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Georgia – Past, Present, and Future

19th CEEMAN Annual Conference
Georgia - Tbilisi | 2011
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I am very glad to see you all here. It is a very important occasion for me personally. Some seven years ago, I was a lecturer at the School of Business of the Caucasus University and I can attest to the good quality of the education that they provide. I am happy that I have this opportunity to talk to you today because I think it is very important to exchange perspectives with people like you. We live in a globalizing world. Things are changing fast. Business schools have done a good job staying abreast of these changes although sometimes things are beyond our control. Business education today is as important as ever. 

My presentation starts with the Rose Revolution in 2003. It will cover the period from that time to the present and will include some forecasts for the future. I am going to talk about structural reforms and macro-economic developments but I would also like to dwell on the key principles that we subscribe to. 

Our decision making is based on the principle of economic freedom. The financial and economic convulsions across the world have made people ponder questions such as whether a Keynesian approach is preferable to a libertarian approach. A lot of empirical evidence has been marshalled in to demonstrate what is good or bad for the economy. Nevertheless, there is not a single country that is very conservative in the management of its fiscal accounts and its bank sector but is not a prosperous country. Therefore, we are trying to make sure that we are not driven by the developments that are going on at the moment. 

We have impartial assessments of our economy, being rated by all three leading rating agencies: B+ by Standard and Poor (outlook rated positive in March 2011), B+ by Fitch (outlook rated positive in March 2011), and Ba3 by Moody’s (outlook rated stable in 2010). This means that the outlook for Georgia is bright on the condition that we continue with the same fiscal policy and same supervision as hitherto. This is quite positive, given the bad backdrop against which we are performing. 

Our economy contracted in 2009 at the time of the global credit crunch. The scale of the contraction was -3.4 percent. Fortunately, this is a lot less than in some other countries in the broad region which experienced double-digit contraction. In 2010, our growth exceeded 6 percent and, according to a very conservative forecast for 2011, the economy will grow by 5.5 percent. There is a consensus on this between our government and the International Monetary Fund but we believe that we can outperform this forecast by a good margin. 

We have an even distribution of the different components of our gross domestic product due to the fact that we are not a natural gas or oil exporting economy. The composition of the country’s nominal GDP in 2010 was as follows: 
■ Industry - 16.9 percent 
■ Trade - 16.6 percent 
■ Public administration - 16 percent 
■ Transport and communication - 11.6 percent 
■ Agriculture - 8.4 percent 
■ Healthcare and social assistance - 6.6 percent 
■ Construction - 6.6 percent 
■ Education - 4.5 percent 
■ Other - 15.7 percent 

The first financial crisis brought shockwaves to Georgia and scared investors. We had to use a considerable fiscal stimulus to contain the contraction and lay down the foundation for growth in the future. Nevertheless, our fiscal deficit reached 9.2 percent of GDP in 2009 after having steadily grown in the previous years. This trend was subsequently reversed. We had a deficit of 6.7 percent in 2010 and probably 3.7 percent this year. We expect a deficit of 3.0 percent in 2012 and 2.3 in 2013. The exact figures of course depend on external factors such as the economic crisis in the euro zone. As far as I know, this is one of the fastest fiscal consolidations in the region. 

The capital expenditure has been very stable, fluctuating at about 20 percent of the overall expenditure, which is a very high level compared to many other countries. That is what I had in mind when I said that the fiscal stimulus in 2009 laid down the foundation for the economic growth in the future. That groundwork came in a variety of different forms, such as building up highways and connecting villages with cities. Also high-voltage power transmission lines were built and investments were made in the water sector. 

Let me tell you how Georgia finances its budget deficit. The bulk of the deficit financing comes from the international financial institutions. In fact we have phased out some of the financial support that we were getting during the crisis and switched back to our pre-crisis level. This means that our exposure to refinancing risks is zero. 

Relative to other countries in the broader region, Georgia’s percentages of budget expenditures on compensation of employees and social benefits are low. In terms of goods and services, we occupy an intermediate position. On the other hand, Georgia has a higher percentage of capital expenditures. Our operating balance - which is current revenues minus current expenditures - is plus 4 percent. This means that we have a surplus economy in that sense. However, we have high capital expenditure, which explains we have a budget deficit. 

Our current account deficit peaked in 2008 but has fallen since that time and should be just below 10 percent this year. It is very difficult to make accurate predictions because of the turmoil in the Euro zone. One of the reasons for the better balancing of the current account nowadays is that a good number of tourists are coming to the country. This is the key service that we are exporting. Also, remittances during the crisis were stable, following an upward trend thereafter. 

