How much more expensive or cheaper our life has become and what we should expect during the months immediately ahead

FROM THE REDACTION

Non-governmental organization
“The Institute of Free Economy and
Business” carried research of
inflationary processes taking place in the Georgian economy and on the consumer
market as well as the inflation dynamics in Georgia. We present you the figures and experts’ opinions concerning the existing trends.

Market Review and Statistics We present you specified indicators of Georgia’s economic development in accordance with the data of the Georgian Statistics Department
Gross Domestic Product
In 2005 the real growth of GDP made up 9.3%. In connection with transition of Georgia to the IMF’s General Data Distribution System (GDDS), the final correction of GDP will tale place in November 2006.
The sphere of financial mediation is developing at notably high rates. The growth rates in this spctor are the highest in comparison with other sectors of the economy. In 2005 the real growth rate of financial mediation made up 52.2% in comparison with 2004. High development rates of the banking sector were largely stipulated by the increase of volume of credit lines from abroad. During the year the share of financial mediation in the GDP has increased by 0.7 percent points. However, in spite of it, it still remains at low level and makes up 2.0%.
The fact that the volume of loans to the private sector has increased by 80% can be considered as particularly positive, while commercial banks’ interest rates on loans have been reduced by 10 percent points on average. Traditionally, 3 sectors of the economy were financed by commercial banks: trade (37.8% of the total volume of loans), industry (26.2%) and construction(11,7%). In view of the above-stated, in 2005 22.3% growth in the construction sector and 14.3% growth in the manufacturing industry took place, which has undoubtedly been achieved by bank credits as well.
In 2005 a considerable increase was observed in the sphere of communications and post. The additional value formed in this sector has in real terms increased by 29.5% in comparison with 2004. This kind of result was mainly stipulated by the implementation of an effective tariff policy in the communications sphere. The cost of the licenses sold in this sphere in 2005, etc. is added to it. Growth of economic activity in the sphere of communications and post should be expected in 2006 as well, since privatization of “Sakartvelos Elektrokavshiri” is planned for this period.
The construction sector is developing in a stable way again, in which 22.3% more additional value was formed in 2005 in comparison with the previous year. This growth would be more impressive but for 25.4% decrease in the first quarter. As it has been pointed out, a long-term crediting from the banking sector largely promotes the development of the construction sector. On the whole, 4.2 times more credits were granted from the banking sector to the construction sector in 2005 in comparison with 2004. The considerably increased financing by the state of construction and reconstruction of roads is added to it.
Agriculture again has the biggest specific share (14.8%) in the country’s economy. Over the past years the specific share of this sector in the country’s total economic activity has been gradually decreasing. In 2004 it made up 16.4%, but in 2003 – 19.3%. This kind of development is logical, since the additional value in agriculture will be formed at the expense of self-employed people, which, in its turn, is very ineffective. In 2005 agriculture has grown by 12.0%. This growth is stipulated by the so called low market effect in relation to the previous bad harvest year: in 2004 the activity of the agriculture sector has in real terms decreased by 7.9%.
In 2005 the volume of additional value in the mineral resource industry has decreased by 13.7%. The share of this sector in the GDP is 0.7% only. However, we have to point out that the mineral resource industry has a big development potential, and the results of privatization carried out in this sector will become evident in the coming period.
The trade sphere is also developing in a more or less stable way. The development of this sector depends on the volume of turnover of imported or local goods. In 2005 the trade increased by 3.4%. The rate of annual growth was impeded by 3.7% decrease in the fourth quarter of 2005 in comparison with the corresponding period of the previous year.
Georgia’s Foreign Trade in 2005
In 2005, in accordance with the declared data (except for non-organized trade), Georgia’s foreign trade turnover made up 3 357.6 million USD, which is 34.6% more in comparison with 2004. In 2005 the volume of export made up 866.7 million USD, which is 34% more than the corresponding indicator of 2004 (646.9 million USD). The volume of import has increased by 34.8% as well: in 2005 – 2490.9 million USD, in 2004 – 1847.9 million USD.
The areal of Georgia’s trade partners, and in 2005 Georgia had trade relations with 132 countries (in 2004 – with 125 countries). The largest trade partners of Georgia are: Russia, Turkey, Azerbaijan, Ukraine and Germany; their share in the total trade turnover is 52.2%.
The main exports products in 2005 are: ferrous metals’ scrap1, natural wines, ferroalloys, fresh and dried nuts, aircrafts, copper ores and concentrates and nitrogen fertilizers. Their share in the country’s 2005 export makes up 52.8% (54.0% – in 2004):
The main import articles are: oil and oil products, cars, therapeutic agents, construction materials, fuel gases and gaseous hydrocarbons, wheat and flour, sugar, gas turbines, turboprop and propjet engines, aircrafts and electric power. They make up 44.6% of the total volume of import (in 2004 – 41.5%).
Based on the information of the Georgian Statistics Department we can draw a conclusion that changing of the basic food products’ prices has a seasonal character. For this period of year characteristic is decreasing of prices for such products as milk, milk products, fish, cheese and meat. In comparison with the mentioned products, the prices for eggs and chickens have considerably decreased – by 4.8 and 4.2% respectively. It was caused not only by seasonal factors, but by spreading of Bird Flu as well.
With coming of spring such products as cucumbers and tomatoes have become cheaper, but it should be pointed out that this mainly concerns imported (Turkish) cultures, while the price for the cultures grown in the country’s greenhouses remains high (7 GEL per 1 kg).
As to non-food products, the prices for diesel fuel and “Regular” petrol have decreased by 0.8% and for kerosene – by 0.6%; while “Winston light” cigarettes have risen in price by 0.9%. In Tbilisi the index of consumer prices (the index of changing of consumer prices’ level) made up 99.25% for a period of one week (March 3 – March16), against the indicator of the end of February – 102.06%.
Monetary Statistics
46 exchange deals with the total volume of 645 711 USD were made at a trade session that took place at Tbilisi Interbank Currency Exchange in March 2006. At March exchange session the National Bank sold 6 036 000 USD and purchased 2 320 000 USD. 32 deals less were made at the trade session of Tbilisi Interbank Currency Exchange; correspondingly, the volume of deals was 5 904 389 USD less;
From March 23 the official exchange rate of GEL in relation to USD remained valid: 1USD/1.8275 GEL.
Domestic currency market
From March 6, 2006 to March 10 inclusive, the official exchange rate of GEL in relation to USD has strengthened. On March 10, the following exchange rate was fixed at Tbilisi Interbank Currency Exchange: 1 USD/1.8260 GEL. During the analyzed period the exchange rate of GEL in relation to USD in the bank note segment of the domestic currency market ranged from 1.8280 to 1.8350.
During the same period the volume of trade at Tbilisi Interbank Currency Exchange made up 4350000 USD and 100 000 Euro. At exchange sessions the National Bank of Georgia sold 850 000 USD and purchased 2 500 000 USD.
The dynamics of the results of trade sessions that took place at Tbilisi Interbank Currency Exchange during the analyzed period

From March 13 to March 17 2006 inclusive the official exchange rate of GEL in relation to USD was characterized by stability. On March 17 the following exchange rate was fixed at a trade session of Tbilisi Interbank Currency Exchange – 1 USD/1.8275 GEL. During the analyzed period the exchange rate of GEL in relation to USD in the bank note segment of the domestic currency market ranged from 1.8280 to 1.8350.
During the same period the volume of trade at Tbilisi Interbank Currency Exchange made up 4350000 USD and 100 000 Euro. At exchange sessions the National Bank of Georgia sold 850 000 USD and purchased 2 500 000 USD.
