The Implementation of the state budget according to the plan is a prerequisite for reducing macroeconomic risks and effectively achieving the set goals. Transparency International Georgia evaluates the implementation of the 6-month plan of the state budget every year to avoid the problems identified during the year and improper implementation of spending programs. This time, we studied the main performance indicators of the first 6 months of the 2022 state budget and developed recommendations regarding the identified challenges.

I. Key findings and recommendations

• In January-June, the 2022 state budget received more Receipts than planned. The plan was fulfilled by 102.7%. The increase in the Receipts was due to higher-than-expected economic growth. The Tax Revenue plan was fulfilled by 100.3%;
• The 6-month plan for Grants was fulfilled by 134% and it totaled GEL 227 million, of which GEL141 million was foreign grants. Georgia received 97% of foreign grants (GEL 137 million) from the European Union, GEL 2.5 million from the German State Bank, and GEL 1.3 million from the International Fund for Agricultural Development.
• The 148% completion of the plan of Other Revenues most significantly contributed to the excessive fulfillment of the Budget Receipts plan. The state budget received GEL 222 million more than planned, which was primarily due to the GEL 356 million income received by the National Bank of Georgia.
• The 6-month plan for the state budget Expenditures was fulfilled by 96.6%, and GEL 8.8 billion was spent. Among expense categories, the highest performance rate (99.7%) was recorded in Social Security, and about GEL 3 billion was spent on this.
• Compared to the first half of 2021, the expenses on Salaries increased by 8%, and the expenses on the Procurement of Goods and Services by 16%. Since January of this year, the increase in Salaries was caused by the increase in wages in the public sector.
• In January-June 2022, GEL 195 million was spent on Remuneration of Non-staff Contractor Workers, which was GEL 42 million (27%) more than the figure of the same period of 2021, and GEL 69 million (55%) more than the figure of 2020.
• In the first half of 2022, GEL 19 million was spent on Business Trips, which was GEL 9.6 million less than the figure of the same period of 2021. Before the pandemic, up to GEL 40 million was spent on Business Trips in 6 months of 2019.
• The deficit of the state budget for 6 months was planned at the level of GEL 1,002 million, while the actual deficit amounted to GEL 373 million. The deficit reduction was caused by the over-fulfillment of the Receipts plan and lower Expenses than planned.
• As of June 30, 2022, the government debt amounted to GEL 28.1 billion, which was about 42.5% of the last 12 month’s GDP. The Government of Georgia borrowed GEL 1,225 million in the first half of the year. At the same time, the debt of GEL 503 million was repaid.
• Of all ministries, the Ministry of Justice spent the least amount compared to the plan - 75.9% of the plan, which was mainly due to the spending of only 23.4% of the funding for the improvement of the penitentiary system infrastructure.
• The Ministry of Regional Development and Infrastructure spent more than the 6-month plan (by GEL 105 million), which was primarily caused by the 125% fulfillment of the 6-month plan for the high-speed highway construction program and the 105% fulfillment of the water supply infrastructure restoration-rehabilitation program.
• The 6-month plan of 17 budget programs was fulfilled with less than a 50% rate, among which the money was not spent at all on 5 programs. These programs are: Strengthening the Capabilities of the Georgian Defense Forces, Tbilisi Metro project, Tbilisi Buses project, Smart Transport System, and Adjara Solid Waste Project.
• Of the large programs, the 6-month plan of which was fulfilled by less than half, the most notable is the innovation and technology development program of the Ministry of Economy and Sustainable Development, for which GEL 22.2 million was allocated, but was completed only by 38%. GEL 17 million was allocated to the sub-program of the Ministry of Environment and Agriculture - the improvement of irrigation and drainage systems, of which only 45.9% was spent.
• GEL 760.5 thousand was allocated in 6 months for the Anaklia deep-water port development program of the Ministry of Economy and Sustainable Development, of which only GEL 165.9 thousand was spent. According to the 6-month performance report of the state budget, preparatory works for the selection of a new investor were carried out. Documentation also was prepared for the development of the terms of expression of interest needed for the selection of a new investor.
• The 6-month actual spending of the state budget shows that the GEL 500 million allocated for the COVID-19 management program (treatment of patients, vaccination, etc.) will be insufficient this year. As of August 31, GEL 464 million have already been spent on this program. This means that it will need an additional GEL 200 million by the end of the year.

