Short analysis of 6-month performance report of Georgia’s 2020 state budget - საერთაშორისო გამჭვირვალობა - საქართველო
GEO

Short analysis of 6-month performance report of Georgia’s 2020 state budget

22 September, 2020

 

I. Key findings and recommendations

  • The 6-month plan for the state budget Receipts was increased by GEL 761 million and amounted to GEL 7,661 million. The increase in Receipts was due to additional debt. In 6 months, the Government of Georgia borrowed GEL 2.541 million. As of June 30, 2020, the government debt amounted to GEL 24.1 billion, which is about 49% of GDP;
  • The economic downturn and the tax breaks imposed due to the pandemic have reduced the 6-month plan for budget tax revenues by GEL 468 million. The new plan of GEL 4,570 million was fulfilled by 100.4%;
  • The 6-month budget Expenditures plan was increased from GEL 6,978 million and amounted to GEL 7,422 million. However, the updated plan was fulfilled by 92.9%;
  • Grants to Local Governments were characterized by the lowest rate of fulfillment (58.9%) of the 6-month plan among all categories of the Expenses. In turn, it was caused by the low level of fulfillment (45.9%) of the Capital Transfers Plan.
  • In April-June of 2020, compared to the same period of 2019, remuneration of non-staff contractor workers was increased by GEL 10.7 million and amounted to GEL 68.8 million. In total, in the first 6 months of this year, the remuneration of non-staff contractor workers was increased by GEL 20.4 million (19%). This happened at the time when saving on administrative costs should have been a priority for the government;
  • Expenses on business trips in the second quarter of this year were decreased by GEL 10.6 million (49%) and amounted to GEL 10.9 million. Despite the cuts, it is interesting why and how up to GEL 11 million was spent on business trips during April-June, when the borders of the country were closed and movement within the country was restricted;
  • From the Expenses the highest performance rates were observed in social security (96.9%) and remuneration in civil service (96.8%). At the same time, the 6-month remuneration plan was increased by GEL 1.5 million, while the social security plan was increased by GEL 456 million;
  • The 6-month plan for health care expenses was increased from GEL 595 million to GEL 737 million, which was mainly caused by the spread of the COVID-19. As in previous years, the amount allocated to the Universal Healthcare Program was insufficient. The initial plan was increased by GEL 89 million to GEL 523 million. By the end of the year, the annual funding for the Universal Healthcare Program will reach GEL 1 billion while the plan stands at GEL 802 million. However, this increase will not be enough either, as GEL 690 million has been spent as of 31 August. By the end of the year, the cost of universal health care is expected to reach GEL 1 billion;
  • The damage caused by the pandemic led to the creation of new spending programs in the state budget. Programs were created in 3 areas: healthcare, social assistance and business subsidies. In the first half of 2020, GEL 460 million was allocated for new programs linked with the COVID-19 of which GEL 370 million was spent;
  • Due to the COVID-19, the most significant increase in 6-month plans were observed in the budgets of the Ministry of Health (GEL 452 million) and the Ministry of Economy (GEL 19.6 million). As for the most significant reduction, it was observed in the budgets of the Ministry of Regional Development and Infrastructure (GEL 47.4 million) and the Ministry of Education, Science, Culture and Sports (GEL 37.6 million);
  • Among the high-budget programs the 57.3% fulfillment of the 6-month plan of the financial assistance program for the unemployed as a result of COVID-19 is worth mentioned. GEL 130 million was allocated for this program;
  • In the first half of 2020, compared to the relevant period of the previous year, the Budget Expenses were increased by GEL 869 million, including the Social Security Expenses that were increased by GEL 631 million and Remuneration that was increased GEL 35 million.

Recommendations:

  • Despite the renewed plans, it is very important for the Government of Georgia to save on unnecessary expenses and use the saved money to help socially vulnerable groups and provide tax incentives for the business;
  • Proper planning and implementation of the Universal Healthcare Program remains a problem, the solution of which is to increase the effectiveness of this program;
  • The amount of government debt is close to the critical level, 60% of GDP. Accordingly, the Government of Georgia should spend part of the foreign aid, received this year, in 2021 and develop a strategy to reduce the government debt in the coming years.

II. Introduction

The spread of the COVID-19 has had a major impact on Georgia's 2020 state budget. The economic crisis caused by the pandemic has significantly reduced budget revenues. At the same time, health and social care spending have been increased. On June 24, many amendments were made to the Law on State Budget for 2020, as a result of which a virtually new, so-called anti-crisis budget was adopted. Transparency International Georgia has already published an analysis of the 2020 anti-crisis budget.

