Georgian Economy in 2005 and Forecast for 2006, Trends and Problems

Lali Chagelishvili

The official data that we get from the State Statistics Department of Georgia indicates growth of the country’s economy and shows encouraging future, but if we proceed from the actual social and economic state of the country we can mention only one thing – there are still the problems in the country that are called social ones, and settling of them is the main task and concern for the country. And economic growth is directly proportional to increasing of common weal.

If we discuss what we have achieved in the 9 months of 2005 and the unsettled problems for the future, we will have to consistently follow the events and indicators.
According to the preliminary data of the Statistics Department, the actual GDP growth in 9 months of 2005 against the corresponding 9 months of the last year has made up 7.7%.
If we familiarize ourselves with the table’s indicators, we shall see that financial mediation sphere is developing at high rates. Growth rates in this sector are the highest in comparison with other sectors of the economy. Actual growth rates of financial mediation in 9 months of 2005 against the corresponding 9 months of the last year has made up 53.6%. High rates of the banking sector’s development is considerably stipulated by increasing of volume of foreign credit lines. At the same time it should be noted that the role of financial mediation in the GDP is still small (1.4%) and it has no essential effect on the total growth rates.
It must be said that over the past 9 months a 6.1% recession in agriculture is observed.
Recession trends are observed in mineral resource industry as well, in which a 17.0% recession is observed over the current year.
Unenviable situation is in the manufacturing industry as well. This sector, along with agriculture, are the leading ones in the Georgian economy, now they are considered as unprofitable ones and the state sees a big potential for their development in privatisation. But we shall get nothing enviable if privatization here is implemented the way it was the case with other units (if we do not take into account that the state will once receive a big profit).
As to the total industrial produce, according to the data given by the enterprises, in January-September 2005 it, in accordance with the main activities, it has made up 1444,6 million GEL, which is 18% more than in January-September 2004.
During the same period of time 23.9% of industrial produce pertains to the public sector, and 76.1% to the private one (in January – September – 35.0% and 65.0% correspondingly).
There is a comparatively consoling situation in the construction sector. According to the official data, in the third quarter of 2005 11.7% more of surplus value was created against the corresponding period of the last year, while in 9 months – 3.0% more. This growth would be more impressive but for a 25.4% recession in the first quarter. Favorable long-term crediting is considerably promoting the development of the construction sector. 27.0% more credits were given from the banking sector to the construction one during the 9 months of 2005 in comparison with the whole year 2004. Added to all this is a considerably increased financing by the government of road building. According to the Treasury Department of the Finance Ministry of Georgia, in 9 months of the current year, in comparison with the corresponding period of the last year, the financing in this direction has increased 32 fold.
In January-September 2005 the produce of transport and communication sphere made up 1014 million GEL in real prices, and the number of employed people – 54.0 thousand.
In accordance with types of economic activities, in January-September 2005 out of the total number of employed people 26.6% falls on industry, 18.0% – on transport and communications, 16.2% – on trade and repairs of cars, household appliances, personal use items, 14,6% – on healthcare and social assistance at functioning enterprises. Electric communication has the largest relative share in production, it holds the first place with 43%; railway enterprises hold the third place after electric communication and transport freight handling and after transport agencies (16.6%).
As to the trade sphere, its development depends on the volume of imported and domestic commodities turnover. According to the official sources, in 9 months of 2005 the volume of trade has increased by 8.3%.
In January-September 2005, Georgia’s foreign trade turnover (except for the non-organized trade) made up 2210.3 million USD, which is 29.0 % more than during the corresponding period of the last year; out of it export – 599.6 million USD (correspondingly 31.9% more), and import – 1610.7 million USD (28.0% more). In January-September 2005 Georgia’s negative trade balance made up 1011.1 million USD.
In spite of the above-mentioned indicators, Georgian economy is characterized by a big trade deficit. The rate of country’s dependence on import is high. In order to provide for economic security of the country and get it out of the system crisis it is necessary to implement an active economic policy which must be oriented for the development of export branches, increasing of competitiveness of the national economy, and have a strategic character.
In September 2005, in comparison with December 2004, the inflation rate made up 1.1%. For reference, inflation in 9 months of 2004 made up 1.0%, while in 2003 – 1.9%.