During the same period the volume of trade at Tbilisi Interbank Currency Exchange made up 3 440 000 USD and 146 000 Euro. At exchange sessions the National Bank of Georgia sold 2 550 000 USD and purchased 20 000 USD.
The dynamics of the results of trade sessions that took place at Tbilisi Interbank Currency Exchange during the analyzed period

Interbank credit auction
1 commercial bank (as seller) and the National Bank (as buyer) took part in the 7 days’ !51 National Bank’s interbank credit auction that took place on March 21, 2006. The total sum of the. deals made at the auction made up 500000 GEL and annual 5% was fixed.
Concerning the Dynamics of the Population’s Purchasing Ability in 2004-2005
(taking into account the changes in the inflation rate and the currency’s exchange rate)
In December 2005, in comparison with December 2003, inflation in Georgia made up 14.2% (2003-7.5%, 2005-6.2%).
A considerable price increase for separate categories of population is lurking beyond the moderate rise of consumer prices (average annual increase in 2004-2005 – 6.9%). In fact, the real inflation indicator for practically all categories of population is much higher than its official level.
7 Days 6% 22.03.2006 5% 21.03.2006
28 Days 8% 22.03.2006 7% 21.03.2006
56 Days 14% 26.01.2006 9% 16.11.2005
84 Days 5% 06.07.2005 6% 20.05.2005
There are several factors stipulating for this. In particular:
The price increase especially concerns the basket of food products. For instance, over the past two years the prices for meat and meat products have increased by 1.5 times, for meat, cheese and eggs – by 2.0 times, and the increase was very high in comparison with the general level of inflation. Proceeding fro the above-stated, the price increase has delivered a particularly strong blow on the purchasing ability of people with low incomes since most part of their incomes was spent on food products. It should also be taken into account that in 2005, in comparison with 2003 (with nine months of the corresponding year) average cash disbursement for one household in the first quintil (20%) group of the population with the lowest incomes has remained absolutely unchanged, while in the fifth quintil group with the highest incomes it has increased by 18.8% (in calculation for one Georgian household it has increased by 14.0% on average).
It should be taken into account that in calculation of the inflation rate comparatively badly represented are such elements of real estate the prices for which have considerably increased over the past two years, and the volume of trade has become intensive (flats, cottages, plots of land). Taking into account the dynamics of prices for them, the real inflation rate would be considerably higher.
At the same time the category with comparatively high incomes has not managed to avoid economic losses. If we directly consider this category, besides the fact that they are consumers of food products that have become more expensive (the 10% of the population with the highest incomes spends by 3.8 times more on food then the 10% of the population with the lowest incomes), they are owners, disponents and consumers of foreign currency. Strengthening of the national currency in relation to the USD over the past two years from 2.075 to 1.7925 (by13.65%) has considerably decreased the purchasing ability of the foreign currency. Taking into account the inflation (that was decreasing in Georgia the purchasing ability of the foreign currency in parallel with strengthening of the national currency), at the end of 2005 it was possible to buy for 100 USD on the domestic consumer market the amount of goods that could be bought for 75.6 USD in 2003 (in other words, in 2005 more than 132 USD was necessary for purchasing of the same amount of goods that could be bought for 100 USD in 2003).
In view of strengthening of the national currency and inflation, the interest rate on deposits laced in commercial banks has practically acquired a negative indicator. – At the end of 2005 the purchasing ability of 100 USD deposits of two years’ prescription, taking into account the added on interest1, was an equivalent of 87,7 USD in 2003.
Taking into account the absolute volume of deposits placed in the Georgian banking system by the end of 2005, it can be said that in view of the factors having an effect on the currency’s purchasing ability over the two years’ period, currency depositors have suffered losses in the amount of about 40 million USD, and taking into account the non-depository sum of the same amount, the volume of losses has made up not less than 80 million USD.

What inflation is and how it is
calculated in Georgia
Inflation Problems in Georgia
Exspert Soso Archvadze
– Mr. Soso, please explain what inflation is, and how it looks from the viewpoint of periodicity and baskets of goods. How it is related to citizens, what consumer confidence index is and why it is important?
– The society has always been interested in inflation situation in the country since it has direct effect on each person. The level andamount of incomes and expenses says nothing about changing if prices in the country, that is about inflation. On the whole, the history of commodity-money relations is the history of inflation. The general level of prices changes according to changing of production conditions and, even in the case of a closed economic system, prices are developing and changing like a living organism. From the viewpoint of society, inflation undergoes the biggest effect among the economic indicators, since productivity of labor is the indicator of correlation of different factors; often public confidence has an effect on the inflation level. If the population does not have this confidence, it changes the mode of behavior, which is expressed by substitution of means of payment – the given country’s currency for the currency of some other country. The period of the coupon was the example of it, when it was substituted for another country’s currency. Georgia gradually enters into the world relations, including international division of labor. We have economic relations with 150 countries and it is natural that the global processes have a direct effect on the processes taking place in our country. Last August a sharp rise in the price of oil products started, which entailed a consumer agiotage; the price of one liter of fuel became almost 1 USD. That is why will not be able to fully retain the order of internal actions without taking into account the events taking place in the world. First of all, this concerns energy resources and vitally important products. When we speak of price inflation, we should differentiate expense and money inflation. In one case, the final price increases along with the increase of production factors, in the other one – public demand for some consumer commodity and it entails rising of its price in conditions of supply’s discrepancy. There are both cases in Georgia. The society has a certain scepsis in relation to the officially published data of the Statistics Department. It calls into question the level of prices published by this service. The level of prices in Georgia is increasing if we compare it to December 1998 when the National Bank stopped intervention at the Interbank Currency Exchange and tried to regulate the exchange rate without it. After that the exchange rate is almost the same. According to the official data, during this time the prices have increased by 54%, which means that we have approached the world market prices under equal conditions. There are different methods, for instance, when purchasing ability of our national currency in relation to USD is calculated by means of comparison of Big Mac prices in the US and in Georgia. Comparison takes place not only in accordance with the official exchange rate, but also taking into account the real exchange rate. According to the Big Mac method, the prices in Georgia are approximately at 2/3 level. Though, according to my calculations, this indicator is still lower. The society feels that the prices are rising. Reduction of currency efficiency of USD raises the population’s question concerning the real adequacy of the price inflation indicators. Till the middle of 1990s Georgia did not have an independent full value currency, coupon was an official legal tender of the National Bank, though several currencies were in circulation at the same time. The consumer market was strictly segmented – rationed consumer goods were purchased for coupons, consumer goods of day-to-day use – for Russian ruble, consumer durable and real estate – for USD. After introduction of GEL these proportions were upset. GEL assumed the functions of the Russian ruble and considerably decreased the exchange rate of USD. However, it will be wrong to say that USD was removed from the Georgian market as means of payment. It should be also said that this kind of situation takes place not only in Georgia, as in transitional country. Increasing of confidence in the national currency is, in fact, an anti-inflationary measure. There is also another aspect, inflation, in its turn, depends on the economy’s health and the rate of business development. Why does it seem to our society that the general level of prices is higher then it is published by the Statistics Department? I would compare this with an instance when a person’s extremity has been amputated but he still feels the pain. A serious blow was delivered on the population with transition to the market economy. In 1995 the rate of monthly inflation made up 65%. This is a very high indicator, that is why a large part of the population has no confidence in the national currency. Of course this is stipulated by other factors as well, these are – lack of protection of economic borders, smallness of our economy in comparison with the scale of the world economy. Georgian economy is a small part of the big world economy, and external exogenous factors have a serious effect on it, which, first of all, concerns energy problems and the political aspect. That is why there was, is, and will probably be a certain distrust of some part of the population, which we certainly have to take into account. A few years ago the Statistics Department carried out an inquiry in which there was the following question: “Where would you place your free means if you had them?” The following variants were enumerated – commercial bank, business, lending, purchasing of real estate, etc. The number of people who preferred to keep their money at home was seven times more than of those ones would place it in the banking system. This fact indicates the factor of the population’s confidence is low. From my point of view, more promotion is needed. Today the amount of deposits in the Georgian banking system makes up about 600 million USD. This is not a big indicator and we are considerably behind Azerbaijan. If we take the period before the 1990, though then Georgia was a part of the Soviet Union, the correlation of the amount of deposits to the GDP was equal – that is 100 rubles of deposits fell on each 100 rubles of the GDP. Now only 6 GEL falls on each 100 GEL of the GDP. More stability is needed in order to use the bank resource as internal investments, for which formation of a corresponding business environment is necessary. Taxation of the interest on deposit is not such a significant sum that can play a serious role in budget replenishment, that is why I think that this part should be reconsidered as well. The amount of dollars that circulates outside commercial banks is larger than the one invested in the banking sector. The indicators published by the Statistics Department are based on the recommendations of the IMF. At least once in three years these methods are reconsidered. This time comparison of prices takes place in accordance with 71 descriptions of goods. About twenty units were removed from the basket of goods and 35 were added. It used to include 297 descriptions of goods, but now there are 311 ones in it. It used to include rent, and now market-value of a one-room apartment was added to it.
