WHAT`S GOING ON?

By Otar Kiria

In the year 2000, Georgian economy remained stagnant. GDP growth was the lowest in past decade – 1,9%. Even this officially reported figure would fall under doubt and portray the environment more critical, if scrutinize the structure of Gross Domestic Product, analyze it and specify the tendencies.

According to estimates, 22% of GDP comes on agrarian sector that decreased at about 15% comparing to previous year. As to industry that increased by 106,4%, it comprised 628,7 million laries in gross industrial product of total 1890,4. You may agree that the figure is a little bit dubious, as it’s unimaginable to produce the product of such value at home. It can not be the cheese, corn, pig etc. or even the ceramic of Shrosha. All highlighted above indicates to fact that the industry hasn’t grown at 106,4% as was announced, moreover, likely to agriculture, it noticeably decreased. Besides that, entire industry focuses on only three figures:
STRUCTURE OF INDUSTRIAL PRODUCT (Y2000) 1) 28,5% of total comes on production of food and beverages (mainly bread and alcohol free juices); 2) 10,5% – scrap metal production and 3) 38,71% – production of electric power (it’s good that 9th and 10th blocks permanently fail, otherwise we’d be having a boom of industrial enterprises) and water-supply. I’m pointing that, because indeed, production growth, as the agrarian one, inclined to decrease and showed negative figure in 2000. If stipulate the figures of these two segments – 21,5+13,3% in GDP, which comprises 6,2 billion dollars according to official estimates, we see the critical picture of our economy in the year 2000. Saying nothing about the investments (284 million laries) those have seriously decreased and 52% of, which are those of communication (failed GT Mobile Company). Here’s another amusing incident in foreign trade where the 384 million dollars of total 1034 came on export mostly comprised of scrap metal export, here should also be mentioned the amount of re-exported Russian military techniques comprising 16 millions at all. It means that in all of 324,4 millions evacuation comprised 44 millions, which was incorrectly attached to the export figures because of wrong methodology. Right because of that we’ve came to 38,7% increase comparing to previous year. How could the Russian tanks be our export? As to others, they are black scrap metal – 20 million dollars, aluminum scrap – 10 millions and copper – 4 millions, which totally comprise the export of black and color scrap metals of 35 million dollars.Thereof, 22% of export comes on scrap metal and 16% – on that of Russian military technique.Plus re-export of 15,882.000 dollars – the 7% of total that wasn’t produced in Georgia. So we’ve came to the estimates showing that 45-50% of total export could not be counted as a real export and is made up from exporting the old scrap metal and recent techniques of Russia, plus transits by the third country. Relying on these figures, we may conclude that export-import ratio is not 47,1% as has been presented in official bulletin that is one of the hardest yearbooks ever, but 160:6885=15%, which is catastrophic. Such tremendous gap of payment balance indicates to next:
a) Occurs the danger of currency reserves of lary, which may cause an inflation;
b) The most of national economy is occupied by hidden one, as, in terms of existing balance gap, it’s impossible to finance the import of such bulk, if not with an amount that circulates out of banks;
c) There still does exist the capital inflow from neighbour countries, which, yet, “holds” the market, but more the streams lessen, bigger the danger of market failure becomes;
d) The export-import account has neither methodological nor practical accuracy;
e) It’s important to establish the control on currency in Georgia. Despite the fact that import increased by 90,6 million dollars and reached 688,5 millions in the Y2000, budget revenues up from that amount comprised only 264,4 millions. The same as in previous year.
Cigarette business collected less by 24,1 million dollars and the oil import – half of the same in previous year. Thereof, we may conclude that import growth did not increase the budget revenues.
This indicates to one: the only thing increased in Georgian economy is an import thus it did not influence decrease positively.
Import volume and Budget
Revenues from Customs
Dynamic YY1999-2000 All highlighted above indicates to the facts as follows:
1. Georgia GDP in 2000 hasn’t increased at all. Dominated the consumptive character of economy. Domestic production decreases by day and with the same proportion increases the import.
