In different countries around the world, there is an aspect of trade with foreign partners. In the business, there is a possibility of one state taking advantage of the other. The scenarios may result in a favorable or unfavorable balance of payments. This essay is an examination of the balance of payments of Georgia whose capital is Tbilisi with a population of approximately 3.9 million people. The economic recovery exhibited by the city of Tbilisi since the year 2000 has seen the activation of urban life and regeneration of the country’s economy (Salukvadze & Golubchikov, 2016).
Current Account
Among the essential elements of the balance of payments is the current account. This is seen as necessary in indicating the state of the economy of a given country. A country is said to be in the state of equilibrium in the current account if the residents are in a position to comfortably purchase their country’s goods and services. With residents, there is the inclusion of the population, businesses entities as well as the government. As a matter of argument, the world controlled by the free flow of capital enhancements and the integration of current accounts in the world financial makeup needs a consideration (Borio & Disyatat, 2015). Taking the case of Tbilisi in Georgia, there is a lot to be derived as far as current account is concerned. According to statistics from CEIC Data (n.d.), Georgia recorded a balance of -1.322 billion USD in December 2017. This is seen as an increase in comparison with the previous year where the record stood at -1.848 billion dollars. As per the annual averaging, the country records an approximately -1.41 billion dollars since the year 1997 to the year 2017.
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According to records dating back from 1997, the time which there was higher recording was in the year 2000 in which the record stood at -175.900 million USD. In contrary, the country has also faced the worst recordings in the year 2008 in which the current account balance of payment stood at -2.811 billion dollars (CEIC Data, n.d.). According to the description from the World Bank sources, the current account balance is the total of the net export of a country for both the services and goods added to net primary earnings plus net secondary gains. In most instances, the recordings are made regarding the USD. The data remains active in most of the Georgia financial channels and databases. The reporting of these statistics is a mandate given to the National Bank of Georgia. As per the categorization, the data is under the global database Georgia. Looking at these trends, it is appropriate to conclude that there is a surplus in the current account over the years concerning the economy of Georgia. Hence, it is indicating an increase and an economy which is healthy. As per the records, it is in line with the excellent indication which means that the assets owned are more than the value of the liabilities. This is conducive for international trade. In overall, there is a favorable balance of payment in consideration of the current accounts which has been seen to be on the right trend in the past ten years.
Capital Account
As far as microeconomics and international finance are concerned, the capital account is one of the primary components of the balance of payments. The capital account measures the financial transactions which are likely to affect the country’s future business activities such as production, income as well as savings. The most distinctive feature of the capital account is that it measures the transferring of liabilities and assets. In case a country has a current account deficit, then there is a probability of the capital account having a surplus. In such a situation of financial analysis, it can be affirmed that the economy is doing good. As pointed out this component of the balance of payment means a record of the overall transactions which can change the external liabilities and assets of the country in action (Gibson & Thirlwall, 2016). For instance, the foreign assets held by the country’s residents in the form of bank accounts, shares and investments. On the same note, the liabilities owed by such a country’s residents to other nations such as loans.
Georgia has had an interesting trend in its capital account component in the past ten years. Like in the case of a current account, there can be noted the variations in the balance of payment in this element. Important to note is the fact that the current account is directly linked to the capital account in that one is likely to affect the other. In case a resident uses his assets to acquire a given product in another country, there will be unmistakably reduction in the capital account owned. This can be further illustrated by the government, a citizen or individual business premises acquiring given assets outside the country using the financial means. This will lead to a probable reduction in the capital accounts.
There was a gradual decrease in capital transfers in Georgia between the years 2011 and 2015 (National Bank of Georgia, 2015). As per the records, the highest recording was in 2011 within this period where there were 145.8 million transfers. As compared to 2014, there was a drop in the annual transfers of net capital transfers of 43.0 percent. The decrease in capital transfers in the year 2015 was as a result of the contraction of credit. This culminates from a slight variation in the capital outflow from the inflow which probably had a small influence on the Net figure (National Bank of Georgia, 2015).
Financial Account
The financial account is a component of the balance of payment which measures either the decrease or increase of the foreign ownership of the assets (Higgins & Klitgaard, 2014). As pointed out earlier, the ownership may be involving an individual private citizen, business premises or the government in general. It should be remembered that financial accounts have some other two subcomponents. With these, there is the domestic ownership by residents of the assets. Another component is the foreign ownership of the assets by the country’s residents. With the second subcomponent, if there is an increase, there is an addition in the country’s financial account. It means that there is money flowing into the country to buy the asset. A country where the domestic savings cannot finance in equal measure the financial needs of its residents should be considered to be having the financial expenditure exceeding the assets. With this, it is clear that there will be a deficit in the total assets owned. In such a situation, it is necessary that such a country should increase its foreign reserves to bring a state of equilibrium to the financial account.
