Georgia’s export trends and problems

Emzar Jgerenaia

There has been a serious increase in Georgia’s export indicators over the past years, in spite of the fact that at the same time import was increasing as well and trade deficit has reached the unprecedented level.

During the two quarters of 2006 the trade deficit became more than one billion and hundred million, i.e. 500 million more than in the similar period of 2005.
Deficit of the current account
In 2005, in comparison with 2004, the deficit of the current account increased and made up -688.7 million USD.
In 2005 the relative indicator of the current account’s deficit increased as well and made up 10.7% of the GDP. The similar indicator of 2004 was equal to 6.6 %.
In 2005 the current account’s deficit was financed at the expense of attraction of foreign investments and capital, which had an effect on stabilization of the currency’s exchange rate.
Trade turnover
In 2005 Georgia’s foreign trade turnover (excluding unorganized trade) made up 3357.6 million USD, which is 34.6% more in comparison with the corresponding indicator of 2004.
In the trade turnover, export makes up 866.7 million USD (increased by 34.0%), while import – 2490.9 million USD (increased by 34.8%).
In 2005 Georgia’s negative trade balance increased by 35.2% and made up -1624.2 million USD.
In 2005 Georgia had a negative trade balance with 101 partner countries, with which the trade deficit made up 1687.5 million USD (in 2004 a negative trade balance was fixed with 104 countries and made up 1321.4 million USD).
A positive trade balance was fixed (63.3 million USD) with 31 countries (in 2004 a positive balance of 120.5 million USD was with 21 countries).
In 2005 the share of foreign trade with the CIS countries increased and made up 1406.1 million USD, which is 42.8% more in comparison with the corresponding indicator of 2004 (41.9% of the total trade turnover).
Georgia’s foreign trade turnover with the EU countries made up 836.7 million USD, which is 14.8% more in comparison with the corresponding indicator of the previous year. 24.9% of the trade turnover falls on the share of these countries.
Russia holds the first place among Georgia’s largest trade partner countries. In 2005 the trade turnover with this country increased by 48.6% and made up 538.3 million USD, which is 16.0% of the total foreign trade turnover. Then comes Turkey (12.1% of the trade turnover), Azerbaijan (9.4%), Ukraine (7.7%), etc.
Last year there were no significant changes in the commodity structure of export-import.
In the export commodity groups, the leading positions have ferrous metal scrap (9.7% of the total export), natural wines (9.4%), ferroalloys (9.3%), nuts (8.1%), aircrafts (8.0%).
As to import, here the leading position is occupied by oil and oil products (13.5%). Then come passenger cars (7.2%).
Forecast (official)
Trade turnover and the deficit of current account
The increase of the foreign trade turnover is expected in the forecasting period.
In fact, a trebling has taken place in comparison with 2000, this mainly happened at the expense of the positive processes related to export legalization. At the same time the deficit of the trade balance has been increasing as well. The main thing is that this very impressive increase has, for the most part, taken place at the expense of ferrous metal scrap, grapes and wine material, nuts, mineral waters, ferroalloys, mineral fertilizers and unprocessed gold. Besides, fruit, melons and gourds, as well as greens were also important items. As it can be seen, the export structure was too scanty and, except for scrap metal, fell on the agriculture sector.

