Georgia: Selected Issues and Statistical Appendix
Author: International Monetary Fund
Publication Date:
07 Nov 2003
eISBN:
9781451814545
ISBN:
9781451814545
Language:
English
Keywords:
ISCR; CR; NPV; bank; ratio; debt service; debt indicator; revenue ratio; NPV ratio; NPV of debt; ratio of the NPV; Debt service ratios; Export performance; Public and publicly-guaranteed external debt
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The econometric results show that it is feasible to estimate robust price and inflation equations for Georgia. The long-term price equation expresses prices as a function of money, the exchange rate, and real income and may be interpreted as portraying equilibrium in the goods market. The paper also represents statistical data of transportation indicators, population and employment, personal income tax, monetary survey, average monthly wages, developments in commercial banking, interest rates, prudential indicators of commercial banks, balance of payments, and so on.

Abstract

The econometric results show that it is feasible to estimate robust price and inflation equations for Georgia. The long-term price equation expresses prices as a function of money, the exchange rate, and real income and may be interpreted as portraying equilibrium in the goods market. The paper also represents statistical data of transportation indicators, population and employment, personal income tax, monetary survey, average monthly wages, developments in commercial banking, interest rates, prudential indicators of commercial banks, balance of payments, and so on.

V. Georgia—external Debt Sustainability Analysis14

A. Introduction and Summary

67. The debt sustainability analysis (DSA) presented in this paper uses work underway by FAD and PDR on a framework for assessing sustainability in low-income countries (LICs). This is an adaptation of the existing Fund framework for assessing sustainability (intended primarily for emerging-market economies) to LICs, which incorporates specific LIC features relevant for medium-term sustainability analysis.15

68. The DSA includes two components—a detailed medium-term baseline scenario setting out assumptions on economic policies and key parameters, and a set of stress tests around the baseline, which are intended to explore the robustness of baseline projections to alternative assumptions on key parameters and macroeconomic performance. The stress tests are based on Georgia’s recent historical performance. This DSA is complemented by a simulation of a hypothetical Naples-terms restructuring of Georgia’s bilateral debt in the context of the Paris Club.

69. Reflecting data availability, the DSA covers only public and publicly-guaranteed external debt and excludes private sector debt and contingent liabilities, including those from the energy sector.16 The stress tests consider the impact on medium-term debt sustainability of a hypothetical government takeover of sizable contingent liabilities; the experiment is a standardized one and not tailored to the potential size of external contingent liabilities in Georgia.

70. The baseline scenario shows a steady improvement in debt indicators, but a lingering burden of Georgia’s external obligations on its public finances. Significantly improving debt indicators would require Georgia to abstain from borrowing on commercial terms and to continue shifting toward concessional financing, while substantially strengthening its fiscal position. The stress tests suggest that external debt indicators could deteriorate considerably under adverse external or domestic developments (e.g., lower export growth or substantial currency depreciation). A concessional restructuring of Georgia’s bilateral debt would significantly improve the debt indicators and enhance sustainability prospects.

71. The paper is organized as follows. The next section provides some background on Georgia’s external debt and its evolution since independence. Section C discusses the baseline DSA and its underlying assumptions. Sections D and E discuss sensitivity analysis around the baseline and simulations results from a debt restructuring on Naples terms. The last section presents a summary and conclusions.

B. Background on Georgia’s External Public Debt

72. The bulk of Georgia’s external debt was accumulated after independence, with very rapid growth during the early 1990s. By 1994, following a civil war and economic collapse, nominal public debt had climbed to US$1 billion, or 81 percent of GDP (Figure V-l), much of it stemming from energy sector borrowing because of the massive dislocations in the sector. In the context of macroeconomic adjustment and more limited borrowing, the pace of indebtedness slowed during the second half of the 1990s, although the debt continued to grow in absolute terms. By 1999, the debt stock had risen to US$1.7 billion, but the ratio to GDP had declined to 60 percent, following strong output growth in the second half of the decade. With little net borrowing, debt accumulation has further slowed in recent years, to a stock of US$ 1.8 billion at end-2002 (because of the large 1999 depreciation of the lari following the Russian crisis, the ratio to GDP declined only to 53 percent despite relatively strong economic growth).

Figure V-l.
Figure V-l.

External Public and Publicly Guaranteed Debt

(In U.S. Dollars and in percent of GDP, 1994-2002)

Citation: IMF Staff Country Reports 2003, 347; 10.5089/9781451814545.002.A005

Sources: Georgian authorities; and Fund staff estimates.

