Trends of Georgian economy in 2004, forecast for 2005

The past year was much complex and significant for Georgian economy. As mentioned in the beginning of last year, the main objective was establishment of financial order and legalization of tax incomes.
It was obvious that in the first year after the revolution it would be impossible to make break-through in production increase and investments as well as in increase of workplaces. In 2004 GDP growth was 8,4% or 9800 million laris compared to previous year. Despite this, downward trend has been observed in agriculture, industry and construction.
Growth in Europe was not great with its major part falling at tax collection ? nearly 80% in average. Therefore, half of general economic growth fell at collected taxes for production and incomes of budget sector.
Besides, serious indicators were observed in export growth mostly at the expense of scrap metal legalization, Madneuli mining production and winemaking components. Pure foreign transfers and credits have increased, too.
Significant growth is stipulated by investments in the construction of Baku-Jeikhan pipeline. At the same time, trade balance deficit has also grown.
It is clear that tax legalization level has reached unforeseen scales. Therefore, the scale of shade economy reduced.
Transfers from abroad increased from 467.6 to 726.4 millions in 2004.
In 2004, the country was a pure consumer with its trade balance deficit reaching an all-time high ? 1198.3 million US dollars.
In export sector export of scrap metals grew by 36 million US dollars, aircrafts, i.e. production of the 31st factory to Turkmenistan grew by 60 millions, ferroalloy ? by 18 millions, copper and fertilizers ? by 10 million.
Of the 2 million able-bodied population only 750 thousand people are employed in Georgia, and the figure has not yet changed. Inflation growth rate has also remained unchangeable with 5,5% in average.
It is clear that mostly from the viewpoint of tax legalization, in 2004 budget was replenished and the way was paved for economic reforms in 2005. The main target of economic reforms is improvement of business environment, attraction of investments, employment growth and increase of taxation objects while continuing the business legalization course. This year priority is attached to production growth.
Large privatization will continue in 2005. It will bring 300-350 million dollars to the budget. As agreed, the privatization will be followed by 200 millions’ worth investments;
Since the enforcement of the tax code that at present stage is complex, but optimal (if not toughened by the instructions of the Finance Ministry), business legalization process will continue and legal turnover will increase by 200 millions in the conditions of shade economy’s decrease by 8-10%;
There should be great deregulation epoch in 2005, and the “Laissez-Faire” principle should be implemented. This will provide wide arena for trade and competition. Business will be freed from state patronage oppressors and economy will gradually start functioning in line with market laws;
? 2005 will become a year of decrease in the number of bureaucratic and institutional bodies and corruption and a year of increase in state officials’ salaries. Naturally enough, it is a poignant process providing for the obligation to generate new jobs. Significant stimulus of this process will be aimed at halving labor taxation burden and promotion of business. Nowadays, one employed supports 5 unemployed. If this proportion does not change, it will be difficult to meet social commitments solely through transfers. At the same time, the reform of the sector should be attached to privatization. For instance, selling of units in public healthcare sector should start and healthcare foundation should be formed. The foundation will grant a 30-year credit for private initiatives at 6% annual interest rate to unemployed staff thus promoting their employment and development of healthcare sector. Internal investments should be performed purposefully through funds obtained from privatization that should be invested in business by means of internal investments. This will serve for recovery of social justice and economic injection.
? In reality, taking a credit from a bank is very difficult since banks do not finance start up businesses and besides a credit at annual interest of 16-20% is too high. Because of the poverty of Georgian population and small-size market, in 2004 profit rate of legal business in Georgia was 12-17%. Hence, sums are totally taken by banks with nothing left for business. This indicates at the necessity to form national foundations for business support. The foundations will finance the so-called start-ups with the annual interest being no more than 6%. This will help to generate workplaces, taxation objects as well as develop production;
The same process took place in many European countries with similar economic conditions, as western investors do not hasten to invest in Georgia;
? No major investors came to Georgia and started work in 2004 (we do not yet imply negotiations on privatization and in this case, we do not make any abstractions);
? The main thing is to create a new judicial system, as business feels unprotected. In general a new criminal code as well as reforms of law-enforcing agencies are a necessary condition for attracting foreign investors and supporting local business in 2006.
The year 2005 should become a year of imposing order in infrastructure structure of Georgia. Production and investments will have no future unless there is such a bad situation in electric power supply and roads sector. In 2005, we should make use of the previous year’s financial reserves thereby paving the way for large-scale reforms in 2006. Western investors do not yet fully believe us. After this they will believe us, and it is a good chance for our economy and country.
Otherwise the fiscal effect of 2004 will disappear. External and domestic debts as well as current increased expenses will again revert the country to the epoch of budget gaps and permanent social tensions.