Concerning Georgia, there is the summary for the financial account specifically for the year 2016. Looking at the records, the stock of the inflow of investment to the Georgian economy by the end of this period was 14.2 billion USD (National Bank of Georgia, 2016). Into further data recorded, the net acquisition of the financial assets in 2012 was 216.9 billion USD. In the same year, there was Net incurrence liability of about 831.3 million USD which translated to equity capital of 762.9 million USD. Advancing to 2016, there was a total acquisition of financial assets of 255.9 million USD. There was a net incurrence liability of 1588.8 million USD. With these, there was reinvested earnings of 308.8 million USD. Summing up the records for other capitals was -550.7 million USD for the year. For the past five years, the highest Financial Direct Investment was in 2014 where 1.8 billion USD was recorded (National Bank of Georgia, 2016). There was a growth rate of about 83% in the same year. However, in the subsequent years 2015 and 2016 there was a reduction in Financial Direct Investment as compared to the previous year. Despite this, it should be realized that the level remained high at 1.6 billion USD.
Analysis of Changes in the Balance of Payments in the Period
The balance of payments of any given country is essential as it enables the citizens and the government to analyze its economic performance over a given period. In case there is a deficit in the balance of payments, it can be concluded that the country is importing more than it is exporting, hence experiencing an unfavorable balance of payments (McCombie & Thirlwall, 2016). When a state finds itself in such a situation, it will be inevitable that it must borrow loans to finance the import load. It is not improbable to understand the performance of an economy but also impossible to do the same without comparing the imports and exports.
According to the reports from the National Bank of Georgia, it is seen that in the year 2016 there was an increase in the government and other sectors liabilities. On the same note, there was a decrease in the loans given by the Georgian National Bank. In this state of affairs, it can be averred that the country’s economy is not doing well. It is important to put into consideration that in most economies, public debt is not directly linked to either the growth or the poor performance of the economy. Instead, they have used the instruments at which the financial policies are formulated. In these cases, there is the endeavor to figure out how the plans can be influenced in terms of the popularity with the debt issues (Panizza & Presbitero, 2014). Despite all these, the Gross Domestic Product (GDP) growth of Georgia in 2017 surpassed projections from the National Bank of Georgia and the International Monetary Fund (IMF). It was expected by the two institutions that the GDP of the country would exhibit growth of 4.2%. However, as noted by Babych and Mzhavanadze (2018), GDP growth reached the 4.8% mark.
Conclusion
It can be summarized that the balance of payment of any country is a crucial factor of consideration in the financial and general economic analysis. Therefore, it is necessary that the imports of any given country at any given time are maintained at a lower state to reduce accumulation of more public liabilities in running the country’s operations. Georgia being a small country, there is an advantage in the consumption of resources which can result in the reduction of the imports. However, the country can do away with the challenges of a relatively small population by increasing the direct financial investments to other countries to increase the chances of the citizens getting the income out of the foreign assets.
References
Babych, Y. & Mzhavanadze, G. (2018, February). The Georgian economy in 2017 – a year in review. The Financial. Retrieved from https://www.finchannel.com/opinion/analysis-3/71565-the-georgian-economy-in-2017-a-year-in-review
Borio, C. E., & Disyatat, P. (2015). Capital flows and the current account: Taking financing (more) seriously. PIER Discussion Papers 14., Puey Ungphakorn Institute for Economic Research , revised Jan 2016.
CEIC Data. (n.d.). Georgia Balance of Payments: Current Account. CEIC Data. Retrieved from https://www.ceicdata.com/en/georgia/balance-of-payments-current-account
Gibson, H. D., & Thirlwall, A. P. (2016). Balance-of-payments theory and the United Kingdom experience . (4th ed.). Springer.
Higgins, M., & Klitgaard, T. (2014). The balance of payments crisis in the euro area periphery , Current Issues in Economics and Finance . Federal Reserve Bank of New York, vol. 20.
McCombie, J., & Thirlwall, A. P. (2016). Economic growth and the balance-of-payments constraint . Springer.
National Bank of Georgia. (2015). Balance of Payments of Georgia. National Bank of Georgia. Retrieved from https://www.nbg.gov.ge/uploads/publications/balanceofpayments/2015/bop_2015_eng.pdf
National Bank of Georgia. (2016). Balance of Payments of Georgia. National Bank of Georgia. Retrieved from https://www.nbg.gov.ge/uploads/publications/balanceofpayments/2015/bop_2016_eng.pdf
Panizza, U., & Presbitero, A. F. (2014). Public debt and economic growth: is there a causal effect?. Journal of Macroeconomics , 41, 21-41.
Salukvadze, J., & Golubchikov, O. (2016). City as a geopolitics: Tbilisi, Georgia—A globalizing metropolis in a turbulent region. Cities , 52, 39-54.
