Forgiveness of Loans: Experience and Mechanisms

Georgia can be considered an independent state, applying progressive and new steps in the post-Soviet space. Georgia is seen in the image of a state supporting public initiatives, capable of becoming an example of real innovations, rapidly advancing in integration with the Euro-Atlantic community. This is another successful step of Georgia.

Georgian Prime Minister Mamuka Bakhtadze said that work on closing bank loan commitments of 600,000 citizens will start in December. We are talking about the financial obligations of citizens to banks and financial organizations. The amount of debt is 500 million GEL. By the decision of the government this debt of citizens will be written off. Such a step makes it possible to judge how much the state attaches to social tasks.

Is It Possible to Forgive Loans in Azerbaijan?

Perhaps the citizens of Azerbaijan are interested in the question: "Why do we not have such a thing, too?" Here it is necessary to separate the two approaches. First, we must not forget the market principle of the obligatory cost of any goods and services. Whatever product or service is purchased in the private sector, its equivalent must be returned. Secondly, if in the macroeconomic context there is a negative reaction of the state in the market for supply and demand, then the government should place its "strong shoulder" under the obligations of citizens. This is included in the concept of the welfare state. If the state has taken steps capable of disrupting the stability of the regime or if the state contributes to this with silence, then the government should neutralize what is happening, using its resources. The devaluation of 2015 in Azerbaijan was caused by the uncertainty of the Central Bank.

In Azerbaijan, there is no experience of forgiving credit debts, but there is experience in eliminating other debts. The state has zeroed symbolic debts for electricity. Reluctance to create a precedent with the erasure of debt indicates a positive intention. It is necessary to accept that the deterioration in the fulfillment of citizens' debt obligations is caused not only by their mistakes in financial self-government, it also lies in the decisions of the National Bank regarding the national currency. Is it right to share responsibility for risks in such a situation? In such a position, the state should start its social functions and become a diligent parent.

The inefficient use of the resources of the International Bank eventually led to a policy of gradually erasing its debts by the state. The state, which lent a shoulder to the International Bank"s 11.5 billion debt, should also help the population.

Recreation and Nutrition of Banks

When the 2008 crisis in the mortgage industry in America reached banks, the crisis became even more aggravated because when banks do not recover, when toxic loans are not prevented, negative signals accumulate in this sector. As a result, there is tension between sectors of the economy.

In fact, the erasure of these debts would contribute to the nutrition of the banking sector at the expense of state resources. When banks cannot return money for the product sold, the frequency of the loan stops and the banking sector cannot feed the real sector. Loans are not offered to the services of the economy or the range of these offers is narrowed and this reduces the growth of the economy. Therefore, in our case, forgiveness of loans is beneficial to two beneficiaries: banks and citizens.

By ensuring the return of sold resources, banks can improve their operations. And it improves the circulation of the economy. Banks are not only unable to collect problem loans on their own, they even attract to this collection companies, which implement this process almost together with law enforcement agencies. And this leads to the impoverishment of citizens and even the loss of their homes, which is contrary to the laws and worsens the social situation. A poor citizen is not only unsecured, he creates a social threat to society.

Mechanisms and Priorities

Speaking of forgiveness of loans, it is not necessary to understand this only as the erasure of citizens' debts by banks. First, our banking sector is weak. There are many internal problems ranging from capitalization to institutional aspects. Therefore, it is not necessary to understand the forgiveness of debts by banks only as a decision of the state. If such a government decision is made, then these funds should be transferred to banks from the state budget and extra-budgetary funds, and banks should use these funds to cover the debts of citizens. Our not well-established banking sector must receive compensation for the product sold, because in a market economy, sold goods and services must be paid for. Violation of this principle means a return to socialism. A transformation of the economic system may occur, or at best, a mixed economic system will be created.

Forgiveness of loans can be divided into 2 phases. First, if the state does not have problems with the return of citizens' debts, let them decide to erase all debts. Secondly, if a restrictive act of forgiveness of debts is signed, forgiveness has to concern social groups that are completely unable to cover their debts. These, at least, should include problem loans. In Azerbaijan, about 1 million citizens have problem loans, and they should fall under the forgiveness act.

Another mechanism can be applied to more sensitive social groups. In this case, for the main stage, you can take three social groups: the unemployed, the teachers and the doctors.

In another mechanism, citizens who take loans in dollars can be taken into account, and at least loans up to 10 thousand dollars can be included in such an act.

I propose to use as a start-up capital to cover citizens" credit debts funds accumulated at the expense of a higher oil cost than budgeted by the state. Then the country will not touch the reserves in the budget for the implementation of social projects. This can be assessed in two aspects: 1) the state gives citizens the benefit they could earn on oil and, 2) using the experience of countries with rich resources, it creates conditions for citizens to directly benefit from oil revenues.

My Expectations

I am not a pessimist. But in order not to live with deceptive hopes and being a supporter of realistic solutions, I consider it useful to look into the recent past. I have no positive expectations in connection with the possibility of forgiving the debts of Azerbaijani citizens, because our state did not apply similar methods or similar social projects for its citizens. True, to create a successful external image we hold Eurovision, sports competitions and music festivals, but we are not interested in the implementation of socio-economic programs to improve the lives of our citizens.

As obligations of a smaller scale were not fulfilled, all the more one should not hope for the implementation of noticeable decisions financially costly and not so significant in humanitarian terms. The money left in Soviet banks was returned to citizens after 20 years. Lump-sum cash benefits (11,000 manat for each family) are not given to the families of martyrs, especially those who died in the Karabakh war of 1991-94. Next to this, it does not seem to me realistic to return credit debts that do not have any significant public importance. If the state, with its devaluations, has opened the way to the deterioration of the position of citizens who have taken up debts in dollars, then it has to cover these debts using its resources. Azerbaijan has sufficient financial resources for this.