In parallel with the amendments to the Law on State Budget, the Ministry of Finance also changed the program plans for revenues and expenses for the first six months of 2020 (January-June). Accordingly, the changed planned figures at the end of June were as close as possible to the actual figures for the first half of the year. Therefore, it is interesting to see the impact of the pandemic on the 6-month plan of revenues and expenses of the initial budget for 2020 (approved in December 2019).

Transparency International Georgia studied the basic features of the six-month performance report of the 2020 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]

The Government of Georgia (GoG) forecasts a 4% economic downturn by 2020. Prior to the spread of the COVID-19, the current year's economic growth forecast was 4.5%.

According to the preliminary data of the National Statistics Office of Georgia (Geostat), in the first half of this year, the Georgian economy shrank by 5.8%. If we look at the quarters, the economy grew by 2.2% in January-March and fell by 12.6% in April-June.

The economic downturn and some temporary tax breaks imposed due to the pandemic have reduced the budget's 6-month plan for Tax Revenues by GEL 468 million. The new plan – GEL 4,570 million was fulfilled by 100.4%. The plan for the second quarter of value added tax (VAT) revenues was reduced the most - by GEL 357 million.

The 6-month plan for Grants was reduced by GEL 8 million and amounted to GEL 46 million, however, due to the increased foreign aid, the budget received a GEL 77 million of grant in 6 months and the plan was fulfilled by 169%.

The 6-month plan for Other Revenues was increased by GEL 136 million and amounted to GEL 393 million. The increase was due to the transfer of mobilized funds of the StopCoV fund to the state budget. The updated plan for Other Revenues was fulfilled by 106.9%.

The 6-month plan for the Disposal of Non-Financial Assets (privatization) was reduced by GEL 1.5 million to GEL 56.5 million. The updated plan was fulfilled by 101.2%.

The 6-month plan for the Decrease of Financial Assets (returned loans) was reduced by GEL 8.4 million to GEL 54.3 million. The updated plan was fulfilled by 146%, the loan of GEL 79 million was repaid.

Budget Receipts also include government borrowing. Due to declining revenues and rising expenses, the GoG has increased its debt by 2.6 times in 2020. The GoG will borrow a total of GEL 8 billion in 2020. The 6-month debt plan has also been increased. According to the initial budget, taking of GEL 1,430 million of debt was planned in 6 months, while the updated plan increased this number by more than GEL 1 billion - to GEL 2,541 million. The new plan was fulfilled by 112%.

Overall, the 6-month plan for the Receipts increased by GEL 761 million to GEL 7,661 million. The updated plan was fulfilled by 104.6%, the budget received GEL 349 million more than planned.


Data source: The Ministry of Finance of Georgia

Compared to the first half of 2019, the budget Receipts was increased by GEL 2.2 billion in the first half of this year, driven by more debt.

IV. Budget Expenditures[2]

Increased expenses due to the pandemic affected the 6-month plan of Expenditures that was increased from GEL 6,978 million to GEL 7,422 million. However, the updated plan was implemented by 92.9% and GEL 6,897 million was actually spent.

The 6-month plan of Expenses - the largest item of the Expenditure s- was increased by GEL 589 million to GEL 5.944 million. In fact, GEL 5,466 million was spent and the plan was fulfilled by 92%.

Grants to Local Governments were characterized by the lowest rate of fulfillment (58.9%) of the 6-month plan among all categories of the Expenses. In turn, it was caused by the low level of fulfillment (45.9%) of the Capital Transfers Plan.

The 6-month plan for the Procurement of Goods and Services was also characterized by low performance. The initial plan was increased by GEL 43 million to GEL 748 million. However, in fact GEL 625 million was spent and the plan was fulfilled by 83.5%.

It is interesting to see a breakdown of the Procurement of Goods and Services, as these are exactly the costs that the pandemic should have had a significant impact on, especially in the second quarter of this year.

In the second quarter of 2020 (April-June), compared to the same period of 2019, remuneration of non-staff contractor workers was increased by GEL 10.7 million and amounted to GEL 68.8 million. There was an increase - by GEL 9.6 million in the first quarter as well. In total, in the first 6 months of this year, the remuneration of non-staff contractor workers was increased by GEL 20.4 million (19%). This happened at the time when saving on administrative costs should have been a priority for the government.

Expenses on business trips in the second quarter of this year were decreased by GEL 10.6 million (49%) and amounted to GEL 10.9 million. Despite the cuts, it is interesting why and how up to GEL 11 million was spent on business trips during April-June, when the borders of the country were closed and movement within the country was restricted. In January-March, business trip expenses were decreased by GEL 2.5 million and amounted to GEL 15.5 million. In total, business trip expenses in the first 6 months of this year amounted to GEL 26.4 million, which is GEL 13.1 million (33%) less than in the first 6 months of the last year.