The trade structure is quite diversified. There is no single strategic country on which we are dependent in terms of either exports or imports. The most important export partners in 2010 were Azerbaijan, Turkey, the United States, and Armenia. Some other export countries are Ukraine, Canada, Bulgaria, Kazakhstan, Russia, Spain, Germany, Romania, and the United Arab Emirates. The leading importing countries were Turkey, Ukraine, Azerbaijan and China, followed by Germany, Russia, the United States, the United Arab Emirates, Romania, Bulgaria, the Netherlands, and Kazakhstan. It is noteworthy that the European Union countries jointly accounted for 28 percent of our imports. 

In 2010, the leading export product was iron and steel, accounting for 26.3 percent of the total. It was followed by vehicles and beverages. In addition, Georgia exports gems and precious stones, ores, edible fruits and nuts, fertilizers, fuel, copper, pharmaceutics, aircraft parts, live animals, and machinery and appliances. Georgia imports mainly fuel, followed by vehicles, machinery and appliances, electrical equipment, pharmaceutical products, iron and steel, cereals, plastics, items of iron and steels, paper and paperboards, tobacco, sugar and furniture. 

We are holding one of the leading positions in the region in terms of lack of trade barriers and unnecessary red tape. We have a free trade agreement with Turkey and have been one of the two beneficiaries of the EU GSP+ Scheme in the CIS since 2006, granting local companies the right to export 7,200 categories of goods to the European Union duty-free. We are now discussing an association agreement with the European Union. We hope to be able to start official negotiations some time later this year. 

Georgia has been a member of the World Trade Organization since 2000. We have had a simplified customs regime since 2006 and a new customs code became effective in 2007. The customs code was combined with the existing tax code in 2010. 

In the wake of the war with Russia, there was an international donors’ conference in Brussels at which the international community pledged USD 25 billion for Georgia for public and private sector operations with the aim of boosting the Georgian economy in the short term and laying the foundation for longterm growth. However it is very difficult to gauge the scale of the private sector operations upfront as it depends on the existence of bankable projects. To be honest with you, we have had very many conferences here, typically resulting in partial delivery of what has been pledged or in no delivery at all. But in the 20 years that I have been in this business, the Brussels donors’ conference was the most successful one for Georgia. 

As of 31 August 2011, approximately USD 2.2 billion of this assistance has been disbursed. 

The government expects that by the end of 2011 Georgia will have entered into firm commitments with respect to the amounts pledged at the Brussels conference, which will provide stimulus funding to the Georgian economy. It is important to note that this will be done without crowding out the fiscal space. 

The public debt situation is quite favorable. The debt indicators are below the prudential thresholds. In terms of the external public debt to GDP ratio, we reached 33.6 percent in 2010 but the figure is now falling. The reason for that is the reasonable pace of disbursement of funds. When you implement infrastructure schemes, you do not implement the full amount upfront but follow a piecemeal schedule tailored to the dynamic of the projects. Another factor is that the ratio of nominal GDP growth to the real GDP growth has rebounded in recent years and has reached 6.5 percent. In that sense, we are being helped by the denominator effect. 

We issued our first Eurobonds in 2008, supposed to mature in 2013, followed by another emission in 2011 that is scheduled to mature in 2021. The price of the first bonds fell initially, then rose, and has since then maintained a more or less steady level. The prices of the subsequent ones have been relatively flat so far. This is similar to what is normal in a stable economy inside the European Union. This is very important because it represents an impartial yardstick for measuring the sustainability of a country’s economy. 

The portfolio average weighted interest rate as of the end of August 2011 was 2.00 percent, which is very low. There is an affordable public debt stock and very low interest rate on external public debt. Interest rate risk has been brought to a minimum. The government’s external debt amortization profile can be characterized as a flat trajectory and easily affordable annual repayment volumes. We are not exposed to LIBOR fluctuations, either. 

I am not going to dwell long on the domestic market debt. I just want to draw your attention to the fact that yields have been going down from a peak of 15.6 percent in September 2010 to 10.8 in August 2011 for the two-year T-notes coupon rates; a similar fall has been observed in the trend of the five-year T-bond coupon rates. 

The Central Bank’s gross foreign exchange reserves are at an all-times high. There has been some inflationary pressure recently, coming from the export of services. The Central Bank adopted an inflation targeting regime, trying to smooth out the excessive fluctuations. The currency has been free-floating, yet remaining quite stable in recent months. 