In 9 months of 2005, consumer prices for meat and meat products have increased by 15.4%, for alcoholic beverages and tobacco – 21.5% (for tobacco – by 32.0%), for soft drinks –by 10.1%, transport – 12.1% (including gasoline – by 36.4%). At the same time, the prices for vegetables and melons have considerably decreased – by 31.8%.
The price index of industrial produce in September 2005, in comparison with December 2004, has made up 107.0%. During the above-mentioned period the prices in mineral resource industry have increased by 29.4%, which was caused by 81.3% increasing of crude oil production, while in manufacturing industry – by 7.0%.
In Septeber 2005 the price index of industrial produce’s manufacturers has made up 101.1% against the previous month’s indicator.
In comparison with the last month, a considerable price increase of 12.0% is observed in mining of non-ferrous metals ores, which was caused by rising in price of copper concentrate and production of metal construction elements and wares – by 32.4%. .
Compared to the last month, the prices in coal mining (by 7.1%) and crude oil production (5.3%) have decreased.
The price index of industrial produce’s manufacturers in September 2005, in comparison with September 2004, has made up 107.7%. A considerable price increase in observed in mineral resource industry (26.6%) and manufacturing industry (8.6%).
The returns of the country’s overall budget (the state budget and the budgets of the country’s territorial entities) in January-September 2005 has made up 2278,9 million GEL. Out of which 74.3% falls on taxes, 10.7% – on non tax returns, 2.0% – on grants received from abroad, and 13.1% – on the returns obtained from operations with capital.
In January – September 2005, in comparison with the last year’s corresponding period, the returns of the country’s overall budget, including grants, have increased by 52.5%, including tax returns – by 33.7%, non-tax returns – by 27.9%, and grants received from abroad – by 35.0%. As a result of an active privatization process in the country, the returns of the overall budget from operations with capital, in comparison with the last year’s corresponding period, have considerably increased – by 63.8 times.
In 2004-2005, in comparison with the previous years, a sharp increase of budget returns was mainly stipulated by production, legalization of import, and improvement of tax administration. Correlation of budget returns to the GDP has increased from average 14% in the past years to 22%.
For September 2005, the volume of the public debt makes 3962.6 million GEL, including foreign debt – 2539.6 million GEL.
During the period of one year the nominal volume of the foreign debt has decreased by 4.3% (in comparison with the corresponding period of the last year, because of 2.9% strengthening of GEL’s exchange rate in relation to USD by the end of the month). The foreign debt calculated in USD has decreased by 1.5%.
As to the analysis of Georgian treasury obligations, according to the official data, in January-September 2005 the Finance Ministry of Georgia issued treasury obligations with nominal value of 34.9 million GEL. The interest rate on treasury obligations made up 12.4% on average, which determined the calculation price and it made up 31.6 million GEL.
In January-September 2005 the state budget has proficiency of 22.3 million GEL, while in the same period of 2004 the deficit made up 66.1 million GEL. The revenues from operations with capital have considerably increased – by 91.4 times during the 9 months of 2005 in comparison with the last year’s corresponding period.
Development rates in the banking sector are stable. By the end of third quarter of 2005 in Georgia there functioned 19 commercial banks, including 13 with participation of foreign capital. The total volume of commercial banks’ assets made up 2588.0 million GEL, which is 40.7% more than in the same period of the last year.
Loans given out to the economy’s private sector play the leading part in the internal assets of commercial banks functioning in Georgia (75.3% of total internal assets). 91.2% of credits are distributed in accordance with the following kinds of economic activities: trade – 37.4%, industry – 28.4%, construction – 16.7%, financial mediation 8.8%. Specific share of these kinds of activities in the GDP’s structure makes up 29.5%.
In comparison with the last year, average interest rates of commercial banks have decreased by 15% in the mean. Reduction of interest rates on credits has had a positive effect on the volume of given out loans.
By September 30, 2005 the volume of the National Bank’s currency reserves made up 447.0 million USD, which is 0.8% more than in the previous month, and in comparison with the same period of the last year – by 22.7%. This level of reserves is equivalent to the medium volume of import of goods and services in 22 months.
Taking into account other aggregates, money supply by the end of September, in comparison with the level of the same period of 2004, according to 0 of the cash outside of the banks, has increased by 27.6%, according to 2 money supply aggregates – by 38.2%, while according to 3 money supply aggregates – by 36.8%.
