WHAT IS GOING ON IN CUSTOMS HOUSE?

BY, Mate Melia, Tamuna Vashakidze

Payments balance deficit of Georgia increases yearly (Chart 1). Export the driving force of which is still represented by different kinds of metals can hardy provide the country with currency flows. At the same time, this is the tendency forecasted to last till 2005 (Chart 2).

The topic of unregistered import is still actual, moreover, in such an important sphere as excise goods (cigarettes, oil products, spirit). This ratio can aggravate the state of our consumer economy and even cause a collapse like “Argentine syndrome”. On the other hand, currency reserves in the National Bank as well as inflation are within the frames of admissible rate. What is going on? Where does the mysterious channel that feeds our economy pass through? Where do reserves exchange come from? How many illegal economic shares are there in the economy?
Withdrawal of The English firm “ITS” that has functioned since 1999 and planned to increase revenues by 50% -100% as compared with 1998, caused an unusual response in society. This firm has not increased budget revenues as it promised to do, but rather decreased them. As far as the quality of physically imported goods is concerned, it has decreased catastrophically, too.
Nugzar Tsaguria (head of the department of fuel, energy and excise)
The most successful year for oil products is 1998. I think that taxation system was ideal then. Taxable base of business made up 15%, with VAT added. Yet, despite the fact that this year 480 000 tons of petrol was imported, smuggling did not cease to exist. There were cases of customs clearance of contraband goods, too, but it is not so surprising because it is impossible to eradicate smuggling. America spent more funds for decreasing smuggling from 15% to 8%, but what were the results? The budget loss from 15% contraband was greater than funds spent by the country. Thus, 15% guaranteed contraband was allowed.
Then it occurred to somebody that if this quantity is imported at 15% rate, the figure could well be quadruplicated. Such a judgement is, certainly, a wrong one. When taxes are increased too high, importers are apt to cease their activities and go over to illegal sector. This causes decrease of legal import. Therefore, increase of taxes is followed by decrease of fixed imports. Afterwards, it became even worse. Ethyl and non-ethyl petrol was differentiated. In fact, non-ethyl one was not imported. Russia prohibited this import. As the taxes were too high, import of petrol became unprofitable. Therefore, excise was increased by 80%. Then diesel was taxed. Diesel was not liable to excise till 1998. As a result of it, 7-8 thousand tons were fixed. We should take into account another factor. There are factories producing kerosene and diesel in Georgia. Yet, no one takes this factor into consideration. Thus, it is not surprising that the quality of this production is subtracted from import. An official letter was sent. It said that one of factories processes 500 tons of oil per day and produces 40%, i.e. 200 tons of diesel. It will produce 6000 tons per month. If the factory expands production, it will, certainly, produce more. Therefore, a consumer loses 18 tons, i.e. 6000 or 12000 tons left. Import of diesel is fixed within the frames of 6-7 thousand tons. The difference is 5.6 thousand tons that are imported via smuggling. It is not true to say that Georgia requires 35 thousand tons per year (the greatest number of diesel is consumed in summer in Georgia). Products of home production are not at all taken into consideration. We close our eyes to this though we should be proud of having home production in our country.
– There is nothing bad in the legal decrease of import. This gives no grounds for panic. But what are the budget losses caused by it?
– Legal decrease of import is a good sign. It entails no budget losses. What is all this panic for then? At first, we should clear out the reasons of import decrease. It is a good sign when it is caused by home production.
– If we study the dynamics of cigarettes, we will see that situation is terrible here, but we should not resent if it is caused by the launching of Samgori factory. Unfortunately, there is another reason. For example, “Marlboro medium” is not fixed in import. Yet, it is on sale everywhere. What does legion do at that time? Why does not it burn “Marlboro medium”.
– What was the increase of petrol import caused by in December 2001?
– By expectations in the increase of excise. 200 GEL excise was taken instead of 80% one. Its date expired in December 31. As far as entrepreneurs knew by experience, there would not be anything good in it. They supposed that 8% excise would be taken till this year in January. Thus, they imported much this year. This year in January there were 21 thousand tons, in February this quantity fell to 12 thousand tons. In March, there were 21 thousand tons again. There was a great fiasco in February.
– What is your opinion of February indices?
– February is a difficult month in itself, but there is another explanation. We will carry 9000 tons of 29 000 over to February and will gain 20-21 thousand tons again. Thus, the import of petrol is stable ?20-21 thousand tons.
– As for diesel, there are 9-7 tons. There was a fiasco in March or, to be more exact, catastrophe. Only 3 thousand tons were fixed. Unfortunately, there is no explanation to it because the figure is small even if we take into consideration local production. There are many inexplicable things. As an example, I would like to say that we had good indices before receiving grant from Turkey. You should not think that I mean anybody. Yet if you receive a grant, you can import many illegal goods.
– As for production of petrol within the country, no factory produces petrol in our country. A petrol-producing factory is being built in Rustavi. It will produce petrol soon after the implementation of reforms. The factory is expected to produce 6000 thousand tons of petrol per month. This quantity will automatically be subtracted from import. Customs is often blamed of all misfortunes. However if economists develop a more perfect system of taxation, we will, probably, be able to do something.
– The situation with cigarettes is of interest ? an experiment was made in 1997. Cigarettes are taxed by 6 tetri; they brought 27 million dollars. This tax has subsequently become ad valorem ? 149%. After this it amounted to 25 tetri, which brought 33 million dollars. However, there is another nuance ? the difference lies in currency exchange. When lari cost 1.25 dollars, income was greater than when it was 25 tetri.
– What are 2002-year prognoses for excise goods?
– There will be improvements if economists will even slightly change taxation system. Both tax police and legion must help us. What is more important, we must not blame each other.