The banking sector has attracted diverse international interests. Some of the financial institutions that have entered the Georgian market are ProCredit Bank, HSBC, Halyk Bank, Commerzbank, Bank Turan Alem, Dhabi Group, JP Morgan, and many more. 

Georgia has a very resilient banking sector. It represents only a very moderate contingent liability of the sovereign. At the end of December 2010, the ratio of assets to nominal GDP was 50.8 percent. The sector has been entirely privately owned since 1995 and there have been no restrictions on foreign ownership of banks. The sector is well capitalized, with an average Basel I capital adequacy ratio of 24 percent, the local standard being 18 percent. The total assets of the banking sector have been rising. Deposits have increased, reaching a pre-crisis level whereas the percentage of nonperforming loans has been stable below 7 percent. 

The capital adequacy ratio is probably the key measure of the sustainability of the banking sector. It has been in the vicinity of 16-18 percent, which is pretty good. Profitability, measured as return on equity, has recovered after a slump from September 2008 to the end of 2009. The non-deposit funding structure is also favorable. Equity accounts for 40 percent, followed by borrowing from international financial institutions, which amounts to 40 percent. Another 8 percent comes from borrowing from non-resident parent banks, 5 percent is provided by domestic borrowing, and another 6 percent comes from private external source. This is a resilient structure that is not exposed to the effect of volatile capital. 

Georgia’s energy imports have a diversified structure. In 2005, all natural gas supplies came from Russia. Now, that country accounts for only 6 percent and more than 50 percent comes from Azerbaijan. Another 13 percent is provided by Armenia. 

The geographic distribution of petroleum and oil imports is also diversified. Azerbaijan provides 45 percent, followed by Romania, Bulgaria, Turkmenistan, Greece, Italy, and Russia. 

The same diversification sector is observed in the agricultural sector. Our traditional products that provide a competitive edge are mineral water and wine. In 2005, before the Russian embargo, 79 percent of our mineral water exports went to Russia. But after the embargo, we reduced that dependence on Russia. Now, 54 percent of the exported water goes to Ukraine. The rest is exported to Lithuania, Kazakhstan, Azerbaijan, Turkmenistan, and other countries. A similar switch occurred in the export of wines. 

As I said previously, the export of services has resulted in an improvement of our current account. What I mean by this is primarily the export of tourism. Georgia is increasingly becoming a global tourist destination. It is now a tourism hub in the Caucasus. Arrivals increased from less than half a million in 2000 to 2.5 million in 2010. This effect was achieved through the domestic road interconnectedness, compounded by the vertical approach to Georgia’s traditional tourism centers (Tbilisi, Mtskheta, Batumi, Bakuriani, Gudari) and the discovery of new promising destinations (Svaneti, Anaklia, Signaghi, Kvareli). This can provide a tremendous lasting boost to sea and mountain tourism, ski tourism, as well as to wine tours and green tourism. Georgia has various sites inscribed on the UNESCO World Heritage List. 

Georgia has cut the number of taxes that it levies to six. All these taxes are flat. Currently, the rates of the main taxes are as follows: 
■ Value-added tax - 18 percent 
■ Income tax - 20 percent 
■ Corporate income tax - 15 percent 
■ Dividend and interest income tax - 5 percent 

As you see, we have abolished the social tax, effectively merging it with the income tax. There are no bracket exceptions or any loopholes for our taxes. There is no payroll tax, social insurance tax, capital gains tax, wealth tax, inheritance tax or duty stamp. Foreign-source revenues of individuals are fully exempted from taxation. The tax rate reduction timetable was further accelerated in 2008. According to the 2009 Tax Misery & Reform Index released by Forbes Business and Financial News, Georgia is the fourth least tax-burdened country in the world, after Qatar, the United Arab Emirates and Hong Kong. We have done this because we want to make business in Georgia as easy as possible for local and foreign businessmen. Not only are our taxation rates low but we also have a very simplified tax system; filing tax declarations is straightforward and easy. 

Our government subscribes to some fundamental policies. We believe in the rule of law and property rights and we think that the state should have a minimal fiscal footprint. We also believe in few, low, and flat taxes, a minimal social security burden on business. Our target is single-digit inflation. We are striving to promote free trade, without any bureaucratic hurdles. 

The customs system in this country went through a major overhaul. We fired a lot of people and got rid of the corruption. This may sound bombastic but we have managed to achieve it. After firing many employees, we hired new ones, put them in glass offices, and made sure that they were well paid. We offered carrots and sticks so that they could do their job properly. 

