The issue of internal debts is one of the most problematic for Georgia at present time. This topic is much of the public interest, because it directly deals with the peopleÆs pockets.

It should be noted from the beginning that it is impossible to name the exact amount of internal debt. It is basically stipulated not only by the fact that it turned out impossible to determine amounts of money within certain components of internal debts, but also because the Government ahs failed to define the structure of internal debts, i.e. it is not yet known what can be considered as an internal debt and what can not.

One of the major components of internal debts, and at the same time one the most serious financial problems which directly concerns with social security of the population, is deposits of citizens in the former state-commercial banks. By August 3, 1993 money deposited into 4 450 000 bank accounts equaled to 27 250 million Coupons (see Table #1).

Money Deposited on Citizens Accounts

Table #1

Taking into account that Georgia has changed its monetary units twice and exchange rates established by the government each time were: one soviet rubble - one coupon and one million coupons - one Georgian Lari (GEL), it will turn out that money deposited into state-commercial banks before August 3, 1993 will equal to GEL 27 250 (twenty seven thousands two hundred fifty).

It is obvious that this figure is far away from reality. Although it is hard to determine the precise value of money deposited by population, but with some rough estimation it amounts nearly to GEL 13 949 million (see Table #2).

Table #2

The government of Georgia commenced to work on the indexation of money accounts since 1995 and by the late 1997 a mechanism has been elaborated by which the population will be able to get their money back in cash (see Table #3).

The method of Indexation of Money Accounts Table #3

For the indexation of money accounts the Ministry of Finance of Georgia has demanded GEL 502 million, which is only 3.6 % of the necessary amount. Personate to the existed mechanism first stage of indexation will be devoted to money on "named" accounts and later to money on "claim" accounts.

2000 should complete the process of indexation. Though it seems somewhat strange how Georgia with its deficit budget can find the necessary GEL 502 million (from which GEL 492 million are due to the last two years). Taking into account that GEL 5 million provided by the 1997 budget for the most socially unprotected layer of depositors (first category handicapped people) has not been distributed (only by the end of the year GEL 500 000 were transferred to "United Georgian Bank" for this purpose) and the status quo in this respect has been maintained through this year too (according to the Ministry of Finance no information exists on the indexation ). Taking into account the paces of indexation we can make an assume that the process of indexation even won't start by the year 2000.

One of the elements of internal debts is the arrears of the Government of Georgia to Georgian enterprises and organizations that have paid in kind to Turkmenistan for the natural gas supplied. By January 1, 1998 the government owed GEL 3 369 million to these organizations from which GEL 1.5 million is supposed to be covered in 1998.

It is worth to note that to confine the Government debt generated by natural gas to only GEL 3 369 million is wrong, because it is still unknown what amount of production has been supplied for natural gas and also there does not exist the appropriate list of all organizations to the government. The given amount of debt has been determined on the basis of applications of organizations, which claim to have made in kind payments to Turkmenistan for natural gas.

Another component of internal debts is the money, which has been on accounts and later blocked at Tbilisi affiliate of the foreign economic relationÆs bank of USSR.

The amount provided for this purpose is GEL 1.5 million - for individuals and GEL 8.7 million for organizations.

The indexation process for individuals' deposits should have started in 1997 and for this purpose GEL 300 000 was allotted by the budget. Indexation shoal have happened by the following mechanise.

_ The amount of USD 100 should be totally recoverable.

_ The amount above USD 100 would be compensated only by 20%;

_ The compensation should be done in national currency by the following exchange rate: USD 1 - GEL 1.3.

It should be noted from the beginning that GEL 300 000 provided by the previous year budget was not used for this purpose and still it is unclear will GEL 100 000 and GEL 200 000 provided for the current year for the indexaton of individuals and organizations deposits respectively share the same fate or not.

The situation here is not promising and still it is ambiguous will the current state budget sacrifice the money dedicated to depositors because there is not even a single account of performed work in respect of indexation which should be submitted to the Ministry of Finance on a monthly basis.

So the government still owes GEL 10.2 million inherited from the foreign economic relations bank of the former USSR.

One of the components of internal debts is money first deposited by Georgian organizations into Russian central bank corresponding accounts and then transformed as external debts of Georgia. Pursuant to the Ministry of Finance this debt equals to GEL585 000 and for its gradual offsetting GEL 400 000 has been provided from which GEL 200 000 is due to 1998 budget.

