1000 Chinese to Build Hyatt in Tbilisi

Nino ArvelaDZe

According to researches, 28% of Georgia population lives below the national poverty line.

Although International Monetary Fund representative in Georgia Mr. Robert Christiansen states that implemented reforms will affect employment indicator and number of people living in poverty in about 7 or 8 years. Therefore, Mr. Christiansen considers Georgia’s economic situation to be positive. He discusses the importance of investment inflow to Georgia. Yet, it turns out that for building Park Hyatt Hotel in Georgia investor employees 1000 Chinese. According to Robert Christiansen right micro and macro development management requires from Georgian government to ensure stability of Georgian economics. Its worth noting that Robert Christiansen delivered the following message to Georgian government at the seminar arranged at Tbilisi State University last year in November: ‘ Government should implement policy to manage foreign investment’. Foreign investors may regain trust to Georgian economic stability, although another threat appears: Georgian population may lose trust in foreign investors.
Georgian experts often discuss the rightness of inflation calculation in Georgia. Representative of IMF, unlike Georgians, states that foreign experts don’t suppose there is any doubt; one can easily get exact inflation indicators on the basis of number and prices of consumed products. Robert Christiansen opened seminar with a question to the audience – are Georgian economic perspectives better now or could we make better forecasts six month later? He reviewed existing situation by the end of September, 2007 and declared that economics growth perspective for this period of time was even better, that shifted problem of inflation. While talking about inflation, he defined that he meant 12 month inflation that was 9% in September and that was unfortunately growing. By the end of September inflation indicator did not seem alarming.
What caused the quick economic growth in Georgia?
Economic and political reforms implemented during four years supported the capital inflow that is the most important event in Georgian economics. Monetary inflow in Georgia is its motive power. Georgia’s GDP amounts to USD 10 billion. Private capital inflow makes its 20%. Issued loans by the World Bank and European Bank for Reconstruction and Development (EBRD) don’t create an atmosphere in Georgia. Several years ago Germans purchased a cement factory in Georgia. Its macroeconomic influence was greater than of loan issued by international organizations. It’s a positive fact. By the end of third quarter 2007, investment volume was USD 955 billions, and the whole year forecast was USD 3 billion. To put it short, there was a great money inflow in Georgia. State budget situation was also satisfactory.

Reasons of Inflation Growth
By the end of 2007 Georgian government introduced a new amendment in budgetary law. According to it budgetary deficit increased from Gel 300 million to Gel 800 million. It is a wrong decision. There is a growing inflation in Georgia, significant investments are put, rising deficit is in direct proportion with inflation. As a rule, state should not pay expenses that will cause inflation growth. Economic development requires stable prices and monetary growth.

Third quarter 2007
Robert Christiansen used ‘B’ estimation while discussing microeconomic situation of the third quarter 2007. B means well, but not excellent. This period of time was characterized with positive economic growth, average but growing inflation indicator, extremely high fiscal deficit, a very big inflow of capital, current account had a high deficit that was a 15% of GDP.

Events of November
Robert Christiansen estimated November 2007 events as extremely negative. As he has mentioned, the World Bank capital inflow didn’t decrease, but it’s not what really matters. Private investors faced threat. They can not trust vague future. Therefore they stopped investing in Georgia. Government estimated the situation correspondingly and made efforts to re-assure investors. Investor’s attitude has affected currency exchange rate. Before November 2007 National Bank of Georgia purchased US dollars and sold Gel. It means that there was an exceeded demand on Gel. Events have extremely changed in November. Investors were buying foreign currency and economic crisis was on its way. Gel strengthening tendency took place in 2007. We can call this period of time an economic boom, as there was an ongoing privatization process and amount in banking sector. Since November 7, stabilizing Gel has quitted.

Results of Political Changes
GDP was 13-15% according to forecasts, actual equaled to 12%. Feasible indicator of inflation equaled to 9%. But actual was 11% fixed. Capital inflow volume according to forecasts was USD 3 billions; Actual was USD 2 billion – significantly less than expected. Deficit envisaged by forecasts was 15%, although 18.6%. By the end of 2007 Georgia faced important problems. Robert Christiansen stated that representatives of Georgian government expected 2-3% of economic growth. Therefore, according to Mr. Christiansen, government had found a way out and was able to continue existing economic policy or implement significant changes.

The way out
According to IMF representative, the first thing Georgian government needed to do was to reassure international investors. By the end of 2007, following year’s state budget was affirmed and it included 6% of GDP forecast, as conditions did not enable to make better forecasting. ‘International Monetary Fund does not give political advice, although it seemed to us that such political decisions as pre-term presidential elections or parliamentary elections in spring would lead to positive outcomes’- declares Robert Christiansen. Therefore, according to forecasts, 2008 GDP will be 8%. It is higher indicator than planned by the government. Assigning new prime minister was followed by changes in economic policy. It became more conservative. Prime minister needs fewer people in government and less fiscal policy. Georgia should implement a principal fiscal policy to overcome an economic shock. It will decrease inflation pressure. Government separated expenditures on social sphere and it was a timely decision. According to IMF recommendations currency exchange rate became more flexible. As for inflation, it is controlled better as it is a real problem.

Distribution of Expenditures
2008 deficit determined by budget is less than that of 2007. Although Christiansen added that there are different methods of determining it. Expenditure structure is changing – defense expenditures reduced form 27% to 20%. The same happened with economic activities expenditures. As for education expenditures, they increase from 7% to 8%, expenditures on social insurance increased from 20% to 23%.

Inflation
Growing inflation from the second part of 2007 causes a problem. According to IMF inflation in February 2008 was 11%. Forecasts show that inflation will slightly rise in March and April, the indicator will significantly reduce in the following months. Although majority of Georgian experts do not agree with this opinion. Usually pre election period is characterized by inflation growth.

Conclusion
Events of November 2007 caused significant economic problems. By the end of September 2007 Georgian government faced the following challenge: how to regain people’s trust toward micro and micro economic development. Besides, the government had to make a decision on implementing the needs required by social programs. Majority of the world’s government would have decided to increase volume of expenditures, but as Robert Christiansen declared, Georgian government made the right decision regarding fiscal policy. Distributed government expenditures, and made currency exchange rate flexible. IMF stated while estimating current situation that results are even better than expected. According to IMF forecasts, Georgia’s economic growth by 2008 will be 9 %. And capital inflow volume will equal to that of the previous year.
As Robert Christiansen states, Georgian macro economic management is of high level and despite problems it gives positive results.