It goes without saying that the physical volume of import decreased after the increase of fixed import (invoice) tax on imported commodity units. The question arises: has the service of these goods been changed? As experts say, it decreased by 15-20% and the physical indices of import by 35-46%.
Naturally enough, 2000-2001 have been years of contraband boom.
In 2002 the volume of fixed import increased. In the first quarter there was increase in the deficit of trade balance (Table 1) totalling 106, 363,000 dollars. Last year, the similar index for a definite period made up 87 million dollars. In 2000 it was 71 million dollars. The most important issue is the deterioration of physically imported goods (Table 2). All this indicates at three facts:
– Compared with 1998-1999, state of import legalization deteriorated because of taxation system.
– Administration in the customs has obviously deteriorated. The process of struggling with contraband as well as that of budget revenues correlation is upset, too, which led to negative consequences ? customs cannot exist without customs service and methods.
– The physical volume of import rose along with the increase of prices on imported goods by ITS.; illegal turnover decreased in the conditions of weak administration;
Vato Lashkaradze (head of information center of customs department):
– The import dynamics has, certainly, grown. As far as I know, there were 50 million dollars in January, then it was 60-70 million dollars. Compared with previous years, there was growth of import that was followed by increase of income.
– As far as petrol is concerned, a significant growth was fixed as compared with previous years. The number of import has been growing since September-October and have even reached 25-26 tons.Yet it is important to increase the present figures by 7-8.
– Will the sum gained be identical to the consumption figure?
– It will not be so great all the same. We do not deal with the analysis of consumption demand, but still Georgia needs 35-40 tons of petrol per month.
– The difference is, certainly, filled by smuggling.
– We cannot deny this, but it is true. However, administration is strong as far as petrol is concerned. The President’s order had its influence, too. If we study the structure of petrol import, we will see that it has significantly increased. We can say that the results are positive.
– What can you say about other goods?
– Indices of other goods are not bad, either. As far as smuggled goods are concerned, it is difficult to say because if we fixed contraband goods, we would be able to detain these goods. The number of smuggled flour, sugar and other kinds of products is especially great, but it is not the problem of customs only. It is difficult to struggle with smuggling.
– What are the 2002-year forecasts about imports?
– It is rather difficult to make prognosis about imports. As a matter of fact, much has been changed for the better. We have already met a wide spectre of importers. There will be other meetings, too. We also met importers of poultry, flour and sugar. We are promised assistance for struggling with contraband goods. We will try to help importers in any way. From the viewpoint of revenues, we think that this share will be much better than other ones. We should also take into account the fact that ITS leaves. I have not yet met any importer that would not be glad to hear the news. Therefore, more suitable conditions are created for importers, which will, probably, help to establish decent relations with them.
– Everybody wonders at what will happen in the customs after ITS leaves. How will the taxation system of the country function? There is one answer to this question: “There have not been a worse situation”.
– Guram Tsikurishvili (head of the department of analysis and prognosis in the administration of financial control of customs department).
– ITS had three main functions: increase of value, control of quality and quantity and control of encoding. Customs agencies deal with determination of customs value. They have developed margin recommended or, to be more exact, recommended approximate prices. Encoding will not be a problem, there will be gradual replacement. 750 million dollars are expected in the course of month. We have consumptive economy. It is due to the fact that we have very great volume of import. 760 million dollars is not small. We cannot give figures percentagewise, but, mostly, technical goods are imported. Oil products make up approximately 1/3. There is also technical and electric equipment. This branch is not developed in our country. As for the production of foodstuffs and branches of light industry, some revival is observed in this sphere. The tempos are, certainly, not so great as to restore our economy. We are on too low a level to meet demands of internal market with local production. Therefore, we are still import-oriented.
– Unfortunately, the current budget law does not provide for the decrease of import and volume of our production: instead, it provides for the increase of revenues of customs system. Thus, we expect annual results to be 760 or even 800 million. There are seasonal changes. Unfortunately, we import goods that can also be produced in our country as, f.e., import of grape . It means that a neighbouring country that produces grape tries to get into our market. Fruit, citrus and vegetables are imported in large quantities. I do not speak of foodstuffs (sausages, meat, fish). Was there such a thing as chicken hap before? There were great poultry factories in Gamarjveba, Kode. They may start functioning some day. Yet, this process is too slow so orientation on import will last for a long time. We expect comparative growth in 2001, at least, 20-30 millions. However, our economy is not developed enough to meet, at least, 80% home demand. We should say that home demand is not completely met by domestic market. Germany is the strongest country, but it has approximately, 400 billion turnover of extrenal trade. The same situation is observed in France. This turnover is greater in the USA and Japan. Trade is a branch where people purchase or sell goods, but if there is a great gap in the balance, then the ratio of import cover with export equals 30-35%. Thus, it meets 1/3 demands of consumer market, which is, certainly, a bad index. Periods of negative balance are sometimes observed in the USA, too.
– The main thing is import-export correlation. Export divided into import equals a ration of import cover with export. If, f.e., I imported 100 millions’ worth goods, I must have 100 million dollars. When I import 30 million dollars’ worth goods, I will gain 30 millions. These 30 millions are designed for covering import. So there are 70 millions left, i.e. in this case, Georgia received additional material resources, but less currency. These 70 million were left uncovered. Such a great difference indicates at currency outflow.
2000-2002 were years of regression in the customs. The main thing now is to stop regression and solve an equation in order to determine the secret channel that nourishes our economy and trade balance deficit with currency.