73. The creditor composition of Georgia’s external public debt has also changed significantly since the early years of independence, as financing from IFIs increased substantially in the mid-1990s. The share of bilateral creditors in the total debt stock declined from 81 percent at end-1994 to 50 percent at end-1998 and 47 percent at end-2002 (Figure V-2). As noted earlier, a significant part of this debt is related to suppliers’ credits from BRO countries (especially Russia and Turkmenistan) contracted mostly during the early 1990s to finance energy-related imports. BRO countries accounted for 65 percent of total claims in 1994, but their share had come down to 38 percent by 1998 and 31 percent by 2002. Claims by Paris Club creditors, excluding Russia, have been relatively low (around 10 percent) and have increased only slightly since 1994. In turn, the share of IMF and World Bank claims has risen steadily since 1994, reaching 37 percent in 1998 and 45 percent in 2002.

Figure V-2.
Figure V-2.

Georgia: Structure of External Public and Publicly-Guaranteed Debt

Citation: IMF Staff Country Reports 2003, 347; 10.5089/9781451814545.002.A005

Source: Georgian authorities, and Fund staff estimates.1/ Excludes Russia.

74. The rapid debt accumulation and the economic collapse of the early 1990s resulted in a heavy debt burden, which Georgia has sought to ease through a series of reschedulings. During 1995-98, Georgia’s bilateral debt was rescheduled through 11 independent country-specific deals. However, Georgia soon began to accumulate arrears on some of the rescheduled debt. In 2001, the Paris Club granted a flow rescheduling of principal obligations on “enhanced Houston terms.”17 These reschedulings have provided substantial cash-flow relief, but—to the extent that they have been mainly non-concessional—have implied little relief in NPV terms, a fact reflected in the relatively low level of concessionality of Georgia’s debt (the overall grant element was 17 percent in 2002).

75. With low concessionality and a relatively short maturity structure, and against the backdrop of low government revenues, Georgia’s external debt has remained burdensome. The NPV of debt and scheduled debt service relative to exports are above the average for other non-HIPC low-income countries.18 By contrast, indicators in relation to central government revenue are much less favorable. At end-2002, the ratio of NPV of debt to government revenue was 500 percent, while scheduled debt service payments amounted to 51 percent of revenue. This reflects partly the fact that, at less than 10 percent of GDP, central government revenue collections in Georgia are among the lowest in low-income countries.

C. Baseline Medium-Term Scenario

76. The baseline scenario is predicated on continued implementation of economic reforms. It assumes an annual average real GDP growth rate of 4 percent during 2003-08 and 3.5 percent thereafter. The current account deficit—excluding pipeline construction-related imports—would decline progressively, with exports and imports assumed to grow at an annual average of about 7 percent over 2003-08 and at about 5 percent thereafter. The relatively strong export performance during 2003-08 reflects rapid GDP growth by main trading partners, rising commodity prices and strong growth in transport services (10 percent on average during 2003-08), following the expected completion of the oil and gas pipelines. Import growth reflects the temporary import increase associated with the construction of the pipelines (an income elasticity of 1.5 is used for other imports). The real exchange rate is assumed to remain constant at its end-May 2003 level. The ratio of central government revenue to GDP is assumed to grow, on average, 0.6 percentage points per annum.

77. On the financing side, new borrowing is assumed to be modest and mostly on concessional terms, with new lending from multilateral creditors less than in the 1990s. The baseline assumes that borrowing from bilateral sources would be slightly above current levels, and be all on highly concessional terms. Grants are assumed to increase over time, especially from 2005 onward, reflecting the expected faster pace of reform implementation. The baseline scenario also assumes (for illustrative purposes) that Georgia will eventually be able to reschedule principal bilateral maturities falling due in 2003 on terms similar to the 2001 Paris Club agreement. Financing gaps are assumed to be filled through a combination of grants and concessional loans.

78. The baseline scenario features a steady improvement in debt indicators (Table V-l). The ratio of NPV of debt to exports is projected to fall to 123 percent by 2005 and then to stabilize at 80 percent by 2015. This declining trend is supported by low net new borrowing and relatively strong export performance. Under the baseline, the debt service ratio would be reduced to 15 percent by 2005, 10 percent by 2008, and under 7 percent in the outer years.

Table V-1.

Georgia: External Debt Indicators Relative to Exports 1/

(In percent)

article image
Source: Country authorities and staff estimates, projections and simulations.

Includes public and publicly guaranteed debt only.

Based on three-year backward-looking average of exports of goods and services.

Historical averages are for period 1996-2002.

Based on current-year exports of goods and services.

79. Debt indicators relative to government revenue also show a steady improvement, but would remain high throughout most of the projection period (Table V-2). The NPV of debt to revenue ratio would fall below 250 percent by 2008, and under 200 percent by 2010. The associated debt service ratio would be 24 percent in 2008, declining to 12 percent by 2015. These projections reflect a relatively slow improvement in central government revenue, from a very low base, to 16 percent by 2015.