One of the essential components of the country's internal debts constitutes moneys borrowed by the Georgian government from the National Bank of Georgia (NBG).

By contrast to other forms of internal debts the amount of this particular debt is increasing gradually and the current situation suggests that this growing trend will be maintained throughout the next couple of years. It is also worth to note that rates of growth for this debt is diminishing yearly.

The marginal amount of money borrowed by the government of Georgia from the NBG was GEL 384.2 million by the beginning of 1998. The costs of service of these debts (money paid on interest rates) amounted to GEL 26.8 million in 1997. Therefore, total liability of the government to the NBG is GEL 411 million.

Additional GEL 54 million has been borrowed by the government from the NBG to cover budget deficit, while budget has allocated GEL 40 million for debt service.

Another significant component in internal debts has been generated via issuing of profitable bonds by the government in 1992. These were the securities, which should have been exchanged into the soviet so called "three-percent" bonds.

In 1992 Georgia has issued government profitable bonds with the total value of 5 billion soviet roubles with effective time of ten years. According to the former saving banks, in the interim from 1992-1994 bonds of 5 811 395 000 coupons value have been released (as in 1993 coupon has been acknowledged as the only means of payment bonds of 5 million roubles have been transformed into 5 million coupons), from which bonds of 1 188 446 000 have been purchased. After drawing profit of 2 171 400 000 coupons, 359 457 000 has been delivered in cash.

So nowadays the liability of the Georgian government in this respect equals to 6 434 892 000 coupons (4 622 949 000 is the basic sum and 1 811 892 000 is the amount of bonds on which dividends should be paid).

If we take into account that Georgian government has not conducted any indexation concerning to bonds and official exchange rates too (1 000 000 coupons _ - GEL 1), then the liability of the government to bond owners will equal to GEL6 435.

To confine the government arrearage to only GEL 6 354 will be unreal. This fact has been admitted by the government too and a special mechanism has been created to support bond indexation (see Table #4).

Table #4

After the indexation the government liability to bond owners has constituted GEL 130 000. It is obvious that this sum is more than GEL 6 435, but it is far less than real amount which is hard to define but it equals nearly to GEL 911 000

(See Table #5).

Table#5

The money allotted for the indexation of bond arrearage is only 14% of its real value.

It can be said assuredly that the process of bond indexation will be completed "successfully" because while the total amount of GEL 130 000 is destined for indexation GEL 70 000 is allocated for organizational expenses.

Treasury liabilities represent the only component of internal debts, the growth of which may be regarded as a positive moment.

The negative sides of increase of internal debts through treasury liabilities yet exceeds its positive sides. In particular, treasury liabilities can be regarded as one of the non-inflationary source for decreasing budget deficits. For instance they helped to cover 1997 budget deficit up to GEL 5 822 287. Although it is a very small amount but we should take into account that the practice of treasury liabilities has been set up only in August of 1997. The budget deficit of 1998 is planned to be covered up to GEL 32 million, though today this figure seems somewhat unreal.

Eventually, what regards treasury liabilities one thing should be mentioned, that neither attracted GEL 5.8 million nor GEL6.4 million-arrearage matter. In this case more important is the experience accumulated by our citizens while dealing with treasury liabilities and what can be considered as more beneficial than anything else.

Table #6

So total official amount of internal debts piled up by January 1, 1998 equals to GEL 933. 21 million, though this figure is not realistic at all. It does not include such entries as:

• the coverage of the liability generated through the purchase of the 1990 former soviet non-dividend bonds;
• the government liabilities generated after the failure of the co-operative accommodation fund;
• the liability generated through the obligation taken by the government to satisfy contracting drivers of the municipal enterprise "Tbiltrans";
• the liability generated through the failure of distributing the items won by the population state lottery drawing;
• The liability generated through the insolvency of the Batumi affiliate of the former Soviet Union "IndustriaBank".

Internal Debt of the Government Table #7

This is mainly caused by the fact that yet it is not officially calculated the amounts of domestic liability by each abovementioned entry and afterwards the value of internal debt will rise to some extent. Those components, which have been admitted as internal debts, are far from reality. As the Table # 7 suggests real value of internal debts can not be less than GEL 14 381. 281 million (although this figure is not precise either but it is closer to reality) and this once again reminds us how deplorable the situation is.