Economic model of Georgia’s administration in 2007

FROM THE REDACTION

Everyone is interested in what will happen on the investment market and in the entire of economy in 2007, are there any macroeconomic parameters, including inflation, dependent on economic logic, and what is the main driving force that is able to push the economy forward in 2007.

Many economic theories and schemes that used to be considered as almost classical ones have been reconsidered in the modern world. The quality of integration and globalization, as well as economic interdependence, has extremely increased in the world and, proceeding from this, the whole weight was shifted to capital flow and the international political condition. At the same time, the effect of the energy carriers market and the high-tech market on the total economic growth rates has seriously increased. These two sectors are becoming very capital-intensive in connection with new inventions, transportation and procuring prices raising. The latter has given impetus to unprecedented giant amalgamations and creation of supranational corporations. However, they may not be supranational according to their economic interests – on the contrary, they are very national. For instance, they belong to the leading capitalist countries, regardless of the geography of their functioning and internationalization of their shareholders. How is the tendency related to the Georgian macroeconomic?
The Georgian economy faces some trivial problems – raising of production, particularly the export one. That is clear to everyone, especially taking into account the 3.2 billion deficit of the trade balance in 2006.
However, it` s impossible issue to achieve a well-organized functioning of private property in the country’s economy and its complete integration with the western market within the period of one or two years. That requires regulation of many other factors. It will take place after settling of the property issue that started in the sphere of public administration since, for the time being, the private property phenomenon does not have the primacy here, and this is a very impeding factor; secondly – culture and impartiality of the judicial authority; thirdly – reduction of bureaucracy in the matter of licensing and deregulation, standardization and certification system improving, creation of a background in international marketing and PR situations, creation of optimal controlling units and structures as well as settling of infrastructure related issues along with provision for an acceptable tax environment and stabilization on the country’s scale.
These issues are not unfamiliar to economists and our western experts; the period of their implementation along with the education reform and creation of the resource market is also known. But in the case of at least 10 years political will existing, what means that is the period till 2015, which is the most optimal one for creation of a solid economic system in conditions of rigorous implementation of reforms. Realization of the aforementioned reorganizations is another matter, but today we shall dwell on one issue – on what should the country live during this period in order to keeping the stability of the GEL’s currency and an acceptable inflation rate for financing the budget’s mandatory expenses, securing the internal and external security or provision for its obligations? In other words, what is the formula, in accordance with which the authority governs the country?
Through the eyes of any experienced western economist, the way, which to a certain extent will meet the country’s requirements during the transitional period in currency flows and provoke the growth of local production, is outside investments. It is a very complex issue since world rating investors does not come easily to the sphere of production, let alone tourism and agriculture, for which we raise our claims. Therefore, the Georgian authority has taken the course for:
1. Construction and management of high-class hotels;
2. Selling of the ineffectively managed state property to foreigners by means of privatization;
3.Tourizm infrastructure development maintaining, basically initiation.
4. Promotion and initiation of the development of house-building, and construction in general, along with construction of roads together with foreign companies;
5. Promotion of foreigners’ coming to the banking sector and attraction of investments to this sphere.
6. Promotion of such international projects developing as Baku- Ceyhan oil pipeline, Shakhdeniz gas pipeline, Kars-Akhalkalaki railway, Trans-Caucasian high-transmitting power lines from Russia to Turkey, etc.
These are six largest channels, from which monetary flows will come in 2007. In addition with capital import from labor resources, i.e. money transfers from the people working abroad. This income item is quite a considerable one since, proceeding from the last year’s dynamics, the inflow of 550-600 million USD is expected.
Investment plan of 2007
1. Electrical communication (Kazakhs): installation of air-lines in the regions, technical re-equipment in Tbilisi – 80 million USD.
2. Mtatsmida park reconstructing: Patarkatsishvili’s project includes 60 million investition for the first stage.
3. Zestaponi, Chiatura – 100 million investment.
4. One hundred twenty million unit power plant is under creation in Akhaltsikhe, for Trans –Caucasian power transmitting line, Russia –Georgia –Turkey transformer. One billion project scheduled to be implemented during two years period.
5. In 2007 Kazaks will invest 200 million in hotel complexes and the whole infrastructure.
6. Reconstruction of the railway – 200 million.
7. Construction of a small Yurmala by businessman Ivanishvili in Ureki – 100 million; The complex schedule including berths, concert halls and hotels.
8. Kuwaiti project: highway to Gori – 60 million.
9. “Kazgas” group: gas reequipment and Likani reconstruction – 70 million.
10. Kazakh group “Alliance”: “Puris Moedani” – Kobuleti race track – Batumi, next to “Intourist” – 60 million project.
11. Bank investment to “Bank Republic” – 30 million hypothec credit, “BTA” – 50 million Kazakh credit and 10 million authorized capital, and 20 million to Georgian firms by indirect way, new “TBC” bank line – 30 million, “Credit Agricole” enters “Tao Bank” with 20 million.
12. 50-70 million to the city construction business, including Shindisi and Tabakhmela project.
13. 150 million worth reconstruction of the gas pipeline and roads in Samtskhe-Javakheti according to “Millennium” project.
14. Baku- Ceyhan income project – 50 million.
15. Small investments – 50 million. Total investments schedule including 1 billion and 300 million.
Citizens’ transfers from abroad – 600 million USD.
Export – 1 billion.
In all, currency incomes in the payment balance will make up 2 billion USD, i.e. 3 billion 400 million GEL. In other words, in 2007, in conditions of other macroeconomic parameters’ solidity, GEL’s exchange rate will remain at the current level.
Demand for money, like supply, will rise by 14-18% and the risk of 9-12% inflation rate will remain. Proceeding from the aforementioned projects, the rate of total incomes’ growth will remain at the level of 7-9% throughout 2007-2008 if, of course, administrative expenses are reduced in the budget so that the country could start reformation of the pension and healthcare sphere.
(January-December 2006)