2. Industry and agriculture are in deep crisis at the moment and it hampers by day, causing finally termination of basic fields of it. Problems emerged in transport, where the turnover decreased by 44%, agriculture had been left without means, and population, in regions with no circulating bulks of money, looses the working stimulus. Production and industry turns back to the misshapen forms of past. Agriculture has no capacity to produce;
3. State debt that reached 4119,9 million laries (1432,7 domestic and 2682,2 foreign) and comprises about 70% of GDP, keeps growing and dangers the future development of economy in country. If stipulate the consumptive character of economy and nonexistence of investments (of both domestic and foreign) and difficulties with GDP dynamic, keeping this tendency, will bring us to the default probably in 2002-05;
4. More, then 50% of production comes on treasury enterprises. Relevantly, 52% of total are employed in state sector, which is catastrophic and indicates to weakness of market economy bein g one of the basic causes provoking crisis. Above mentioned points that besides being far from market-led economy, we slightly approach the case of an old type of Yugoslavian Socialism. Socialism reigns t he privacy and business relations in whole. Even the management tools by government do not differ from socialistic ones much. And the most important: we have socialistic mentality. Business and business relations are still considered as a piece of speculation, businesspersons as a leech that seizes indescribable wealth with exploiting and deceiving the working masses, threatening lately “innocent” and “uncompromised” politicians, oppressing them, taking sites in policymaking and finally fighting against bright future of masses. Inwardly, we’re not ready for building the free, but unmerciful and stern economy based on market mechanism. That’s too strange for us, as we were living under pressure of Russia for 200 years; were selling what we had, stealing and abusing each other how could and informing the Caucasian Ridge across the ocean for doing a favour to “patron” when could. Gratuitous incomes run in our blood and will take a long time before we purge of the “Asian laziness and eastern inertness”. We all know that, but to acquire the political capital and justify the pretense for sites, protect population’s interests and scream: we are the innocents and those – “corrupted”. So, I thought of corruption. Former first family of US made a big money up from pardoning prisoners. It totally did 140 in January 2 of, which squandered all over the world. Hillary Clinton’s brother got US $400 000 up from those two. That’s a corruption! And it all takes place in country where the government officials earn more then $100 000 per year. In Georgia State Minister does 800 a year, other ministers – lower. It’s less then officially announced minimum wage of 199 laries per head. Even the countries of such size are unable (including France, Germany and Turkey) to fight corruption, and which set of seven will solve it in Georgia? Or why does these foreigners scream on us? If they have already defeated corruption at home and now are doing the same here? It’s interesting what period do we have at our disposal to built the country of Swiss standards in Georgia? The result – nation is astonished. It can’t describe who’s right and who’s wrong. It should have known that it’s the season of allocating political sectors and vectors, so none would take care of economy in general. Important here is to catch the vectors in sector. If not? Then what do we need a restored economy for, if are out of sector? – People? People will endure, as always! They have no other way then tolerating. If they aren’t ruled, can’t even make a step. Thus, the ruler is busy with political sector and vectoromania. So will we go to a faraway, built on market mechanism and private property country called Georgia. We’re now in Egypt, waiting for our Moses to affirm the target and date with pharaoh? Yet our society has divided in four parts:
Nation is confused. Can’t describe where’s the solvency, who’s the benefactor, who has an intention to divorce the nation and who aims at bright future of it.
The only solvency is in private property, in creation of transparent and equal for everyone business environment, in announcing the businesspersons and privacy as the supreme etc. There’s nothing in the nature, but private interests! Private interests immanently require the supremacy of society’s interests, as wealth can’t be gained and protected lonely. In terms of constant strife, progressing selection and evolution processes strengthen the balance in general. It’s a rule of both nature and human. Everything what’s against the nature will destroy. Those who urge to contradiction – are the demagogues. Private property and business aren’t used to the arrangements like: this kind, that kind, partial, obeying, socially orientated – all those are fable and silliness.
