georgia for the Y2000 made up 1,5 billion US dollars.
We know from the experience of foreign countries that the amount of external debt is considered to be normal if the interest does not exceed 15% of GDP.
What is the situation like in Georgia from this point of view?
In 1998 as well as in the previous years, the tempo of increase in the external debt exceeded the that of gross domestic product
As for the structure of external debt, the technical credit ratio in the whole number of credits makes up 14%, the trade credits ratio makes up 42% and that of rehabilitation ones – 44%.
In 1998 52 million GEL were assigned for the repayment of external debts, which made up 10% of budget expenditures; in the Y1999 this sum totaled 81,6 million dollars. This sum is much greater than that of healthcare, natural resources protection, construction and energetic taken together.
This index will increase in case there are no appropriate positive consequences of economic reforms.
We can learn from the experience of foreign countries that the restructuring of external debt has only a temporary positive effect and can by no means completely solve the problem. This measures will be effective only coupled with the stabilization and structural reforms. That is why a debt crisis in Georgia must become a stimulus for the modernization of structural transformations and rationalization of economic relations. From this point of view, it is necessary to implement liberal tax reforms the principles of which are universal in the whole world.
Besides, it is necessary to single out the following priorities; the establishment of limit at the expense of the Central Power, decrease of administrative expenses, reduction of benefits and subsidies for state enterprises, suspension of financing the secondary needs.
External credits in developed countries are used, principally, for the export incentive. In this case money-and-credit policy must be aimed at the development of export production.
It is also necessary to overcome technological lag, which requires investments.
The consistent performance of the above-mentioned measures will make it possible to gradually repay external debts.