Table V-2.

Georgia: External Debt Indicators Relative to Government Revenue 1/

(In percent)

article image
Source: Country authorities and staff estimates, projections and simulations.

Includes public and publicly guaranteed debt only.

Historical averages are for period 1996-2002.

Central government revenue excluding grants (includes Road Fund).

Georgia: Has the Debt Problem Deepened?

Debt sustainability analyses were performed for five low-income CIS countries in advance of the February 2002 CIS-7 conference in London.1/ Compared to the results of the February 2002 analysis, the present study shows a substantial increase in the ratio of the NPV of Georgia’s external debt to exports and to government revenue.

Under the February 2002 scenario with debt rescheduling on Houston terms (based on the 2001 Paris Club agreement and treating 2003 and 2004 maturities on Houston terms), the ratio of the NPV of debt to exports was projected to decline from 97 in 2002 to 76 in 2008, and the ratio of the NPV of debt to central government revenue to decline from 295 to 201 over the same period. This compares favorably to the ratios reported in the baseline scenario in this study (Tables V-I and V-II).

Three main factors account for this deterioration in Georgia’s debt ratios. First, the use of lower discount rates in the current study reduces the concessionality of Georgia’s external debt and increases the NPVs. Second, the recent depreciation of the US dollar against major currencies raises Georgia’s external debt expressed in U.S. dollars significantly, as a substantial fraction of Georgia’s external debt is denominated in Euros or SDRs. Third, the present study uses a lower base for export projections than the London paper, as 2002 exports were lower than originally projected.2/ The increase in the debt ratios cannot be attributed to additional borrowing, as Georgia has not contracted much additional external debt in the past 18 months. Projected growth rates of exports and government revenue are broadly comparable in the two studies.

1/

See IMF and World Bank, Poverty Reduction, Growth and Debt Sustainability in Low-Income CIS countries, February 2002. Available on the CIS-7 initiative’s website: http:www.cis-7.org.

2/

Also, in the 2002 study all extrabudgetary funds were included in central government revenue, whereas the present study only includes the Road Fund.

D. Stress Tests

80. This section tries to gauge the robustness or ambitiousness of baseline projections by applying a set of sensitivity tests. The tests assume that key macroeconomic variables (e.g., export growth, current account balance, official grants) are at their recent historical averages, or below them by a factor reflecting their historical volatility. Historical averages are computed for the last seven years (1996-2002) and volatility is measured through standard deviations. The alternative scenarios—listed in Tables V-1 and V-2—assume that financing needs over and above those projected in the baseline are met through borrowing on commercial terms (five years maturity, including one year grace, and market interest rates). This assumption affects the path of the various indicators, with NPV ratios declining relatively quickly over time and debt service ratios rising rapidly following the shocks.

81. The stress tests show that the medium-term debt dynamics can be highly sensitive to some alternative assumptions. Under more sluggish export growth or an exogenous increase in debt (e.g., through the assumption of significant non-guaranteed liabilities by the government), the ratio of the NPV of debt to exports would increase by up to 40 percentage points, climbing to almost 173 percent under the latter scenario in 2004 (Table V-l). The ratio of debt service to exports would go up by 10-15 percentage points relative to the baseline, reaching 24-30 percent in 2005. Changes of this magnitude could put the balance of payments under severe stress, especially given Georgia’s weak international reserve position.19

82. Indicators relative to government revenue would also deteriorate sharply under certain scenarios (Table V-2). For example, under a hypothetical 30 percent real depreciation in 2004, the NPV ratio would jump to 467 percent and would remain above 300 percent through 2008; the associated debt service ratio would increase to 60 percent and then decline to under 40 percent by 2007. An “exogenous” increase in debt would have a similar impact on debt indicators (stress test 5 in Table V-2).

83. Some of the stress tests involving the external current account and real GDP growth look more favorable than under the baseline (stress tests 1 and 3 in Table V-1, and stress test 1 in Table V-2). This is because performance in terms of these variables during the period over which historical averages are computed (1996-02) was stronger than assumed under the baseline for the years the stress tests are carried out.

E. Restructuring of Bilateral Debt

84. This section simulates a restructuring of Georgia’s bilateral debt in the context of the Paris Club. The simulation assumes a hypothetical stock operation on Naples terms comprising all eligible bilateral debt. This implies that two-thirds of non-ODA debt is forgiven and the remaining third is rescheduled over 23 years, with 6 years of grace. ODA debt is rescheduled over 40 years, with 16 years of grace, implying a reduction in NPV terms of about two-thirds. The restructuring is assumed to be based on the stock of debt at end-2003.