– What will you tell us about food products?
– Food products are also goods. After reconsideration the share of food products has considerably decreased. This decision has stood our objective information a bad stead. It happened at the beginning of 2004, and during the following period, I mean the period after the Revolution of Roses, the prices of food products have considerably increased. But for the old weights, our inflation indicator, from the viewpoint of food products only, would be 2-3 percent points higher, and correspondingly the total inflation indicator would be higher. Reconsideration of weights in the basket of goods and decreasing of the food products’ part has led to low inflation indicators.
– Inflation is the reality existing in the economic space in the given period of time. First of all it has to do with consumer prices, and points 10-15 are very significant in them. The latest research has shown that food products and energy resources are significant for 90% of the population. Their money is spent on the 2500 kilocalories that are necessary for physical existence so that the temperature of their bodies should not be 370 and they should not become frozen. The matter concerns physical existence. Bread is a basic product from the viewpoint of carbohydrates, and there is serious inflation here. Potatoes, sugar, rice, fats and meat are not so important already. The prices of electric power, gas and fuel are also important. If we calculate inflation based on active basket of goods and 15 food products that it includes adding 3 energy resources, drugs, from the viewpoint of which there is a disturbing statistics (drug-stores have become the most profitable and successful business) and finally medical care – after their assessment we shall see that inflation makes up 17-20%. Inflation for a week, decade and month must be established. As to the annual one, it is already the matter of rhetoric. However, first of all we need the basket of these 15 products in order to plan our economy. Calculation of consumer confidence index is also very important. Without it the inflation indicator may turn into fiction. It is very important in any country. In our country the exchange rate of GEL is not tied to the inflation indicator, foreign trade deficit, the level of production and the growth of GDP, that is there is no interdependence. Often the economy moves mechanically. However, we should say that there is growth in the economy, which is expressed in construction and fiscal part. Nevertheless, there are no appraisal criteria and the market is chaotic. In calculation of inflation we should to take into account the price of a one-room apartment.
– In Moscow establishing of flat prices takes place in accordance to 30 points. In Tbilisi it should be done in accordance with at least 20 places. Our society consists of two stratums – the rich and the poor, the middle class is so weal that it has no real effect on economic processes. A poor person has to be content with a few food products, and the prices for them have increased by 1/5 and more in comparison with the inflation indicator. Rich people also experience the price rise, they spend more money on food products in comparison with poor ones. If we divide the society into ten groups, 10% of the richest people spend almost four times more money on food products then the poorest ones, while from the viewpoint of calories, they take 30% more. However, rich people spend money not only on food products, but on non-food products as well. He buys, for instance, a color TV set or some consumer durable items. Over the past two years the exchange rate of the national currency in relation to USD has strengthened, that is why entrepreneurs and natural persons that had incomes in USD have to pay more. If a TV set used to cost 400 GEL and 125 USD was enough to buy it, now it costs the same but the inflation level is unchanged, and today 225 USD is necessary to buy it. We should also take into account that those people that have a deposit in the banking sector practically do not get the interest since it is less than the inflation level. From the viewpoint of deposits for two years, the losses have made up almost 40 million USD. That is, if deposits placed two years ago were not withdrawn and the exchange rate of the national currency remained unchanged, those deposits would have 40 million USD more purchasing ability in comparison with the current ones. There is also another fact why the population experiences inflation so keenly. If we divide the population into 10 or 5 equal groups, we shall see that over the past two years the level of their incomes and expenses has been increasing non-uniformly. The level of incomes and expenses of 20% with highest incomes has nominally increased by 20%, and that of 20% with the lowest incomes has remained unchanged. In Tbilisi, none of the members of at least one family out of three ones has a job with a fixed salary, they are either unemployed or have some other sources of income. Only 7% of pension age population live alone, that is why the problems of social protection, poverty and nutrition is not only consists in a large number of old people and pensioners, that problem is that in families, in which there are both an able-bodied person and an old person, the able-bodied person is unemployed and cannot support the pension age citizen. Over the past two years the level of incomes in the highest group has increased by 18%, and that of the lowest one has remained unchanged. If we divide it by the official indicator, that is approximately by 14%, we shall see that the real income of 20% with the lowest incomes has decreased by 15%, and that of with highest incomes has increased by 5-6%. The incomes of the first group have increased, and those of the second one have remained unchanged, while the incomes of the remaining 60% have decreased. On the whole it turns out as if the country’s internal incomes and expenses grow at higher rates than the inflation indicators, however, in real terms only 20% managed to protect themselves against the price increase, another 20% have improved their condition, while the well-being of 60% has deteriorated. We say that the budget has doubled, pensions have tripled, however, according to statistical data, the number of families being beyond the poverty line has not decreased. This happens because the differentiation is rather high. There is another reason for the population’s lack of confidence. Inflation is the indicator that characterizes the dynamics of prices in the society. It is implied that the society should be more or less homogeneous. If there is no middle class in the society there will be a problem of a broken bridge between the rich and the poor, and these two groups are distinguished by different culture of behavior. They live in the same city but their aspirations and culture of behavior are absolutely different. That is why there appears distrust towards inflation indicators. Taking care of formation of the middle class and promotion of development of small and medium business is necessary so that this indicator should play a uniting role in the society. This is not a purely statistical work. Observation over the prices is made till 10-12 date of the month, then the results are compared with the data for 10-12 date of the following month, but this is not the main thing. Until the society becomes more or less homogeneous there will always be a possibility that inflation indicators will be dissimilarly by different stratums of society. According to the current method, the inflation indicator fixes the changes that have taken place before the period from 10 to 20 date of the month, however, if changing of prices took place on 21 or 22 date it is not fixed. For instance, on August 22 of the last month, rising in price of oil products started, and on September 9-10 the prices started to come down, but these changes did not coincide with the observation period. During this period the population paid more, which considerably emptied its pockets. For this reason the population did not have money left to purchase goods of no less importance. Maybe the prices for other goods have not increased since there was no money left, that is the factor of demand inflation decreased to the minimum, but it was not fixed according to the existing method of inflation calculation method. The prices for many goods are so high in Georgia that in case of their further increase, they will be calculated as unchanged prices that, correspondingly, have no effect no effect on the inflation indicator, but in reality the population pays a high price to purchase them. May be inflation rate will make up 6%, but the population pays colossal prices for purchasing of consumer goods.