Intensive disputes are under the way concerning GEL ` s solidity issue. According to the elementary economic theory, its solidity impedes the development of export.
However, it is only an empiric supposition, since it can be seen from our export’s structure that the share of purely processing production is very small and, if there is one, it depends on imported raw materials, as it is the case with nitrogen. Therefore, a solid GEL does not inflict much damage to this weak export system. On the contrary, it contributes to the development and stimulation of local production. Here, proceeding from the existing stereotypes and the situation that has shaped in Georgia, there is clash of opinions among the economists. In reality 80% of Georgia’s domestic production depends on foreign raw materials – bread production, energy, fats and carbohydrates along with cereals and sugar, as well as production of juices, milk and dairy products, let alone construction. Cheap import makes production cheap, since the basic component in price formation is of import origin. Let no one say that we produce enough beet or wheat to full out with work Agara sugar-refinery and our grinding mill, the same can be said about meat and butter production. From this point of view, the incentive is a serious one and it, along with the aforementioned factors, should stipulate for a serious growth of local production and its entering into the world market in competitive conditions.
The policy that is now implemented by the government from the viewpoint of local production will give a result in 3-5 years and, probably, GEL’s exchange rate should contribute to export’s rise to the level that will make the trade balance deficit acceptable for the economy’s macroeconomic stability, and during this period, by means of attraction of investments at all costs, we should retain the current rate of economic growth and macroeconomic stability so that the country could function and fulfill its economic obligations.
That is why an average 3-6% food products prices increasing expected in 2007-2008, and as far as basic products are concerned, for example bread, dairy products and cereals, they will not change at all. However, pensions and incomes of those employed in the public sector will rise insignificantly. In January 2007 inflation rate reached 12% in comparison with January 2006, and in comparison with December 2006 – (10.9) 6%. All in all, if we make use of expert calculations, from January 2002 to January 2007 life has become more expensive by 31,2% on average.
According to expert calculations, another regular rapid inflation growth falls on April-June, and then it will become stabilized again and eventually it will be lower than the last year’s indicator.
The exchange rate of GEL and USD in pair will remain almost unchanged in this period, the level of bank deposits will make up annual 9-11% in view of the increased demand for money in construction and trade sphere, and average annual of the bank credit – 15-20%.
Price increase in the construction sphere will come to a stop at the level of December 2006 and speculative agiotage will be replaced by a stable period. At the end of the year stagnation in the construction business is expected, since quite a large amount of investments was made in it and the market, including the speculative one, has become saturated. This will make liquidity related problems to some of bank institutions and they will have to attract sums from the foreign bank network. All in all, it will have no effect on the financial market’s stability, though there is a danger of the Korean syndrome origination. When the crisis broke out in Korea, it happened not because of public administration, but in view of attraction of investments by private firms in larger amounts then it was required by the market. This gave rise to the obligations crisis that later on engulfed the whole of South Korea.
From our point of view, in 2007-2008 there are reserves in Georgia on this point.
The economy administration model implemented by the government include:
– Covering of the currency deficit by means of investment attraction and retaining of stability in the economy;
– Encouraging of local production oriented for imported raw materials by means of retaining of cheap import and giving a stimulatory incentive to it during the 5-6 year transitional period so that it could create a strong production background and turn the export potential into a serious basis. I think that even theoretically it is difficult to find quite an effective economic way out in this transitional period over the coming 5-10 years.