5. Forms the strange situation: country with such terrible economy manages the lowest inflation rate – 4,6%, which is two times less then that it previous year (SOS!). Meanwhile, volume of credits by commercial banks in foreign currency exceeds that in national one by 3,7%. Sure thing that during January-February 2001, exchange rate of lary had been lastingly declining. Because of the critical state of economy, we may concede that the exchange rate will go on falling down or will continue to swallow the transfers “granted” by international organizations and be proud on the fall of it.
Despite all, there’s another problem coming up. The serious financial crisis rises in neighbour country – Turkey. Lira devaluates with catastrophic paces. It’s expectable that Turkish import may deflate and induce flood of goods at a damping prices on Georgian market, which will finally cause realization of goods in laries and then, exchanging them into dollars, serious outflow of capital from Georgia. It will strike a blow to lary and finally produce crisis of entire domestic economy. It will be harder then the result of 1998 August crisis in Russia, which gave a birth to Ergneti fair, and commodity intervention by Russia. We see the serious problems in here, but notice no mechanism of protection yet;
6. Consumption prices are about to freeze, as there’s a huge hunger of money within economy. Agricultural industry is left without money, which will soon cause the collapse, followed by price boom we concede. The price on oil will advance first, and then, about all of the products approximately by 50%.
II-III quarters will probably be the period of consumption price explosion, immanently causing market (consumption) decrease at last. Hunger of circulation means and inflation will strike a blow to economy and deepen the crisis.
About 25% of population that’s 1300000 is unemployed according to official information. Minimum wage for workable man comprises 199 laries, thereof, the employed in state sector are below the minimum wage. It has already been announced that state sector, or the half of the employed, is starving. As to sources from illegal revenues and hidden economy, we do consciously ignore them at this moment;
7. 46 thousand of totally registered 76000 companies (up to Y2000) do not function, soon 10-15000 more will join them as we concede. Officials report that 15 divisions of national industry do not operate and there’s no plan of employing them in close future. Because of tax burden, inequity in business and expanded contraband, legal business became non-profitable. Therefore, certain part of it transited to illegal one. If the ratio in 1999, was 3/2 to the legal one, that in 2000 turned into 2/3 to illegal, experts consider. The trend goes on deepening;
8. The central section of budget mobilized 446 million laries – less then that in previous year. Despite the increase of import this year, budget revenues factually didn’t change. Moreover, cigarette and oil businesses collected less then did last year, which constituted 40% of total incomes. Tax revenues those totally comprised 707 million laries (local budget + special funds) where allocated entirely for wages, pensions and bureaucratic staff expenditures + insignificant part of debts. Or, there were no amounts for capitalization and creating even the single job. The same is proposed in Y2001 Budget, which likely to ancestor, seems consumptive.
Sure thing, there could be no other substitute, when no electricity in working hours, tax burden exceeding 67%, legal business under arrest of illegal one that’s so expanded that destroys the entire economy and deflates currency etc. Only Moldavia suffered such crisis among former USSR States (See the table on the next page).
The Y2001 crisis gets deeper. The most of commerce businesses (especially, clothes sales) become non-profitable, many of them close, this could be true to service division (except barber’s shops and casinos) and food objects as well. Indeed, only 20 restaurants work in Georgia, including 16 in Tbilisi City. Among profitable business are the production of bread (mostly with staling electric power or smuggled diesel) and nonalcoholic beverages. Prospers also the pharmaceutical business 99% of, which comes on foreign side and indicates to fact that nation?
Crisis is expectable worldwide in the Y2001. Stagnation is waiting for an American economy as well. Japan transits from stagnation to crisis at this moment. Deflation of EURO couldn’t save Europe, as export remained expensive and foreign trade balance deficient. Downward move the exchange indexes of leading industrial countries; crisis covers the world of technologies; oil price will remain advancing on the world market. It has already exceeded $30 per barrel. Seems one of the basic reasons of deepening the crisis worldwide as well countrywide will be the black gold – oil.