In conclusion I would like to say that our economy is a not system-defined one, when changing of one indicator has a certain effect on another one. One can hardly speak about sustainable development without it. Our economy looks like a Georgian fairytale, where a beauty, locked in a crystal castle, was kissed by a youth. The warders weighed her in the morning and in the evening. It turned out after weighing that her weight was gained by the weight of one kiss. The Georgian economy is in this beauty’s condition. The rate of industrial growth should not depend on the work of one enterprise. Even the construction of Baku-Jeikhan construction should not have an effect on the total volume of the country’s domestic product and investments. We need high growth rates, additional jobs and sustainable development. All the rest is only superficial indicators that characterize the real situation to a lesser extent. Correspondingly, our economy, the prosperity of each of us and economic security remain hostages of politics.
– What are your forecasts concerning inflation from today’s point of view?
– According to its volume and significance, the Georgian economy is very small. It is not a secret that in accordance with the indicator of GDP per head we are not even at the medium level in world. In order to reach this level we should increase our GDP by two and a half times. Our influence on the world economy is very small. However, the influence of the world economy on ours is very big. First of all we are dependent on other countries from the viewpoint of energy resources. There was a time when more than a hundred of brunches of industry and productions were developed in Georgia, we had a little of everything, but this did not give our national economy a monopolistic position. That is why increasing of prices depends on the outside factors that are developing in the world economy. There energy resources are rising in price, since the demand is increasing too. Correspondingly, we shall not be able to avoid expenses’ inflation.

How much more expensive or cheaper our life has become and what we should expect during the months immediately ahead

Why Food Products
Rise in Price
Expert Gela Khanishvili
– Mr. Gela, please, tell us what is going on in food industry business.
– I think this discussion will find its way. Let us begin with wheat. Wheat plays a key role for any state from the viewpoint of strategic its importance. It is not only a food product that can or cannot be in the basket of goods or on the table. The price of wheat, its supply, production and import can determine the strategy of the country’s economy. In any country, rising in price of bread is a serious indicator for rising in price of everything. In our country this role is played by oil products, however, the dynamics of bread prices and provision of the country with bread in general have a bigger load. What is going on in Georgia in this respect now is interesting. It can be said that after gaining independence there was chaos in Georgia from this point of view. There was Sheverdnadze’s decree during his presidency that the country should have a transitional resource, the matter concerned 80 000 tons of wheat, which we never had. This decree was passed in 1996. All ministers of agriculture confirmed the necessity of this resource, but, what is most important, this resource was never created.
– Why?
– Because during this period, to be more exact from 1992, the Georgian wheat market was regulated by the US. The wheat exported from the US always was on the market – 50 000-100 000 tons or more. Besides, there was a permanent strategy concerning the amount and time of delivery of wheat to Georgia. That is, in fact, this issue was in the center of the state’s attention.
– How was wheat consumption changing?
– Over the past years there has been qualitative changes in wheat consumption in our country, which is less evident for an ordinary consumer. Wheat was exported from Russia, Ukraine and Central Asia, however, the basic part was American wheat that served for improvement of its quality and obtaining of normal quality flour. That is American wheat, besides a latent reserve, had some more loads which was wrongly understood in our country. In other words, American wheat contributed to selling of Georgian wheat, that is, if there is no high quality wheat on the market, the locally produced wheat, which, unfortunately, is not distinguished by qualitative indicators, will not sell. Wheat’s quality has many gradations. In our country there is no good seed producing industry, the land is not well-attended and rested, the culture of fertilization is not developed. If 8-10 tons per hectare are gathered in some other country, in Georgia they gather 2-3 tons and it is considered as a big achievement. There was an occasion when 80 centners were gathered in our country, but when? When in droughty 2000 the US granted us 6000 tons of good seed wheat and we obtained 8 tons per hectare in Kakheti and Shiraki. In our country there is neither seeds turnover nor observation of sorts, and what is being done is so insignificant that has no effect.
– Why were not good seeds granted by the US kept?
– Seeds can give good quality wheat during one, two or three years. Like any other raw materials it needs renewal. The business that will grow seeds and supply them to farmers with the purpose of obtaining high quality wheat should exist in the country. From this point of view, there is a vacuum in the country. A peasant sorts out wheat in order to obtain seeds.
– What is the total volume of harvest in our country?
– During the peak period when 80 centners per hectare was obtained, the total volume of harvest in Georgia reached about 230-250 thousand tons. This is absolutely not serious indicator, since about 80 000 tons is food wheat, which makes up only 10% of the country’s demand. That is about 800 000 tons of wheat should be milled. The volume of consumption is not constant. If the demand for farinaceous foods or macaroni products increases in the country, the demand for wheat increases as well. The same concerns cattle-breeding. If we want to have mixed fodder production and non-food wheat in the country, then these700-800 tons will become a million. I want to say that the system concerning how much wheat we need has many indicators, but now it is approved and agreed upon the Georgia will consume about 700 000 tons of wheat. From my point of view, meeting of 100% of the country’s demand with the wheat produced in the country is impossible, since the land intended for economically more profitable agricultural products should not be occupied by wheat.
– Does it turn out that protection of the wheat market has no big importance?
– Yes, it does. However, from my point of view, protection of the market needs consideration of all segments and an individual approach. What does protection of the wheat market mean? We may not protect wheat production, but we must protect the wheat processing industry, that is we should import wheat but not flour. This must be the country’s strategy. Protection of the country’s interest does not at all rule out the existence of free economy and Georgia’s place in the world segment of this free economy. It is written in the text-books about America that the country protects the interests of producers and consumers.
– Maybe it is better to cancel the customs tax for wheat for a peasant to understand that he should grow some other crop instead of wheat. Let us draw Megrelia as an example, they often grew maize in places with low crop capacity instead of growing lemons there, which would bring more yield.
– I agree with you, but, unfortunately, the areal of wheat cultivation is strictly determined in accordance with the regions. In some areas it is impossible to grow anything but wheat. As to the fact whether it is possible to grow in Georgia the amount of wheat that would meet the country’s demand, I would reply that it is possible if the whole area will be sown with wheat. There are different segments – wheat production, its processing, flour import, then production of bread products and in the end – a customer’s interest. Of course, each segment should be protected starting from a consumer’s interests – he will have cheap bread if flour is imported from Russia. But there is a general economic segment – Georgia has processing industry on the scale that can give us flour at equal price under equal conditions, that is under conditions of right taxation. In short, it will we a competitive flour. However, we do not speak about quality since flour production is very conservative. If we do not take into account the final automatized stage, the system of the rest of the installations has remained practically unchanged. The problem is that the cost of custom clearance of the imported flour is fixed artificially. That is, very often its custom clearance costs less than that of wheat. Custom clearance of a ton of wheat cost from170 USD and custom clearance of a ton of flour cost the same, while its invoice should be at least 1/3 more expensive starting from processing expenses. Moreover, transportation expenses have a serious effect on both wheat and flour. During the season you can buy wheat in Kazakhstan for 80 USD but its transportation will cost 60 USD. That is I want to say that, from the viewpoint of protection of the market mechanism, the Georgian market does not need creation of artificial barriers. It needs a single customs policy. Let zero taxation be for American, European, Ukrainian, etc. wheat. Even in these conditions Georgian wheat will have no problems since a producer does not bear transportation expenses and it remains competitive, and he has an incentive to grow high quality wheat, and at the same time his low quality wheat is supplied to the customers at free prices by means of its mixing with the imported American, Russian or Kazakh high quality wheat.