Maintenance expenses of transport, equipment and military weapons were significantly reduced. In the first 6 months of 2019, GEL 66.4 million was spent in this direction, as for 2020, this number was decreased by GEL 20.3 million to GEL 46.1 million. In 6 months, the representation expenses were decreased by 48% and amounted to GEL 4.8 million, which mainly includes hosting of foreign guests.

Although part of the state institutions worked remotely, the office expenses were decreased by only GEL 3.6 million (7.2%) in the second quarter of 2020, compared to the same period of 2019.


Data source: The Ministry of Finance of Georgia

From the Expenses the highest performance rates were observed in social security (96.9%) and remuneration in civil service (96.8%). At the same time, the 6-month remuneration plan was increased by GEL 1.5 million, while the social security plan was increased by GEL 456 million.

GEL 456 million increase in the 6-month social security plan was caused by: GEL 170 million allocated for subsidies for utility bills due to the deterioration of the socio-economic situation caused by the COVID-19, GEL 38 million allocated for financial assistance to vulnerable groups, GEL 25 million allocated for assistance to socially vulnerable families and GEL 130 million allocated for the unemployed.

The 6-month plan for health care expenses was increased from GEL 595 million to GEL 737 million. A new program, the management of the COVID-19, was added to the existing healthcare programs. GEL 55 million was allocated for this program in January-June, but only GEL 40 million was spent.

As in previous years, the amount allocated to the Universal Healthcare Program was insufficient. The initial plan for 6 months was GEL 434 million, which was increased by GEL 89 million to GEL 523 million. In fact, GEL 522 was spent. With the amendment to the 2020 State Budget, the annual funding for the Universal Healthcare Program has been increased from GEL 757 million to GEL 802 million. However, this increase will not be enough either, as GEL 690 million has been spent as of 31 August. By the end of the year, the cost of universal health care is expected to reach GEL 1 billion.

The 6-month plan of another important component of the Budget Expenditures - the Acquisition of Non-Financial Assets (also known as capital/infrastructure expenses), was reduced by GEL 118 million to GEL 826 million. The updated plan was fulfilled by 99%.

The 6-month plan for the Increase of Financial Assets rose by GEL 318 million. The increase was due to the accumulation of funds on the budget balance. However, due to the large amount of foreign aid, the balance increased by almost 5 times than planned and the 6-month plan of the Increase of Financial Assets was fulfilled by 303%.

The last category of the Expenditures is the Reduction of Liabilities that covers state liabilities coming from the loans taken in previous years. Initially, it was planned to repay the debt of GEL 506 million in 6 months. The plan was reduced to GEL 480 million and was fulfilled by 99.6%.


Data source: The Ministry of Finance

In the first half of 2020, compared to the relevant period of the previous year, the Budget Expenses were increased by GEL 869 million. Social Security Expenses (pension, social assistance, and healthcare) were increased by GEL 631 million. Administrative Expenses were increased by GEL 60 million, including GEL 35 million in Remuneration and GEL 25 million in Procurement of Goods and Services. GEL 36 million more was spent on capital projects (Disposal of Non-financial Assets).

V. Budget deficit and government debt

GEL 924 million of the budget deficit[3] was planned for the first half of the year. Under the updated plan, this number was increased to GEL 2,061 million, while the actual deficit was GEL 2,308 million. The increase in the deficit was due to the decline in revenues and the increase in expenses caused by the economic crisis.

For this year the budget deficit is planned to be GEL 7 billion. Consequently, in the second half of the year, if the budget expenditures are fully utilized, the deficit will be much higher than in the first half of the year, which will contribute to some macroeconomic instability on other equal terms. Especially challenging is the stability of prices and the exchange rate of GEL.

As of December 31, 2019, the government debt was GEL 20.6 billion, which was 41.3% of last year's GDP. As of June 30, 2020, government debt amounted to GEL 24.1 billion, which is about 49% of the previous year’s GDP. The increase in government debt was due to additional commitments to finance the increased budget deficit and the depreciation of GEL. At the end of 2019, the government's external debt was USD 5.5 billion, which was GEL 15.8 billion calculated by that time’s exchange rate (2.87). As of June 30 this year, the foreign government debt was USD 5.9 billion (GEL 18 billion). In the first 6 months of 2020, the government's domestic debt was increased by GEL 1.2 billion.