Thus world isn’t sitting idle of course. In January, President George W. Bush had announced the 1,6 trillion tax-cut, which he sees the end of encouraging the business in view as well as that of business activity in field of technologies etc. Europe is trying to get back the amounts credited to Russia to invest them at home. World is doing its best to avoid the upcoming economic tornadoes. What do we?
The Y2001 will be one of the most difficult years for Georgia. Despite practical fulfillment of budget (officially), pensions and wages are still on schedule of liabilities. This couldn’t be the half of what’s going on with agricultural and industrial sectors. Government doesn’t allocate even a tetri for capitalization in these fields. The Y2001 Budget is far from economics in general. We haven’t got the priority to save even one field of economy. Agriculture of ours remained me the cosmic station “MIR” that’s doomed to be drowned. Main, now is which of Atlantic or North oceans will it fall in. We’ve already lost foreign market – the Russian one that was the only real. The second – Turkish – is still under pressure of crisis. The third – new one haven’t yet appeared. As to fiscal policy, seems like tax code is written for another country and the business ? Changes in business environment is a fantasy.
Where’s the solvency?
Question is too banal! There are ways those could facilitate the influence of world crisis upon Georgia and if not in 2001, could lay out the real contour of economy for 2002, 2003 or even for 2004.
Namely: we haven’t got the essential – coordinated economic policy that relies on concrete economic strategy. Distinctly exist the monetary and budget policies those are related to the fiscal one no way. This one is not in context with macroeconomic plan and parameters, which do not relate with the policies of labour resources and society on the one hand and those of foreign economic and debts on the other. Shortly, each exist for own and not as an entire. Important is to coordinate all of the enumerated above and draw up the complete doctrine of lifting the country up from crisis, which should have the synchronic mechanism. It will be the national program with strategic character and concrete mechanism for operating next 3-6 years.
? Privatization of entire system and release of industrial enterprises from local governance and institutional doctrine, for the purpose to sell them to the real investors. With that process, economy should be transparent and the one setting competition for equally delegated subjects. Each “specified” appeal destroys the economy;
? Moderate protectionism for the fields of national production, which won’t transform into discrimination of foreigners and could play a role of “odds” given to young subjects on Georgian market as a start;
? Introduction of capitalization elements up from the consumptive character of economy and creation of State Investment Fund of Georgia, where the 10% of State Budget will be collected each year, for investing them into new businesses on the basis of announced contest (tender). This will be the fund of future, collected amounts of, which could be loaned for 20-30 years as a “Libor” interesting rate;
? Qualification of communistically educated (mostly enough competitive) people and creation of “Georgian Capital and Businessmen Survival Fund” that will be aimed at supporting young businesspersons, advance of their qualification, elaboration of different projects and assistance in advertising, could it be protection of their intellectual property or even the means for advertisement. “The Fund of Future of Georgia” will be the guarantee for maintaining our intellectual genetic fund;
? Fiscal revolution. This will be the fiscal strategy based on strategic purposes of macroeconomic development. it doesn’t mean that we deny the ad valorem form of taxation and accept that of fixed one. If transition to turnover tax is not considered together with entire economic priorities, we’ll make an undecided step and as the result, will have the experiment. Tax burden is astonishing not only of rates, but because of the administrative dictate of accounting methods and technologies as well;
? Introduction of entire labour and social tax with a real rate and facilitation of taxation system;
? Introduction of new schemes for accepting the foreign injections and creation mechanis for the pressing monitoring of it;
? Creation of program for entire economic strategy, or in other words, that of lifting country up from crisis, stipulating utilization of local resources of production and consumption of each field as well as regional self-expressions.
Professionals should implement all highlighted above, for the purpose to terminate the crisis deepening by 2002-2003 and turn the development upwards by 2004.