85. A restructuring on Naples terms would have a significant impact on the various debt indicators, reflecting a high share (43 percent at end-2003) of bilateral obligations in total debt, and the eligibility for restructuring of almost all bilateral debt. Under the scenario, the ratios of NPV of debt to exports and revenue would decline to 98 percent and 275 percent (in the base year), respectively (Table V-3).20 The corresponding debt service ratios would decrease by an average of 5 and 20 percentage points over the period 2004-06 compared to the baseline. The ratio of debt service to exports would reach single digits by 2004, while the debt service/revenue ratio would fall to under 25 percent by the same year, below 20 percent by 2006, and to 10 percent by 2015. The path and level of the debt service ratios suggest that Georgia’s external debt would become manageable with a stock operation on Naples terms.

Table V-3.

Georgia: External Debt Indicators After Naples Terms Rescheduling 1/

(In percent)

article image
Source: Country authorities and staff estimates, projections and simulations.

Includes public and publicly guaranteed debt only.

Based on three-year backward-looking average of exports of goods and services.

Based on current-year exports of goods and services.

Central government revenue excluding grants (includes Road Fund).

86. Note that if the hypothetical stock operation took place later (say, in 2006-07) but was preceded by a flow rescheduling on Naples terms starting in 2004, the picture described above would remain largely unaltered. The debt service ratios would change little as the portion of debt service not being cancelled would be rescheduled on the terms described in paragraph 84. The NPV ratios would, of course, be higher during the period of the flow rescheduling (2004-06), but would subsequently converge to those presented in Table V-3, following the stock operation.

F. Summary and Conclusions

87. Under relatively strong growth performance and low new borrowing, Georgia’s debt indicators are projected to improve steadily over the medium term, but the country’s external obligations are likely to remain fiscally burdensome. Debt indicators in general could deteriorate sharply under external or domestic developments that result in sluggish export growth or a substantial currency depreciation.

88. A concessional restructuring of Georgia’s bilateral debt would produce a substantial improvement in debt indicators and would enhance medium-term sustainability prospects. However, embarking on a sustainability path would crucially require that Georgia (a) abstains from borrowing on commercial terms and continues to shift its financing mix toward more concessional sources (including grants); (b) considerably increases tax revenue collections; and (c) implements the reforms required to achieve and maintain solid export and GDP growth.

14

prepared by Lisandro Abrego.

15

See Assessing Sustainability (SM/02/166) and Sustainability Assessments—Review of application and Mythological Refinements (SM/03/206).

16

Energy sector debts are likely to account for the majority of excluded contingent liabilities. Debts stemming from energy supplied by Azerbaijan, Russia, Turkey, Anglo Oil and Itera as listed in Table II-2 of this selected issues paper, for a total of US$185.4 million (5.5 percent of GDP), are not covered by an explicit government guarantee and hence are not included in this debt sustainability analysis. This number should be viewed as a lowerbound estimate for contingent external liabilities.

17

Under the Paris Club agreement, ODA debt was rescheduled over 20 years, with 10-year grace; non-ODA loans were rescheduled also over 20 years, but with a 3-year grace period.

18

Georgia’s ratios of NPV of debt and debt service to exports were, respectively, 148 percent and 23 percent in 2002 (Table V-l). The corresponding ratios for non-HIPC low-income countries were 143 percent and 15 percent (see IDA and IMF (2003), Heavily Indebted poor Countries—Status of Implementation, SM/03/294).

19

Gross international reserves excluding pipeline-related imports are projected at the equivalent of 1.3 months of imports at end-2003, and to increase to 2 months of imports by 2008. Even under this modest improvement, financing gaps would emerge in the balance of payments throughout the projection period.

20

The NPV of debt to revenue ratio after Naples terms would be above the HIPC Initiative threshold (250 percent), but the ratio of government revenue to GDP (of less than 10 percent) would be below the threshold for eligibility under the fiscal criterion (15 percent).

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Cover IMF Staff Country Reports
Georgia: Selected Issues and Statistical Appendix
Author: International Monetary Fund
Volume/Issue:
Volume 2003: Issue 347
Publisher:
International Monetary Fund
ISBN:
9781451814545
ISSN:
1934-7685
Pages:
80
DOI:
https://doi.org/10.5089/9781451814545.002
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    External Public and Publicly Guaranteed Debt

    (In U.S. Dollars and in percent of GDP, 1994-2002)

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    Georgia: Structure of External Public and Publicly-Guaranteed Debt

External Public and Publicly Guaranteed Debt

(In U.S. Dollars and in percent of GDP, 1994-2002)

Georgia: Structure of External Public and Publicly-Guaranteed Debt