– What kind of effect will it have on the price? It is logic that by zero customs taxation we do not leave the Georgian wheat market unprotected, on the contrary, by means of it we can enable milling plants. Georgian production is really competitive since the transportation price is low. On the other hand, by cancellation of the 12% tax we create conditions for the development of milling plants. Besides Russian wheat, high quality Canadian, European and American one will be imported, and the milling plants have the prospect of cancellation of taxes. From this point of view, wheat will not rise in price, but with raising of legalization level, in conditions of legal registration of Kakheti wheat, which now often takes place the other way round, if Russian wheat is imported according to real invoice, flour will rise in price. In your opinion, how much will flour rise in price?
– There is one very important aspect – real business is wheat’s importer, and flour importer as well, working according to the principle – installation from wheels, this is a construction term which means unloading of a building structure right on delivery. No one will assemble a building structure on the spot. However, this should not take place in wheat production. Today the prices of bread and flour on the market are not regulated by the Georgian business and the Georgian economy, they are regulated by the processes taking place outside Georgia’s economy. In particular, Georgian wheat does not play a decisive role in the segment, but at the same time it has a very important property – a Georgian peasant sells a small stock of wheat like other countries’ peasants do, that is the amount that will cover his expenses. This concerns fuel, fertilizers, etc., the rest he tries to keep till the wheat season. Wheat ripens in summer, harvest is gathered in July-August, September and October are the months when wheat is still cheap, stabilization of prices takes place in November and their growth begins in December, which is related to many factors, but not to the Georgian economy. Nothing can really be added to wheat’s price in Georgia when not a single entrepreneur has a resource to import it. That is why it is the use of the banking resource that inflates the price of wheat.
– And which has considerably risen in price lately.
– It has risen in price and, on the whole, it is a considerable load for wheat, since if we take an average merchant, mill and supplier from Russia, the biggest margin for the merchant can make up 19 USD, and in peak period – 15 USD. 5 USD per ton is a bank’s service expenses and its interest. When wheat comes to port it should be bought there and given to an entrepreneur providing 2-3 months’ period for him to pay money. During this period the bank takes 5 USD, and the company about 4.5 USD. But this is not most important either. The main thing is that we are dependent on Russian wheat price. Now the main players in Russia are “Glenkor” and “Dreifus”. These two companies purchased the whole Russian stock and are monopolists on the market, and can do whatever they want. There are still free players in Russia – collective farms, grain elevators that had free hand during a certain period of time, however, after emerging of the above-mentioned companies, they do not have this opportunity any more. “Dreifus” purchased wheat at the lowest prices, which should have been done by an entrepreneur, and today it dictates the rules of the game. Let us suppose that there is a collective farm that still has wheat. Why should he reduce the price to the level lower than that of “Dreifus’s”? It follows the monopolist, and local Georgian peasants follow it as well. About 2.5 months ago a ton of wheat cost 125-139 USD. The matter concerns Russian 3rd class wheat.
– How much is American wheat?
– There is no American wheat on the market any more, and this is a separate subject. Today Georgian importers mainly work on Russian wheat. Russia has high quality and good wheat. Kazakh wheat is good as well but it is denser and it should be mixed with other one in order to obtain high quality flour. Generally speaking, the more kinds of wheat there are the better, however, a permanent kind of wheat should exist as well. Today Georgian enterprises work depending on the kind of wheat that is imported to the market. There is no planned total cycle, there is no stock either. It is unknown who benefits in this business. Of course it is good if a Georgian entrepreneur buys a ton of wheat at 135 USD during the peak period, and sells it for 170-175 USD during the peak period. Here is the real aspect – a mill had wheat, ground it and has to buy it again. It received a profit out of grinding, and then has to purchase wheat in Russia again, where the prices have been already increased. Then this stage continues, under CIF terms a ton of wheat costs 175 USD on the border.
– How much will wheat cost in the middle of April?
– Unfortunately, I do not have statistical data. A special structure used to exist in the country which has been sold as a private one. It purchased information from different Russian markets. It was analyzed, and the state – the Ministry of Economy, the Ministry of Agriculture and the State Chancellery received information on the passed period and the expected statistics.
– Who bought this organization and why information analysis does not take place any more?
– It was Ltd. “Agro Systems” that had various functions. It was created by the Americans and it was financed by the EU’s money, and initially this organization had a certain regulatory function, then it was transformed into a limited liability company and was deprived of this function, however, it directly received humanitarian wheat. Then it won the tender, continued market research and worked on Russian, Kazakh, Ukrainian wheat besides the American one. This organization does not have financial resources to have a serious success on the market, and over the recent years, in fact, it was not given the right to carry out economic activities. In 2002 American experts studied its prospects. It was the time when Ergneti market thrived and there were serious problems with smuggling. The conclusion was that it did not perform the function for implementation of commerce activities for the state, but there was an alternative that the state, if it wished, could turn this organization into a structure that would have fulfilled the functions the state was to fulfill. It would not have trade in wheat but would have served the state carrying out analysis and research. The choice of the state as follows: it was sold as a limited liability company with 100% share, it was purchased by an investor from Azerbaijan and this organization ceased to exist. Now it, along with other organizations, mills wheat and sells it. Another player appeared on the market in the form of the mill, but the link, which was fulfilling the matter of state importance having the status of a private law person, was absolutely excluded. Today no one buys this information.
– Correspondingly, we cannot determine what inflation rate will be.
– It is so. I can say only one thing based on experience – March prices will not be a limit, they will be increasing still more. According to general statistics, when there is a forecast of wheat yield in the country, here I mean Russia, Ukraine and Kazakhstan, that is the regions that basically supply, there will be stable prices in September-October, from December the prices will rise, and from May they will decrease. However, we purchased in formation from Russian and American companies that study the prospects of the 2006 yield. Wheat price will not decrease more than its lower bound it the yield prospect is bad. About three years ago a specific phenomena took place on the wheat market. Russia annually consumes about 60-70 million tons of food wheat, Ukraine – 10-12 million tons. If I am not mistaken, in 2002 both Russia and Ukraine had a very large yield, it was so large that Russia had a remainder in the amount of 20 million tons. Ukraine also had an unsold remainder. This fact caused a sharp deflation of prices on the market and a kilogram of wheat cost 3 cents. For this reason Russia and Ukraine signed multimillion ton contracts on the European market, the market absorbed the wheat and under these conditions the contract obligations were left for the following year. On the following year the yield was not so large and the international obligations remained unfulfilled, and there was deficit both in Russia and Ukraine. Wheat is grown for the Russian market in Siberia as well. When it was impossible to export it anywhere, it was purchased by the state, and this wheat proved useful to Russia in conditions of deficit. It started purchasing wheat in Kazakhstan and Uzbekistan. It was the first occasion when Uzbekistan exported 1 million tons of wheat. However, Ukraine did not manage to purchase wheat anywhere and it was delivered there from the US by ships, in order to avoid a catastrophe on the market. The Deputy Prime Minister and the Statistics Committee fell prey to it. One sack of flour cost 17-20 GEL on the Georgian market. This price inflation delivered a direct blow on Georgia and the price of one sack of flour rose to 40-42 GEL. It was the period when the state started to latently regulate the market and used the only reserve – American wheat as a tool. Today a peak decreasing of prices on the Georgian market is not expected, but fluctuation of prices is a constant and attendant process.