We want a flexible labor market with minimal state interference in employeremployee relations. We have managed to abolish the ossification that we had in that respect. Now, our labor legislation is flexible. This factor is contributing to the swift rise of the economy. 

We are aiming for limited government because an oversized administration puts a burden on society. We do not want to spend more than 30 percent of the national income on government. Beyond that limit, business starts getting stifled. It is easy to be profligate in doling out pensions and benefits but history is replete with bad examples of economies that have run aground for that reason. We do not want that to happen to this country. Therefore, we have imposed something like a straightjacket on the government in order to curb its spending impulses. Our consolidated budget deficit to GDP ratio must not be in excess of 3 percent. This is a rule that will come into effect as of 2013. Also, the ratio of public debt to GDP must not exceed 60 percent. 

We are committed to deep deregulation, dramatically minimized and simplified licensing, and aggressive privatization. State assistance to the poor should be means-tested and focused. The civil sector should be lean and efficient, providing value for the taxpayers’ money. 

Since 1995, there have been no restrictions on the convertibility of the currency or on the repatriation of capital and profit. We have a ban on state ownership of banks and on state imposition of price controls. In effect, we have had no state-owned banks since 1995 and no price controls since the early 1990s. There is also a ban on the increase of the number of licenses and permits and a ban on the increase of state or independent regulators. Currently, independent regulators exist only in financial services, communications and utilities. 

We have a means-tested social assistance system. Assistance is rendered through vouchers and other tools that empower citizens and give them choice in healthcare, education and other sectors, rather than direct funding of state-owned service providers. 

It is important that we have a so-called principle of universality of the budget. This means that only the central government is allowed to borrow money. This is important because a lot of the trouble that we observe in various countries stems from their devolution of fiscal power and borrowing authority. 

Finally, I want to point out that, according to the World Bank, Georgia has taken enormous strides forward in terms of improving its business climate. It is the leading country on the World Bank index of cumulative change in Doing Business indicators between 2006 and 2011. 

Some of you may wonder if our reforms are sustainable. I am confident that they are. We have built new institutions that are here to stay. Our reforms have created a new and irreversible institutional culture. We did not root out corruption by means of sticks and carrots only. We did it also by empower-13 ing people who do not subscribe to it. They have created an environment in which you cannot steal. This is what will sustain the momentum. 

Question from the audience: Jean-Pierre Lehmann 

Minister, I would like to congratulate you on these remarkably favorable indicators. Could you tell us also something about the level of unemployment, poverty and social inequality, as well as the education level, as potential challenges for the future? 

Dimitri Gvindadze 

Unemployment rose during the crisis period. It was not associated with damage to the infrastructure but with damage to the banking sector and the resulting lack of business conference. It is something invisible, yet powerful. We tried to address this issue by a series of measures. To be honest, the unemployment statistics vary. Some say it is in the vicinity of 10 percent, whereas others estimate it at 15 percent. It depends on the methodology that you apply. If you ask a taxi driver who has a degree in engineering, he will tell you that he is unemployed simply because he is not working as an engineer. He is unemployed in his own perception. Therefore, it is impossible to come up with a uniform approach to the study of unemployment. 

As for pensions, we recently raised the minimum amount to 100 laris. We realize that this is very low but this is what I meant when I said that profligate social policy should not derail the economy. On the bright side, we have a very easily manageable pension system given the fiscal setup. I do not think that the pay-as-you-go system can work but if you attempt to introduce mandatory personal contributions, you need a very long track record of success. You need investment opportunities and I am not sure that we have them. Therefore, we are going to continue with our universal pension system. 

On the demographic side, I do not have exact figures at the moment. I can only tell you that we have a population of about 4.3 million and that it is quite stable. 

Question from the audience: Danica Purg 

Minister, I would like to ask you what your dream is. How do you see Georgia 10 years from now? 

Dimitri Gvindadze 

I definitely want to see Georgia as a member of the European Union. This is not only a political dream; it also has a cultural element. It is not the dream of the government but of the Georgian people. Go to the countryside and ask the farmers where they want to be in 10 years. You will see that there is very strong consensus on our goal of joining the European Union.
19th CEEMAN Annual Conference: Management Education in a Changing World: Are We Ready for the Challenge?
Political Economics
September 2011
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October 2011
Dimitri Gvindadze, Georgia – Past, Present, and Future,
Accessed: June 24 2019,
Available at: http://ceeman.lecturehub.com/lectures/634/2011_ceemanac_tbilisi_gvindadze_gppf
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