Recommendations:

• The Government of Georgia should maintain the reduced budget deficit rate until the end of the year. Part of the increased budget Receipts can be used in future years. Reducing the budget deficit will have a positive effect on the macroeconomic stability of the country: it will reduce the government's debt burden, the negative pressure on the price level and the exchange rate of the GEL;
• In the budget performance reports, the Ministry of Finance should provide information on how many non-staff contractor workers are employed in each institution and how much is spent on their remuneration. Growing expenses on temporary workers raise questions about inefficient spending and nepotism, as hiring such employees is less regulated by law.
• The planning and management of health care programs and sub-programs should be improved, since, like the practice of previous years, the costs incurred for certain health care sub-programs significantly exceed the planned figures;
• Investment credit utilization rates should be increased, especially in those projects where the 6-month plan fulfillment is less than 50%. Investment credits are an important source of foreign currency inflow into the country and at the same time, they are aimed at the development of the country's transport and utility infrastructure.

III. Budget Receipts^[1]

The Government of Georgia (GoG) forecasted a 6% economic growth for 2022. However, according to the preliminary data, in January-June, compared to the same period of 2021, the economy of Georgia grew by 10.5%, and likely the GoG will significantly increase the forecast. The higher-than-expected growth of the economy was mainly due to the high rate of export growth, the significant recovery of the tourism sector, the increase in remittances from abroad, and the complete lifting of regulations imposed on businesses due to the pandemic.

As the economy grew faster than expected, in the first half of the year, the state budget received more Receipts than planned. In particular, the 6-month plan of Receipts was GEL 8,885 million, while in fact, the budget received 2.7% (GEL 9,380 million) more and amounted to GEL 9,124 million.

Separately taken the Tax Revenue plan was fulfilled by 100.3%. Due to the higher-than-expected economic growth and inflation, the plans of the Income, Profit, Value-Added, and Import Tax revenues were fulfilled with a significant excess (by 112%) and GEL 643 million more than planned was transferred to the budget. The Excise Tax revenue plan was completed by 100%. As for Other Tax Revenues, i.e. the tax deductions, instead of the planned GEL 418 million, the budget lacked GEL 205 million here, and the plan was fulfilled by 49%. The GoG did much larger tax returns than it had planned. This was the reason for the negative figure.

The 6-month plan for Grants was fulfilled by 134%. In particular, the budget received GEL 58 million more than planned and it totaled GEL 227 million, of which GEL141 million was foreign grants and GEL 86 million was revenue from central government LEPLs[2] and N(N)LEs[3].

Georgia received 97% of foreign grants (GEL 137 million) from the European Union, GEL 2.5 million from the German KfW Development Bank, and GEL 1.3 million from the International Fund for Agricultural Development.

The 148% completion of the plan of Other Revenues most significantly contributed to the excessive fulfillment of the Budget Receipts plan. The state budget received GEL 222 million more than planned from this source. Other Revenues include the interest received from state property, dividends, rents, administrative fees, fines, and transfers. The highest over-fulfillment was in dividends – GEL 149 million, which was due to the GEL 356 million income received by the National Bank of Georgia. In the form of interest benefits, the state budget got GEL 20 million more than planned, and GEL 9 million more than planned from fines.

The 6-month plan for the Disposal of Non-Financial Assets (privatization) was fulfilled by 112% and the state budget received GEL 132 million instead of GEL 118 million. The over-performance was caused by the increase in the number of privatization objects.

The 6-month plan for the Decrease of Financial Assets (returned loans) was fulfilled by 117% and the loans of GEL 87 million were returned.

Budget Receipts also include government borrowing. The GoG borrowed GEL 1,225 million in the first half of the year, which was 93% of the planned figure.

Out of GEL 1,225 million, GEL 432 million was domestic debt, and GEL 793 million was foreign debt. The 6-month plan for taking domestic debt was fulfilled by 96%, and that of foreign debt by 92%. The backlog in foreign debt was in long-term investment concessional credits, the plan of which was fulfilled by 88.4%.

Data source: The Ministry of Finance of Georgia

Compared to the first half of 2021, in the first half of 2022, the state budget Receipts decreased by 2.7% - GEL 256 million. The decrease was caused by the debt of GEL 3.5 billion, which was taken by the GoG in the first half of 2021 contrasting the first half of 2022 when the GoG took a debt of only GEL 1.2 billion. If we compare Tax Revenues - the main source of budget Receipts - with the same period last year, in 2022 it increased by GEL 1.8 billion.

IV. Budget Expenditures^[4]

In 2022, the 6-month plan for the state budget Expenditures was fulfilled by 96.6%, and GEL 8.8 billion was spent, which was GEL 307 million less than planned.

The 6-month plan of the Expenses - the largest item of the Expenditures - was fulfilled by 96.6% and amounted to GEL 7 billion. Among expense categories, the plan of the Grants for Local Self-governments was fulfilled with the lowest rate - 86.1%.

Among expense categories, the highest performance rate (99.7%) was recorded in Social Security. This item also includes healthcare expenses, the programs of which have been implemented at a high rate. For example, the Universal Healthcare Program has been fulfilled by 100%, and the Public Health Protection Program by 112.4%.