In September 2005, money multiplier, according to 2 aggregates, has increased by 0.6%, while the same indicator according to 3 aggregates has increased by 13%. In accordance with the materials of the Georgian Finance Ministry, in 2002-2004 strengthening of the national currency’s exchange rate was observed. By 2004 GEL’s exchange rate had become stronger and made up 1.917 for 1 USD.
According to forecast appraisals, medium exchange rate of GEL in 2006 will make up 1.85GEL for 1 USD.
During the last two quarters, increasing of inflationary processes was observed in Georgia. Its rate made up from 7 to 9% in September-November 2005. If rising of prices in the country were stipulated by economic growth, it would, first of all, have an effect on social state of the society, and in particular on poverty and unemployment levels. According to the experts’ appraisals, the poverty index in Georgia is 53-54%, unemployment reaches the level of 38-39% (instead of 12% calculated by the Statistics Department). If an active economic policy is not implemented in the country, we should not expect radical changes of the situation in 2006, moreover, we should pay serious attention to the inflationary processes so that the inflation would remain within the rate of 5% and be amenable to regulation. However, we would like to point out that retaining of the inflation rate within 5% level, as it is predicted by the Ministry of Finance, is possible only within the framework of a strict monetary and credit policy, which is less possible against the background of the current events.
The issue of the defense budget for 2006 remains unclear. The 2006 budget remains with deficit (333 million GEL). Repayment of one part of the debt (254.3 million GEL) will be carried out by means of the World Bank’s long-term credit, and the second part – by means of international financial organizations and the credit allocated for Georgia.
In 2006 the Ministry of Economic Development will continue the privatization process, which we cannot call an active economic policy, and we also want to point out that determination of the country’s strategic spheres and implementation of investments for their development remain out of the context.
If we take a look at the implementation of the trade policy in the country, we would like to point out that the current policy will remain in the export, that is the leading role will again be played by metal scrap, ferroalloys, wine, aircrafts, mineral waters, sugar, and nitrogen fertilizers. Import items will be: oil, oil products, motor-cars, therapeutic agents, natural gas and carbohydrates.
Comparatively stable situation will be in construction and banking-finance sphere. Currency reserves of the National Bank and financial mediation will increase. The tendency of treasury obligations’ emission will continue.
Taking into account the improvement of economic development’s forecast indicators and tax administration, the forecast indicator in relation to the Customs Department is determined at the level of 1 0686 million GEL, which is 21.3% more than the planned indicator for 2005, and in relation to the Tax Department the forecasted indicator is determined at the level of 1 561.4 million GEL, which is 15.4% more than the planned indicator for 2005.
Trade policy will be spearheaded at the extension of preferential and nondiscriminatory trade regulations. The work for full-fledged utilization of possibilities arising from membership in the World Trade Organization will be made more active.
The forecasted income tax indicator in the 2006 draft budget is determined at the level of 296.2 million GEL, which makes up 2.3 of the GDP. In comparison with the annual indicator of 2005, the growth will make up 10.6%. The forecast income tax indicator is determined at the level of 261.0 million GEL, which makes up 2.0 of the GDP. In comparison with the planned indicator of 2005, the growth will make up 20.6%.
The income from VAT in 2006 is determined at the level of 1071.2 million GEL, which will make up 8.3% of the GDP. The growth makes up 18.8% in comparison with the planned indicator of 2005.
Excise forecast indicator makes up 344.9 million GEL, which makes up 2.7% of the GDP and by 8.2% exceeds the planned indicator of 2005.
Customs tax forecast indicator is determined at the level of 159.0 million GEL, which makes up 12% of the GDP, and exceeds the planned indicator of 2005 by 17.6%.
Property tax forecast indicator is determined at the level of 60.7 million GEL, which makes up 5% of the GDP, and exceeds the planned indicator of 2005 by 13.9%.
The volume of taxes from gaming business is determined at the level of 6.1 million GEL, which is 50.0% less in comparison with the planned indicator of 2005. This is stipulated by the changes in the legislation regulating this sphere.
The revenues from the social tax will make up 430.9 million GEL, which makes up 3.3% of the GDP, and exceeds the planned indicator of 2005 by 31.1%.
The forecast volume of non-tax revenues in the overall budget of 2006 will make up 208.9 million GEL, which is 1.6% of the GDP. In comparison with the planned indicator of 2005, a reduction by 68.8% can be observed.
The forecast indicator of grants in 2006 is determined at the level of 140.1 million GEL, in which a big specific share (96.8 million GEL) have current purpose grants.