At the same time the service export market is characterized by seriously growing and convincing trends (see Chart !2).
According to this chart, the income service export increased by 30.6% against the fourth quarter of the previous year. From which, 60.9 million USD falls on tourism. It is almost equal to the total transport indicator. In spite of the fact that in the final quarter of the last year Georgia’s commodity and service balance deteriorated by 46.7%, there are still serious liquid reserves here.
This progress was held up in 2006 and the main items of the basket found themselves under the threat of a serious drop. For instance, in the first and the second quarters 854 million worth of
wine and wine materials dropped, especially sharp drop was in the second quarter. The forecast till the end of the year is as follows. The same concerns nuts and mineral waters, let alone fruit and vegetables. In all, as far as these items are concerned, the volume of export will decrease by 200-250 million USD till the end of the year.
At the same time, a macroeconomic disbalance is to the fore. In particular, according to the government’s program for 2007-2010, a growth in all directions is planned.
In spite of this kind of impressive growth indicators, which imply 8-9% growth in the next four years (while, according to the recommendations of the IMF, it should be 5-5.5% from the viewpoint of the interests related to inflation). There is a serious decrease in the basic GDP indicator of 2005-2006. In agriculture this decrease was 10% in 2005, and, as it is expected, it will be 14% in 2006, the same concerns industry as well. Out of 2 million of able-bodied population, 570 000 people are employed on contract basis, the official unemployment, that has increased, makes up 280 thousand, while the remaining 1150 000 thousand people are self-employed, and this figure mainly falls on agriculture sector. Unemployment rate rose here because of obstacles in the export production, the same picture is in the manufacturing industry.
In the first quarter of 2006, in comparison with the similar period of the last year, the real growth of GDP made up 8.4%.
High level of activity was fixed in the sphere of financial mediation. The surplus value created in this sphere is 56.7% more in comparison with the first quarter of 2005. Just as it was in 2005, in the first quarter of 2006 the financial mediation sphere was developing as the higher rates compared to other sectors of the economy and represents the main source of the economy’s stability. Correspondingly, its share in the GDP is growing: during the period of one year it increased by 0.5 percent points and made up 2.1%. The construction sector again continues its developing at high rates. In the first quarter of 2006 the real growth in this sector made up 25.9%. The construction sector’s development at such high rates was caused by the considerably increased state budget financing (by 110.6% in comparison with the first quarter of 2005), added to this are the loans granted by the banking sector to the construction sector, which, in its turn, contributes to creation of the surplus value in the construction sector. During the period of one year the share of construction in the GDP grew from 4.4% to 6.7%.
However, the activity of the agriculture sector decreased considerably. In the first quarter of 2006, in comparison with the corresponding period of the last year, the real drop in agriculture sector made up 8.3%. On the one hand, it is stipulated by a comparatively high basic effect (in the first quarter of 2005 the real growth rate of agriculture was 19.2%), and on the other hand – by unfavorable climate conditions.
Employment and unemployment
According to the statistical data, in 2005 (nine months) the number the employed in the country’s economy made up 1737.7 thousand people. 34.0% of them were employed by hiring, while 66.0% were self-employed.
According to the strict assessment criterion of the International Labor Organization, in 2005 the number of unemployed people increased by 6.9% and made up 277.8 thousand people. According to the moderate criterion, 334.4 people were unemployed, which is 3.7% more in comparison with the corresponding indicator of the previous year.
The unemployment rate, according to the strict criterion, made up 13.8%, and 16.1% – according to the moderate one, which is explained by the fact that a wider circle of people are considered as unemployed ones in accordance with the moderate criterion.
It is also noteworthy that last year the number of public officials decreased by nearly 40 thousand people, while the number of unemployed people increased by nearly 20 thousand people.
At the same time, noteworthy is the fact that during the coming years the indicator of the foreign debt’s repayment is considerable. Proceeding from this, a decisive significance is attached to export currency flows.
Foreign debt service in 2007-2010 is indicated in the chart that is given below, which, according to the two agreements reached with the Paris Club, envisages the terms of the debt’s deferment and the accelerated rate of repayment of the debt to the EU in 2006-2007.
In other words, we shall have to pay 260 -160 million annually, which requires currency incomes. However, this problem this problem can be neutralized by the increasing indicator of the service balance.
The next problem is inflation indicator, which seriously increased in May 2006 because of rising energy carriers’ prices and slowing down of agricultural production rates.
which means that a big part of the population’s deposits are in dollars, and the transfers coming from outside the country are also made in the dollar equivalent. That is why in carrying out of spendings the population suffers losses firstly because of the strengthened GEL and secondly because of inflation, so the losses calculated this way are much higher than just the inflation indicator.
Probably, there is nothing new here, except for our wish to return to this problem and consider it again why we do not have a perfect economic program of export promotion, which impedes the development of export production in Georgia. Or, maybe, we have it? In order to look into this issue we have analysed the government’s document “The strategic economic program for 2007-2008 on the main directions of economic development and the schemes of the reforms”, in order to find an answer to this question. Here we presnt the excerpts from it:
The government’s “strategic plan for 2007-2010” (which any of you can see by visiting the official web-site of the Ministry of Finance – www.mof.ge) should be changed.
There is not a single word about export problems in this strategy. Moreover, it is written there that “in accordance with the forecast calculations, in 2006-2010 the export growth rates will exceed the import growth rates”. Correspondingly, both absolute and relative indicators of the current account’s deficit will decrease.
The share of the the current account’s deficit in relation to GDP is expected at the level of -10.6% in 2006, and -10.5% – by 2007.
It is a very disturbing circumstance, since today it becomes a problem number one not only in repaying of foreign debts, inflation management and solving of employment problems, but for the economy’s condition on the whole.
The departments, which should present the way of getting out of it, formulated their strategy as follows:

The Ministry of Economic
Development
The Ministry’s mission:
Elaboration and implementation of effective economic policy with the purpose of provisionm for high rates of sustainable growth of the country’s economy.
The strategy of realization of the Ministry’s mission:
– Development of the country’s infrastructure with the purpose of improvement of the investment climate;
– Liberalization of the trade sphere and reduction of technical barriers;
– Institutional deregulation of the economy;
– Attraction of investments by means of privatization of state property and provision for the effective and transparent management of the property remaining in the state’s hands.
The result expected in the medium-term period:
– Creation of favorable entrepreneurial environment and considerable increasing of the volume of investments in the country’s economy;
– Creation of new jobs in the private sector;
– Provision for sustainable and high-rate GDP growth and a sharp reduction of the poverty level.
The medium-term priorities of the Ministry:
– Elaboration of the country’s economic policy and coordination of its realization;
– Liberalization of the trade sphere and reduction of the technical barriers in trade;
– Reformation of standardization, metrology, accreditation and market supervision system;
– Participation in reformation of the system of licenses and permissions (in accordance with the Ministry’s competence);
– Privatization of economic subjects and property owned by the state;
– Optimization and liberalization of the transport management system, development of the road infrastructure.
The Ministry of Agriculture
of Georgia
The mission of the Ministry:
– Existence of competitive products in conditions of effective agriculture;
– Provision for Georgia’s zooveterinary and phytosanitary safety and recognition of the country as a reliable trade partner;
– Provision for food products’ safety.
The strategy of realization of the Ministry’s mission:
Ï% Eradication of the factors inhibiting the development of agriculture by means of elaboration of the single state policy and legislation;
Ï% Provision for the country’s zooveterinary and phytosanitary safety, as well as food products’ safety by means of implementation of state supervision.
The result expected in the medium-term period:
– Favorable environment for the development of agrobusiness;
– Food products’ safety;
– The country’s zooveterinary and phytosanitary safety;
– Competitiveness of Georgian products on the international market.
The medium-term priorities of the Ministry:
– Provision for food products’ safety and quality;
– Development of agricultural infrastructure and reformation of melioration systems’ management;
– Development of viticulture-wine making sector and struggle against falsification.
Probably, this material also requires serious correction from the viewpoint of the fact that the Ministry of Agriculture does not provide for food products’ safety, but its subdivision is in charge of the control over this safety and they wanted to say this. It will not be able to produce concrete products either, it has nothing to do with it, it is an economic function, and even if it could do this, it is prohibited by the Constitution. Similarly, they are probably not ready to be spoken to about export and the system of its promotion.
Is there export promotion in Georgia now?
– Export production is exempt from VAT, excise (except for scrap metal) and customs tax.
-??????
I do not know anything more, maybe someone else can say?
Based on the experience of the countries with transitional economy and the western countries in general, we urgently have to solve several problems in this direction, as a tactical economic move. In particular:
– There is no system of Eximbanks and the corresponding programs.
In 2005, in comparison with 2004, interest rates on loans in the national currency decreased by 3.9 percent points and made up 20.7%. The banking sector has no strategy in this regard.
Resources are inaccessible or unprofitable for export production. On the contrary, by strengthening GEL, we are making export excessively expensive. It is true that our currency, according to GEPLAC’s experts, is quasi stable and quasi fixable, but it still has this effect on export.
– In importing equipment, technologies and raw materials we make export production pay VAT at the border, and freeze their scarce floating assets for a long time.
– The issue of metrology, calibration as well technical specifications is not being solved, which is a direct responsibility of the state.
– It is true that last month we again became members of ISO after paying of 9000 USD membership fee, but the issue of standardization and certification, as well as creation of the corresponding base, is still open.
– The policy of contribution to insurance development in agriculture has not been elaborated.
– Unsolved serious infrastructural and energy problems and high cost of energy carriers.
– Unqualified cadres and nonexistence of the system of professional cadres’ training and retraining.
– Raising in the Georgian business of the level of implementation of international business and general knowledge of international trade. Here the matter concerns not the giant enterprises, but medium business, which can become a realizer of the export potential.
– Poor development of curative resorts’ tourism and nonexistence of the promotion program, even from the viewpoint of taxation.
– The policy of promotion of corporate business in agriculture, in the spheres where “the invisible hand” reacts and works badly.
– Poor promotion of the country and its business abroad.
– Non-financing by the donors of concrete programs in the export sphere and, proceeding from this, presentation of concrete strategic programs to them.
Here are the problems that should be considered and solved in order to be able to sustain this outside pressure and fully develop the export potential, so that the country could occupy its place on the international market.