In the first 6 months of 2022, the Administrative Expenses, which include Salaries and the Procurement of Goods and Services, amounted to GEL 1.7 billion, which was 4.6% less than planned. GEL 866 million was spent on Salaries^[5] (97.5% of the plan), and GEL 877 million was spent on Procurement of Goods and Services (93.3% of the plan). Compared to the first half of 2021, the expenses on Salaries increased by 8%, and the expenses on the Procurement of Goods and Services by 16%. Since January of this year, the increase in Salaries was caused by the increase in wages in the public sector.

To break down the expenses on the Procurement of Goods and Services, the Remuneration of Non-staff Contractor Workers contributed the most to the increase in this category. In January-June 2022, GEL 195 million was spent on Remuneration of Non-staff Contractor Workers, which was GEL 42 million (27%) more than the figure of the same period of 2021, and GEL 69 million (55%) more than the figure of 2020.

Of the other expenses included in the Procurement of Goods and Services, Office Expenses and Transport, Equipment and Weapons Maintenance Expenses also increased significantly - by GEL 35.5 million and GEL 16.7 million, respectively.

In the first half of 2022, GEL 19 million was spent on Business Trips, which was GEL 9.6 million less than the figure of the same period of 2021. Before the pandemic, up to GEL 40 million was spent on Business Trips in 6 months of 2019. Therefore, in 2020-2022, the expenses on Business Trips were significantly reduced.

Data source: The Ministry of Finance of Georgia

The 6-month plan of another important component of the Budget Expenditures - the Acquisition of Non-Financial Assets (also known as Capital Expenses), was fulfilled by 101.6%. Up to GEL 1.2 billion was spent on this category. Compared to the Capital Expenses for the 6 months of 2021, 11% more was spent in this regard in 2022.

The 6-month plan for the Increase of Financial Assets^[6] was fulfilled by 54.5%. In particular, the GoG loaned GEL 87.5 million, instead of the planned GEL 161 million.

The last category of Expenditures is the Reduction of Liabilities, which covers state liabilities coming from the loans taken in previous years. The debt of GEL 503 million was repaid in 6 months, which was 99% of the plan.

Data source: The Ministry of Finance of Georgia

Compared to the first half of 2021, the state Budget Expenditures in the first half of 2022 decreased by 12.6% (by GEL 1,270 million). The decrease was caused by the fact that in the first half of last year the GoG returned GEL 2.2 billion of debt, and this year it repaid only GEL 503 million. The largest item of Budget Expenditures – the Expenses have increased by GEL 470 million this year, compared with the same period of the last year.

V. Budget deficit and government debt

The deficit^[7] of the state budget for 6 months was planned at the level of GEL 1,002 million, while the actual deficit amounted to GEL 373 million (GEL 629 million less than planned). The deficit reduction was caused by the over-fulfillment of the Receipts plan and lower Expenses than planned. By 2022, the annual (12-month) budget deficit is planned at the level of GEL 2.9 billion.

The reduction of the budget deficit led to a decrease in the volume of the government debt, but not by exactly GEL 629 million (the amount by which the deficit was reduced). The government took only GEL 88 million less new debt than planned and still raised at least 93% of the planned financing and increased the balance of budget residual^[8]. In the first half of the current year, the Expenses were to be financed with GEL 197 million from the budget residual. However, this amount was no longer needed. On the contrary, the GoG increased the amount available on the budget residual by GEL 348 million. Therefore, the GoG took a part of the new debt to increase the budget residual and will probably use part of this amount in the second half of the year.

As of December 31, 2021, the debt of the GoG was GEL 29.8 billion, which was 49.5% of the last year's GDP. As of June 30, 2022, the government debt amounted to GEL 28.1 billion, which was about 42.5% of the last 12 month’s GDP.

A significant decrease in the debt burden to GDP (by 7% points) along with a decrease in the debt expressed in GEL, was caused by the 10.5% economic growth recorded in January-June and high inflation (12.8%).

Even though in January-June 2022, the GoG took a new debt of GEL 722 million, due to the appreciation of the GEL, the government debt expressed in the Georgian currency decreased. At the end of 2021, the foreign debt of the GoG was USD 7.7 billion, which at the exchange rate of the time (3.10) amounted to GEL 24 billion. On June 30 of this year, the foreign debt was USD 7.5 billion. Therefore, it was reduced by USD 268 in January-June 2022. However, due to the appreciation of the Georgian currency, the foreign debt of the GoG expressed in GEL decreased more significantly - by GEL 2.1 billion.

By the end of 2022, the GoG plans to borrow about GEL 4.3 billion, but at the same time, it will repay the old debt of GEL 1.2 billion. As a result, this year the government debt will increase by GEL 3.1 billion. However, due to getting more budget revenues than expected, the GoG may take less debt than planned.

