The FINANCIAL -- Verdict: FactCheck concludes that Giorgi Kakauridze’s statement is Half TRUE
Resume: The deficit spending of the budget implies the amount by which government spending exceeds its revenues from the economy. At the legislative level, the budget deficit is defined as a total negative balance of the budget. According to data of Ministry of Finance, the negative balance during 2018 was observed in February (-80M), May (-4M) and September (-50M) alone. It should be noted that May’s figure is meager and can only be theoretically called the deficit spending. Therefore, a reference to the budget surplus is largely consistent with reality.
Besides the interconnection between the budget revenues and expenses, in terms of providing money to the economy, it is important how the government deals with funds that are accumulated as a result of the surplus. During ten months of the current year, total of additional 620M GEL was transferred from the budget and 210M GEL was transferred from autonomous republics and municipalities to the deposit of commercial banks, which in fact is the money supplied to economy.
It should be noted that transferring the funds to the treasury is a more costly choice, abstaining from allocating the funds to the bank deposit is not a reasonable decision. However, during the depreciation of the currency rate, it is more appropriate to choose the costly alternative and not supply additional resource to market until pressure factors on the currency rate are eliminated.
Deputy minister of ministry of finance, Giorgi Kakauridze, in the context of influence on the GEL exchange rate, stated that the deficit spending of the budget did not occur and surplus was observed at the end of each month of the current year.
One of the factors affecting the national currency rate is the volume of GEL that is supplied to the economy. Funds raised for the budget implies extracting GEL from the economy, whilst costs incurred implies returning money to the economy. If government extracts more funds from the economy than returns, it reduces the volume of GEL and contributes to the appreciation of the currency rate. At the legislative level, the terms are defined by the Budget Code of Georgia. In particular, a difference between budget revenue and expenses is an operating balance of the budget.
Difference between the operating balance of the budget and change of non-financial assets is a total balance of the budget. A total positive balance is the budget surplus, while the total negative balance is the budget deficit.
Graph 1: Operating and total balance of aggregate and state budget (Million GEL)
Source: Ministry of Finance of Georgia
Expenses incurred from the state as well as from the local budgets have an identical impact on the economy. Therefore, in this case, it is relevant to review consolidated budget data. As demonstrated on the graph, the operating balance of the consolidated budget is positive during the entire period. In other words, total revenues of the budget exceeded total expenses each month.
However, the budget deficit is defined against the total balance calculated in consideration with changes of non-financial assets. The total balance of the consolidated budget is mainly positive, implying surplus. The figure is negative in February (-81M), May (-4M) and September (-50M) alone. It should be noted that the May’s figure is meager and can only be theoretically called the deficit.
Besides the interconnection between the budget revenues and expenses, in terms of providing money to the economy, it is important how the government deals with the funds that are accumulated as a result of the surplus spending. These funds could be transferred to the treasure and in this case, money is taken out of the market. Or they could also be transferred to commercial banks as deposit and thus, returned in circulation.
Grap 2 reflects figures of transferring the budget funds in commercial banks.
Graph 2: Funds allocated in commercial banks (thousand GEL)
Source: State Treasury of Georgia
It is important to explain that whether funds will be supplied to economy directly from the budget spending or indirectly through the deposits transferred to a commercial bank (which will be naturally used by commercial banks for current crediting), they both increase the money supply to the economy.
According to state treasure data, at the beginning of the current year, 555M GEL was transferred from the treasury and 180M GEL was transferred from autonomous republics and municipalities on the deposit of commercial banks, which in fact is the money supplied to the economy and when all things are equal, could not have a positive influence on the GEL exchange rate. It should be noted that keeping money in the treasury is a more costly choice than placing on deposit.
Therefore, abstaining from transferring the funds to the bank deposit is not appropriate, when all things are equal. However, during the depreciation of the currency rate, it is more reasonable to choose the costly alternative and not supply additional resource to market until pressure factors on the currency rate are eliminated. It is obvious from the graph that during the August-September period, when the GEL rate faced depreciation pressure, the amount of deposits is substantially less, which is considered a desirable scenario.