– That is why a permanent monitoring is necessary.
– Ii is necessary that the state should know what reserves it has.
– Especially in a country like Georgia where, from the viewpoint of calculation of inflation rate, a lion’s share among other food products in the basket of goods falls on bread, and its price becomes determinant. When we speak of inflation we have to calculate the real one. In your opinion, will bread prices rise in April-May?
– I think that the prices will remain stable. Margins are rather high this year. The talk of bread prices started when average price of a sack of flour reached 42 GEL. Today its price is less than 32 GEL. That is why there is no threat of increasing of bread price yet. There is also no threat that a deficit will emerge on the Russian market the way it happened a few years ago. However, a natural increase will take place, but in future flour producers or bakers will nominally retain the price of bread, and will regulate it by means of internal resources. I repeat once more that bread price will not rise yet, though increasing of scale of legalization in the energy sector, gas sector, water sector and from the viewpoint of bread registration, which, in my opinion inculcation of cash registers will entail, may provoke increasing of prices on the market. Though, to the luck of Georgian consumers, it must be said that there is such a keen competition between small and large bakers that the prices are somehow retained, and in competition conditions they try to retain the prices for fear of losing their customers. In general, it must be said that the price of Georgian bread has become stabilized during the period of peak prices when a sack of flour cost 42 GEL. Though there was a certain fluctuation from the viewpoint of price decreasing. That is why the price of bread from thone (Georgian bakery) that was sold for 50 tetri increased to 60 tetri, then this price was retained by many bakeries, but some of them decreased it again. That is why I repeat once more that the resource is still big. However, retaining of bread price does not mean that wheat price will not increase. I just want to say that, for the time being, there is no power in Georgian business that will leave in the Georgian economy the profits that objectively exist in wheat business. We are just buying and selling. From the viewpoint of food products’ safety, the country is practically unprotected. There was an occasion when the border was closed for two weeks because of the avalanche. During that period we sold 12 000 tons of wheat since Georgian wheat processing industry found itself without wheat and, naturally, without flour. But for American wheat or the resource that existed then, the problem would have been a very serious one. Today, in conditions of political tensions, it is enough for anybody to say that his wheat should not be sold on the Georgian market, or should be sold at a high price to create serious problems. It takes 25 days for a loaded ship to come to Georgia. That is, an automatic one or two months’ drop will be on this market. In the Ministry of Agriculture there works Omar Kacharava and obtaining of information is held up by his experience, knowledge and personal contact. I want to tell you that there is no source of information, since a private entrepreneur is not obliged to notify the Ministry of Agriculture concerning the kind and the amount of wheat imported by him.
– Who supplies wheat to Georgia?
– It may sound paradoxically, but there is one real supplier of wheat from Russia. It is one Georgian lady who is a successful businesswoman in Russia and it is she who basically supplies importers with wheat not only in Georgia but in Armenia as well.
– Who is this lady?
– Unfortunately, I do not know her surname, but her name is Maia.
– There is information that some mill plants are importing wheat from Krasnodar.
– Gori mill plant, Kochreti, Kutaisi, Mzekabani and the wheat exchange are importing wheat. Businessmen that have good contacts are a basis of wheat supply, and it is significant that cheap wheat is imported to Georgia thanks to this Maia. That is if “Glenkor” or “Dreifus” were suppliers, it would be 5-10 USD more expensive. In this case this business is a legal one, but in reality different mill plants have one source of supply. Today, out of the total amount of wheat imported to Georgia, 200-250 thousand tons is Russian.
– Does it turn out that 90% of the wheat market depends on Russia?
– Yes, it does.
– What is the volume of American aid?
– There is no American aid. The last American aid in the form of humanitarian aid was received in autumn 2004. Then 50 000 tons were imported to Georgia. Our authority itself rejected American aid. When the aid was received by Georgia, it played an important role from the viewpoint of market regulation. Besides, it had an important function – the avail sum was fully placed on a special account of the Ministry of Agriculture, and was to be used for agriculture development programs only. Though, nothing has been implemented so far.
– Has America reduced the amount of aid or it grants something else instead of wheat?
– American aid did not pursue a financial object only. It really saved the country from hunger.
– In short, we are fully dependant on Russia not only in gas but in another strategic product – wheat. We are not protected since we have no alternative source of wheat supply.
– Theoretically, there is an alternative source, wheat can be bought in America or Ukraine.
– How many large mill plants are there in Georgia now?
– About 10. Mill plants in Poti, Zugdidi, Kutaisi, Gori, also Didube, Mzekabani, reappeared on the market, Marneuli mill plant was seriously enabled, Kachreti and Rustavi mill plants have good prospects. “Anapi”, which is an independent player, also imports wheat. Wheat processing industry does not exist in Ajara any more. Along with these old and large mill plants, those ones that cannot be called small also developed in Georgia. There are 3-4 serious enterprises in Tbilisi, but they have problems as well, since large investments were made in them but the reurn is rather small. There is also information that a rather big mill is being built in Tbilisi. Construction of a 30 000 ton elevator and 500 ton new modern mill is already a serious matter. If all the mills enumerated by us work with full capacity, it will become possible to export flour to the Transcaucasia and Central Asia. 20% of the Georgian mill plants is enough to meet the demand of the country’s market.
– In your opinion, what should be done in order to use this potential as an export one?
– From my point of view, nothing can be done about it. It is impossible to export flour to Armenia since all wheat processing enterprises of the country are working. Most part of wheat is imported to Armenia through Georgia. Armenian flour is imported to our country and you will easily find it on the Georgian market. At to Azerbaijan, it is worth to enter its market because of one thing only – the quality of our flavor is better then theirs. However, Kazakhstan is situated near it and Georgian wheat will not be cheaper then Kazakh one, the same applies to flour as well.
– Then, what is the use of having so many large mill plants?
– That is the point. A modern mill plant will be saved by these capacities. The time of giants like Marneuli mill plant has become a thing of the past. Poti mill plant will exist because it is situated near the port, but the flour produced there has competitors in Turkey. Turkey stimulates import by means of direct subsidies, that is why it has very cheap flour.
– Does it have the right to do it?
– Powerful countries have the right to everything. You can import Turkish flower at a very low price. Turkey carries out direct financing of exporters. We submitted information concerning it to the parliament but there was no result. There is no wheat processing industry in Ajara since there is no point in it. Gori flour is of high quality. The former administration of Poti liquidated the production, Zurab Tsomaia did his best to improve the situation but he failed. Poti flour was in demand on the Georgian market since it was of the highest quality. Now Poti flour is sold for old name’s sake.
– What is the way out? What kind of prospects are there?
– Our prospect is a free market for flour with zero customs tax, and creation of a competitive barrier for flour. But this is only the theory, since Georgia has signed agreements that it will not be able to change. Only practical decision is left – not to allow custom clearance according to artificial prices, that is flour should not have lobbying so that its real cost should not be fixed.
– O.K. The second important product in the basket of goods is sugar, rising in price of which has worried the population.
– Frankly speaking, I have not obtained insight into the sugar business but, from my point of view, it is possible that the market will be opened for sugar import. We can also theoretically consider sugar production in Agara.
– How profitable is it?
– Agara was related to the sugar-beet producing region – Khashuri, Kareli, Gori. During the communist period Agara basically received Cuban raw sugar-cane and processed. Nevertheless, I think that sugar production in Agara was a political entourage.
– Does it have any real prospect?