By the end of 2020, the GoG will borrow more than GEL 8 billion, but at the same time it will repay the previously taken debt of GEL 1 billion. As a result, this year the government debt will increase by GEL 7 billion to GEL 27.6 billion, which will be 54.8% of projected GDP (up 60% is allowed by Georgian legislation). The government will not spend GEL 2.5 billion this year from the debt taken in 2020.


Data source: The Ministry of Finance of Georgia

VI. New budget programs caused by the COVID-19

The damage caused by the pandemic led to the creation of new spending programs in the state budget. Programs were created in 3 areas: healthcare, social assistance and business subsidies. In the first half of 2020, GEL 460 million was allocated for new programs linked with the COVID-19 of which GEL 370 million was spent.

In the first half of the year, the largest program linked with the COVID-19 was the subsidy for utility bills, for which GEL 173 million was allocated and the plan was fulfilled by 99.8%. In April-May, GEL 130 million was allocated to compensate those citizens who lost their jobs due to the COVID-19. However, only GEL 74.5 million was actually spent from this program, therefore, the plan was fulfilled by 57.3%.


Data source: The Ministry of Finance of Georgia

VII. Public institutions and programs expenses which have been significantly altered by the COVID-19  

In the first half of 2020, the COVID-19 had a significant impact on government spending. Accordingly, the expense plans for the mentioned period have been changed. The plans have largely changed in the direction of reduction, although the budgets of four institutions have been significantly increased, namely: a) the Ministry of Healthcare, b) the Ministry of Economy, c) the Ministry of Environment Protection and Agriculture, and d) the Ministry of Justice.

First of all, the Ministry of Healthcare is noteworthy, whose 6-month plan was increased by GEL 451 million. The 6-month plan of the Ministry of Economy was increased by GEL 19.6 million. GEL 15 million was cut from marketing activities of the LEPL the National Tourism Administration, which is part of the Ministry of Economy, but at the same time, a GEL 39 million program for renting quarantine spaces has been added to this Ministry’s budget.

The 6-month plan of the Ministry of Regional Development and Infrastructure was reduced the most - by GEL 47.4 million, which was due to the reduction of capital expenses. The 6-month plan of the Ministry of Education, Science, Culture and Sports was reduced by GEL 37.6 million, which was due to the savings in cultural and sports programs.

 

 


Data source: The Ministry of Finance of Georgia

As for budget programs, the 6-month plan of the Universal Healthcare Program was increased the most - by GEL 45 million. The 6-month plan of the Viticulture and Enology Development Program was increased by GEL 5.2 million.

The 6-month plan of the water supply infrastructure restoration-rehabilitation program of the Ministry of Regional Development and Infrastructure was reduced by GEL 22.8 million. The 6-month plan of the same ministry's road infrastructure improvement program was reduced by GEL 19.4 million. Moreover, the 6-month plans for cultural and sports programs have been significantly reduced.


Data source: The Ministry of Finance of Georgia

VIII. Public institutions and programs with the lowest fulfillment rates

After the spread of the COVID-19 in Georgia, government institutions began to make some savings. Although quarterly spending plans have changed since June, procurement of goods and services that were not an urgent need have been suspended since March. Agencies had low rates of implementation of the 6-month plan in terms of Procurement of Goods and Services and Acquisition of Non-Financial Assets.

Among all public institutions, the Office of the State Inspector spent the least compared to its 6-month plan - 54.8% of the plan. Then comes the Cabinet of the National Security Council with 59% fulfillment of the plan.

The Central Election Commission spent 63.6% of the planned amount in 6 months. More specifically, only GEL 502 thousand was spent out of the allocated GEL 5.3 million for the program of election activities. GEL 153 thousand was spent on the procurement of goods and services while the plan stood at GEL 3.9 million.


Data source: The Ministry of Finance of Georgia

Table 6 shows the programs and sub-programs for which the 6-month plans were implemented with less than 60%. The plans were completed by 0% or the money was not spent at all on 3 programs, namely: management of public clinics, Batumi bus project and Tbilisi solid waste management project.

Among the high-budget programs the 57.3% fulfillment of the 6-month plan of the financial assistance program for the unemployed as a result of COVID-19 is worth mentioned. GEL 130 million was allocated for this program.


Data source: The Ministry of Finance of Georgia


[1]  Receipts are a sum of Revenues, Disposal of Non-financial Assets, Decrease of Financial Assets and Increase of Liabilities.
[2]  Budget Expenditures are the sum of Expenses, Acquisition of Non-financial Assets, Increase of Financial Assets and the Decrease of Liabilities. 

[3] According to the Georgian legislation, the budget deficit a gross negative budgetary balance. Since the gross balance does not fully include revenues and expenses, the definition of the budget deficit used in this report includes change of liabilities or sum of lacking money, which was financed by taking new loans.  

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