Domestic and external debts, ways and mechanisms to overcome them (using the example of Georgia)

Abstract

Public debt in Georgia is one of the most important challenges for the state budget, which is of particular importance in implementing the country's long-term economic stability and development plan. State debt is divided into internal and external debts, which differ by employer, currency and risk. Internal debt is a liability that the government assumes within Georgia, in GEL. Georgia's internal debt mainly arises to cover the budget deficit. The process of taking on domestic debt is regulated by the Law “On the Budget System” (Parliament of Georgia, 2005). This allows the government to protect the fiscal balance and reduce the risk of external crises. It mainly involves: bonds and state loans with local banks and financial institutions; covering the budget deficit; financing domestic infrastructure projects. Domestic debt reached approximately 10.9% of GDP after 2024. The main advantage of domestic debt is that it is less sensitive to exchange rate fluctuations, but its servicing requires regular financial resources from the budget. External debt includes credits and loans received from international organizations and foreign banks. External debt is related to international loans and affects the exchange rate and economic stability. According to historical data, excessive growth of external debt has created the most severe financial crises for many countries. In the example of Georgia, according to the National Bank, the structure of external debt is mainly loans taken in foreign currencies. External debt is particularly important because: it increases debt service risks when the exchange rate of the lari changes in foreign currencies; determines international economic dependence; is important for foreign investment and development when financing projects. Domestic and external debts represent a significant challenge for the Georgian economy, however, structural reforms, promoting economic growth, fiscal discipline and prudent debt management allow the country to maintain stability and reduce the debt burden in the coming years.