The FINANCIAL — Reducing tax revenue and raising public debt are considered the main fiscal risks for Georgia according to a recent survey conducted by PMC Research Center.
The results of the survey are very promising and claim that these are quite serious risks but Georgia’s fiscal stability seems to be maintained in both short and long term calculations. However not all experts agree with the conclusions.
“Tax revenue is a key factor for maintaining fiscal stability as 84 percent of budget revenue is taxes,” said Besik Namchavidze, one of the authors of the survey. “Predictions are quite optimistic as the country is moving on from a crisis situation and the main macroeconomic indicators are improving. For example, public debt for GDP used to be 45 percent in 2010 and it is supposed to decrease to 33 percent by the end of 2012. Budget deficit was 4.5 percent in 2010 and it is predicted to be 1.5 percent by the end of 2012. So the dynamics are quite hopeful.”
The current trend is quite optimistic. PMC’s centre examined how long it will last and how ready the Georgian economy is for new challenges for example regarding the financial crisis.
“According to our survey Georgia will not be facing a debt crisis in either the short or long term periods,” Namchavidze explained. “Furthermore, Georgia’s fiscal sector is ready for three years of currency rate shocks and budget deficit as well as economic growth. Stress shocks have showed that the macroeconomic indicators which determine fiscal stability don’t elude the maximum margin in case of shocks.”
The survey shows that the economy can still develop if the growth of tax revenue lags behind the growth rate of nominal GDP. In this case the economics of the country will grow with the sectors which are not taxed by VAT. According to this scenario tax revenue to GDP is reducing significantly.
“Our calculations show that if tax revenue to GDP is 24.6 percent in 2012, it will be 20.5 percent by 2020. And the rate will reach 19.4 percent in 2025,” he said.
“The reduction of tax revenue to GDP is a favourable condition for the development of the economy. But on the other hand the government has to fulfil its obligations. The survey showed that debt service indicators are not high enough to create problems for the country’s solvency.”
“The scenario doesn’t look favourable if only social expenses have a high share in the growing budget deficit. If such politics last a long time, the country’s fiscal stability will inevitably face a huge danger.”
In total the survey results are very promising, but not all experts agree with it. Irakli Murtskhvaladze, economic expert, thinks that the results are misled as its assumptions are not correct.
“All the assumptions are suspicious,” Murtskhvaladze claims. “All this data was taken from the Ministry of Finance and National Bank of Georgia. This was not an independent survey. Currency rate, economic growth and inflation tend to have been unstable for the last ten years. So it can’t be as stable during the coming years as was assumed in the survey. If we don’t take these factors into consideration, we can’t make a reliable survey.”
The survey was conducted by PMC Research Center last month. The Center (member of PMC Group) was awarded a grant by the USAID funded G-PAC programme to conduct comprehensive research and risk analysis of the fiscal system of Georgia in order to identify possible risks associated with fiscal sustainability for medium (3-5 years) and long (5-15 years) term periods.
Discussion about this post