– Unfortunately, I do not know the extent to which it is capable of meeting the country’s demand for sugar.
– Is growing of sugar-beet profitable for a sugar-refinery?
– No, it is ruled out. It would be wrong to use Kartli land for growing sugar-beet again in order to supply Agara sugar-refinery and, besides, it is very difficult to grow this plant. It is not profitable, and I would not advice anybody to do it.
– In other words, we do not inflict losses to the market by cancellation of the customs tax. On the contrary, raw materials for Agara sugar-refinery will become cheaper. However, there is a serious increase in price of sugar in our country, and besides it is supposed that there will be a bad yield.
– According to the information I have, a deficit of sugar in the world is expected which, naturally, will have an effect on the Georgian market. Sugar will rise in price on the country’s market, but this will not be a fault of the country’s economy. The point is that the government should not pretend that nothing is going on. In this case the authority should explain the situation to the people. There are such issues to which claims can be raised, but there are also those ones that does not depend on the state.
– Oils and fats are also basic ingredients of the basket of essential goods.
– I think that in Georgia there is a good experience of sunflower seed oil production. The largest part of crop areas in Shiraki is given for growing of sunflower and wheat. Here we have to protect the market as well.
– Does Shiraki oil have good quality?
– It is always possible to obtain high-quality oil by using factory processing. The oil that is sold on the market now is home-made, it is thick and harmful to health.
– How profitable and acceptable is Georgian oil?
– First of all, we should know what we want. If the country has a potential of oil production in Shiraki, it should have a strategy. It is my personal opinion and not the state strategy.
– There is a program of oil production out of maize.
– If this program provides for 100% meeting of the population’s demand for high quality oil, then we have to start thinking already now how to solve this problem. We can speak about oil, sugar and cabbage, but we have to find out what the state needs, where the vector of agricultural development will be spearheaded. If it wants to protect the market, it is not determined by the customs tax only. There is a great number of protective measures. Now an apple garden is being laid out in Kartli. This means that importers of fuel, chemical fertilizers, tractor drivers and other agriculture workers will be employed. Peasants will have work and will turn into farmers. Here the matter concerns the general state policy, but I shall speak about my village.
– What do we have besides apples?
– We have everything, potatoes for instance.
– Potatoes are supplied from Bolnisi and Marneuli. We have early and autumn sorts of potatoes that do not meet the market’s demand. And if Georgia does not import potatoes, onion and vegetable from Turkey, it will not be able to live.
– What do we call the production of potatoes, cabbage and apples? The products grown by peasants? O.K., then how many percents of what he can grow does it make up? I do not think that it will be more than 30-40%. We do not take it into account the fact that this potential is destroyed in our country. Who said that Georgian potatoes will not have other markets besides the Russian one? Who worked on the issue of rendering assistance to a Georgian peasant in growing of potatoes that will be intended for the world market? We have to educate this peasant. Today the state has left this issue without any attention, and it thinks that everything will be settled of itself. Maugli was grown up in forest too, but this does not mean that an ordinary peasant will enter the world market be means of his knowledge and education. This is a separate subject. If today assistance is rendered to a peasant and he is told that he grows Kekhura sort of apples for the Russian market, on which there is a great demand for it, probably another sort – Puzhi will appear on the same market that is unfamiliar to the Georgian market. If we do not give him information about it, he will grow Kekhura again and the market will not be satisfied. We start to grow a new sort of nut-tree that gives a large number of nuts almost as big as apples. In this case we have to give information to peasants so that they could grow and use the new crop. In other case, a peasant will come to this conclusion himself, but, unfortunately, it will be late. Here the matter concerns the state that should find levers for acceleration of processes. It should determine what a peasant does not know. If the state does not have a general strategy of development, it will remain in conditions of primitive slogans that market will regulate everything itself. Of course it will, but we should understand that here the matter does not concern planning when a peasant is told that he must grow 5 tons of potatoes. Does America have a planned economy? When there is a very rich harvest of wheat and the price for it decreases, it compensates for the difference by direct subsidies so that a farmer should not lose interest in growing of wheat and should not give up this business. That is why America has huge reserves. Today everything happens spontaneously in our country. Presently we have a big deficit of beet. In the country they pay 1.5 GEL for a kilogram of beet. Last year tons of it were thrown away. Why? A peasant that had to throw away beet last year, switched to another crop this year, and that is why the deficit has emerged. These poor peasants that have not become farmers and have a hoe and a spade only, will again sow beet and there will be a rich harvest again next year. This is a result of the fact that there is no general work on this kind of issues. Today there has been a talk of melioration. I now that the current Minister of Agriculture has stopped financing of melioration as soon as he took up the post.
I want to say that here the matter concerns not only the customs. The state should think of stimulating of local production and take care of its development.
– Agriculture does not have any program.
– I also see that it does not, but today agriculture faces another contradiction. In view of the prospect that the market will be absolutely open for any apples and juices, thousands hectares’ apple gardens appear every year, which is sure to create problems. Market in Kartli was closed because of the conflict with Russia. Soon a peasant will have doubts concerning horticulture. Taking care of one hectare of a fruit garden is not cheap, but the expenses should be reimbursed. Of course this concerns any crop, it must have a market.
– What can you tell us about chicken meat and meat market in general? Georgian chicken meat used to be competitive on the market, but there emerged the unforeseen world problem, and the state does not do anything for rendering assistance to production. If I am not mistaken Georgia could give consumers up to 3000 tons of chicken meat, and 5000 tons including imported chickens and trotters. All this was substituted for other kinds of meat, the price of which increased by about 30-40%. Maybe it would be better to cancel customs tax for meat since we have no prospect of its production. Is rising in price of meat expected?
– Georgian economy, in view of its small size, is very susceptible to any global fluctuations. I am sure that bird meat production will not be safeguarded against it, and if everything continues this way it is doomed to ruin. I do not see the way of solving this problem in a short period of time. The only thing that can be done by the state is that it should seriously think of securing of production of such bird meat that will be safe for the population. Of course it is very difficult, but control over migrant birds only will not solve the problems of entrepreneurs that invested millions in this business. There is one aspect that may become a very important one tomorrow. Meat has catastrophically risen in price and this process will continue. In fact, Georgia is not a meat producer that could meet the demand even for fresh meat. We know that most of restaurants and snackbar work on imported meat. Let alone processing plants. Wurst is imported too. When mean the domestic market when we say that pork and beef will rise in price. But where will the problem of bird meat go? It will push up the price of meat for the world economy is not tied to India only. Wurst and meat that is imported to the country as a raw material will rise in price, since any producing country will face the same problems. As to the Georgian market, a peasant will not slaughter the hibernated cattle in spring, but the cattle that he is going to slaughter occupies a very small segment of the market. I am not speaking about Russian and Indian meat only. Cows are fed from feeding-racks and fattened up by means of various machinations. Meat on the market have already risen in price and this process will continue. At last bird production was created in Georgia in which a modern conveyer method is applied. Fresh chicken meat was supplied to the market. But this has not been started in cattle breeding yet. As before, pigs and cows are bred by a peasant. And one more thing, Indian and other meat is sure to rise in price. I have to tell you that I shall eat a village chicken with pleasure.
– The same concerns fish as well, we do not produce it. However, for instance, warm-water scad was imported from Bulgaria at cheap prices. Fish has catastrophically risen in price as well. We have also made a serious mistake in licensing, the Turks have purchased all the licenses. Finally, the basket of essential food products has risen in price and will become more expensive.
– What do we call “rising in price”? If we compare the prices with the last year, we shall see that they have doubled.
