State debt will fund long-term business loans
12 December, 2013
State debt will fund long-term business loans
The Georgian government plans to raise GEL 600 million by issuing state Treasury Bills next year. 200 million of this will be deposited with commercial banks, to disburse long-term investment loans.
Analysts find the scheme bizarre. According to Nodar Khaduri, Minister of Finances of Georgia, initially the plan was to issue only 400 million worth of T-Bills, to finance state budgetary needs. But now comes the extra 200 million for commercial banks to disburse long-term credits to businesses … and
the banks’ interest rate will be only 1%.
In fact commercial banks are the only sector allowed to trade in state securities. Therefore to issue T-Bills the state must borrow money from banks.
Normally interest rates for T-Bills average 5-5.5%. But according to Khaduri, the borrowed money will be returned to banks again - through deposits - at 5%+1%. Ultimately, banks will secure extra capital of GEL 200 million as cheaply as 1%. But the mandatory obligation for this cheap financing is hard and fast: banks will have to disburse this 200 million on long-term business loans only, and not on consumer credits.
According to Khaduri, the state loses nothing, since banks will get this additional cheap financial resource to finance the economy alone. It is certainly true that Georgian banks have a surplus of capital but they shun business loans and disburse consumer credits primarily.
“We will just help banks to transform the so-called short money into long money. We have worked on this issue with National Bank of Georgia, and Economic Ministry, and banks,” Khaduri said. Financial analysts cannot get a grip on this money juggling scheme, since Georgian banks have no deficit of financial resources. They are just shy to take risks on the credit economy. If government aims to cut down interest rates, then the GEL 200 million is too small a sum to have any influence on the market – it makes just 2% of the total credit portfolio of Georgian banks.
Lia Eliava, a financial market analyst, disapproves of the governmental initiative completely. “The internal debt is a loan taken from the banks in fact, and the state budget has to pay interest to them. When the state budget takes a loan to finance a concrete project it is a normal practice. But to return the borrowed money to banks lacks any logical explanation and poses many questions,” she said. “Locating state money in banking deposits while we have no deposit insurance system in the country is absolutely not acceptable.”
Soso Achvadze, an economic analyst, thinks that the state can take credits only if these credits will be spent on reasonable projects. But the profitability of the credit-based projects must be measured parallel to the implementation process of the finance projects, and not post-factum. He also reminded that Georgia still has to clear the old Soviet period internal arrears that disappeared after the collapse of the Soviet regime.
“The Georgian state issued around 40 million in Rubles during the Soviet period,” Archvadze said. “The Ruble was strong then, and this money value more than tripled commensurate with today’s standards. Georgia has to clear this debt. All our neighbors have already paid off this sort of arrears.”

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