Data source: The Ministry of Finance of Georgia

VI. Public institutions and programs with the lowest fulfillment rates

In the first 6 months of the current year, ten public institutions could not spend more than 80% of the planned expenses. The State Inspector’s Service was the worst performer in this regard, which could spend only 55.7% of its plan. Then comes the High Council of Justice with a 57.6% fulfillment rate and the Apparatus of the National Security Council with a 67.7% fulfillment rate.

The ministries spent about 88% of the Expenses (excluding debt service). Accordingly, their spending significantly determined the fulfillment of the overall Budget Expenditure plan. Out of the existing 11 ministries, only the Ministry of Regional Development and Infrastructure spent more money than the 6-month plan, the Ministry of Education and Science fulfilled the plan by 100%, and the expenses of the other 9 ministries were less than the plan.

Of all ministries, the Ministry of Justice spent the least amount compared to the plan - GEL 40 million less (75.9% of the plan), which was mainly due to the spending of only 23.4% of the funding of GEL 20 million allocated for the improvement of the penitentiary system infrastructure and 59% usage of the money designated to the policy development and management program (overall budget: GEL 27 million).

The Ministry of Economy and Sustainable Development fulfilled its 6-month plan of expenses by 80.1%. Compared to the plan, the actual spending of this ministry was GEL 83 million less. More specifically, GEL 30 million less than the plan was spent on the entrepreneurship development program, and GEL 29 million less on the state property management program. The entrepreneurship development program includes the components of increasing access to finance for business, and the state property management program covers the costs of property maintenance, protection, privatization planning, and implementation.

As was mentioned, the Ministry of Regional Development and Infrastructure spent more than the 6-month plan (by GEL 105 million), which was primarily caused by the 125% fulfillment of the 6-month plan for the high-speed highway construction program and the 105% fulfillment of the water supply infrastructure restoration-rehabilitation program. In total, GEL 101 million more than planned was spent on the mentioned two programs and overall spending reached GEL 607 million.

Data source: The Ministry of Finance of Georgia

Table 3 shows the programs and sub-programs for which the 6-month plans were implemented with less than 50%. The plans were completed by 0% or the money was not spent at all on 5 subprograms. Of these programs/subprograms, the largest is the Tbilisi Metro project (budget: GEL 47 million), which is financed by the European Bank for Reconstruction and Development (EBRD). Next comes the Tbilisi Buses project (budget: GEL 23.8 million), which is financed by the same bank. Moreover, the money was not spent on the program of strengthening the capabilities of the Defense Forces of the Ministry of Defense, the budget of which was GEL 9 million for 6 months, and GEL 18 million - for 12 months. The mentioned program includes financing of air defense. According to the operational information of the State Treasury of Georgia on the implementation of the budget, no money was spent on the mentioned 5 programs even as of August 31, 2022.

Of the large programs, the 6-month plan of which was fulfilled by less than half, the most notable is the innovation and technology development program of the Ministry of Economy and Sustainable Development, for which GEL 22.2 million was allocated, but was completed only by 38%. The mentioned program is implemented directly by the LEPL Georgian Innovations and Technologies Agency. For 6 months, GEL 17 million was allocated to the sub-program of the Ministry of Environment and Agriculture - the improvement of irrigation and drainage systems, of which only 45.9% was spent. The mentioned sub-program is implemented with the financing of the World Bank.

GEL 761 thousand was allocated in 6 months for the Anaklia deep-water port development program of the Ministry of Economy and Sustainable Development. This program, which was completed only by 21.8%, is being implemented by the LEPL Anaklia Deep-water Port Development Agency. The purpose of the program is to identify a new investor as a result of the tender, conduct negotiations, and sign an investment agreement. According to the 6-month performance report of the state budget, preparatory works for the selection of a new investor were carried out, including full-scale research to study the potential cargo turnover of Anaklia port. Documentation also was prepared for the development of the terms of expression of interest needed for the selection of a new investor.

The 6-month actual spending of the state budget shows that the GEL 500 million allocated for the COVID-19 management program (treatment of patients, vaccination, etc.) will be insufficient this year. According to the original plan, GEL 394 million should have been spent on the mentioned program in the first half of the year. Later, the 6-month plan increased to GEL 425.5 million, while in fact GEL 416.1 million was spent. According to the data of August 31, GEL 464 million have already been spent on this program. This means that this program will need an additional GEL 200 million by the end of the year. In October 2021, Transparency International Georgia published an analysis^[9] of the draft 2022 state budget of Georgia, where we wrote that the amount allocated for the COVID-19 management program was insufficient and additional hundreds of millions of GEL would be needed in this direction. However, then the GoG did not consider our recommendation.

Data source: The Ministry of Finance of Georgia