– O.K., our country has become a member of WTO. In your opinion, why do we cancel the customs tax? I say nothing about the 150 millions that our budget used to receive. From my point of view, the country has lost its face, it does not have a policy. The matters stand so that reorganization of the government should take place. The Ministry of Economy should b liquidated with delegation of its functions to the Ministry of Finance, the Ministry of Agriculture should also be liquidated, and something should be left in the form of programs which should be implemented in accordance with the “Law on purchases”. The Ministry of Energy that does nothing should be liquidated at all. Culture, sport and education should be united in the form of a department. Only one large ministry will remain – the Ministry of Economy and Finance. What do you think about this issue?
– Over the past two years the present authority has been creating state structures not according to the principle of what kind of functions the state should implement, but in order to reduce the number of ministries with the purpose of decreasing of expenses. I know only one thing that there must be a leading structure in the state that should determine its function. It does not matter how it will be called – a ministry or department. I think that the functions of the state should be determined. We crossed out the WTO document at one stroke, which means that Georgia has chosen one way only – to get or to lose everything. I hail the decision of the Ministry of Economy that what should be liberal should become liberal, but whether everything should be liberal is another matter, and I think that no one has thought about it. There must not be zero taxation on everything, and this will become evident soon. Theoretically we choose a good and necessary approach but we distort is so much that we receive the inverse effect. The same concerns inculcation of cash registers, if the authority had taken adequate decisions there would not be this kind of result. This is not a problem to receive such publicity. At Chicago airport I saw a negro bootblack who had a cash register that could accept credit cards. We should not discuss whether cash registers are necessary or not, but should care for not carrying money in pockets. It also happened because toughening of administrative measures has not been thought through. Unfortunately, good undertakings often come to nothing. In my opinion, liberalization of customs taxes should take place where it must be done. Should we believe that the state does not need the development of strategy in the whole system? It turns out that the state strategy is zero.

How much will a Credit Cost and what Threatens Georgian Banks?
Banks are one of the strongest sectors of the Georgian economy both from the viewpoint of profits and capitalization. So far, none of founders of commercial banks, that are joint-stock companies, have had the right to have a share more than 25%. This limitation is lifted according to a new draft law that has been submitted to the parliament. However, this barrier did not prevent Kazakh “Turan Alem” bank from buying 75% of the “Silk Road Bank”. At the same time, the controlling stock (51%) of the “United Georgian Bank” was purchased by Russian “Vneshtorgbank”. 25% belongs to the European Bank of Reconstruction and Development. Armenian “Kaskad Bank” also appeared on the Georgian market with 50% of the total capital of Georgian commercial banks, while 76% of total bank assets belong to foreign banks. Both the National Bank and the government contribute to inflow of foreign capital. By July1, 2007 the authorized capital of banks will increase to the sum in GEL equivalent to 12 million USD. It is natural that Georgian bank bosses will have to invite foreigners with the purpose of replenishment of this capital. At the same time, a rather serious process of concentration and mergence takes place in Georgian banks. From this point of view, “Bank of Georgia”, that adjoined several financial systems – “Intellectbank” and “Tbiluniversal Bank”, is the most aggressive one. In experts’ opinion, “Basisbank” will also join them soon. A serious capitalization takes place, the price of this bank’s shares has increased from 1 to 8 GEL. According to the financial market experts, in will become 16 GEL this year. They also believe that “packing” of “Bank of Georgia” takes place with the purpose of its selling to a foreign bank in the nearest future. The decision concerning purchasing by French “Sosiete Generale Bank” of the controlling stock of “Republic Bank” has already been taken. By the end of the year 70% of the Georgian banks will be in the hands of foreigners. Presently, in Georgia there are 19 commercial banks, the combined assets of which made up 1 372 739 at the beginning of 2004, at the end of the same year – almost 1 7 000000, and by the end of 2005 – 2548 268, out of which more than half a billion belongs to “TBC Bank”. Large banks are: “TBC Bank”, “Bank of Georgia”, “Republic Bank”, “Cartu Bank”, “United Georgia Bank” and “ProCredit Bank”.
The amount of granted loans for January 1, 2006:
To legal entities – 1217527
To natural persons – 482663
80% of granted loans are in foreign currency. At the same time, the interest rate makes up 15.8, and 18.1% on loans in the national currency to legal entities, 22.5% – to natural persons. More than 50% of loans were granted to the trade sector, and less than 6% – to agriculture. That is, in spite of the fact that the amount of attracted foreign capital to bank assets has increased, the amount of deposits of natural persons has seriously increased as well.
December 2003 – 287245
December 2004 – 359159
December 2005 – 527585 (1000 GEL)
Nevertheless, the interest on credits granted to business has not become cheaper, on the contrary – it has increased by 3-4.5% in 2005. At the same time, the incomes from the granted credits are constantly increasing.
Out of 19 Georgian commercial banks, 12 have foreign capital. For January 1 2006, 6 banks out of them had a capital of more than 10 million GEL.
Source of information: the National Bank of Georgia, Bulletin of Monetary and Bank Statistics

FADI ASLI AGAINST THE AUTHORITY

According to the President of American Chamber of Commerce in Georgia Fadi Asli, a constant pressure on business on the part of financial police creates the atmosphere of terror and has a negative effect on the attempt to attract foreign investors. He pointed out that lack of a well-defined economic policy is a weak point of the present authority. Business was oppressed in Shevardnadze’s time as well, but now the situation has deteriorated still more. Financial police behaves like militia. This is inconceivable. They go to a businessman, stop his business and send representatives of the Tax Department to him.

Restoration of the irrigation system is planned. By 2010 the Ministry of Agriculture is planning to irrigate 300 000 hectares of land. According to Mikheil Svimonishvili, the irrigation program will cost 50 million USD to the state. The sum will be allocated by various donor organizations. Maximum area of the country’s land that needs irrigation makes up 735 thousand hectares. However, by 2010 only 300 thousand hectares of land will be irrigated by means of the system.

The Tax Code is being changed again
The government has taken a decision to change the Tax Code again. The new draft envisages the following:
1. Excise on tobacco will be reduced: on imported tobacco goods – from 90 to 50 tetri, that is by almost 40%; on local ones – from 70 to 50 tetri.
Experts believe that this decision will presumably come into effect in June and make cigarettes cheaper. It is natural that the volume of contraband will decrease too.
2. The period of return of the sum excessively paid by entrepreneurs will be decreased from 6 to 3 months.
3. According to the existing Code, if an entrepreneur deliberately or unintentionally shows a reduced amount of incomes in the declaration, he will be fined for 25% of the reduced sum.
4. In accordance with the new draft, an entrepreneur will be released from the fine if he submits the corrected data himself.
5. According to the existing Code, if an entrepreneur increases the volume of VAT or artificially reduces it in the VAT declaration, he is fined for 100% of VAT indicated in this invoice, while, according to the draft, he is fined only for the sum by which the volume of VAT was reduced or increased.
6. According to the Code, the tax authorities have the right to sequestrate the whole property of enterprises having bad debts, while, in accordance with the draft, they can sequestrate only the part of property that is necessary for paying of the debt, and an entrepreneur has the right to sell the sequestrated property himself within a period of one month.
7. The responsibility of the natural persons that carry out economic activities becomes stricter. For instance, here the matter concerns the people who lease out a house or a country-cottage and are not registered with the tax authority. This also concerns private flats leased out in Kobuleti and Batumi, fine – 100 GEL.
The draft will be considered at the next meeting of the government and will come into effect till the end of autumn.