LOW Temperature, HIGH prices AND winter

Maka Ghaniashvili

Winter is approaching and major part of the population thinks how to pass another severe winter.

No matter how far the president of National Bank (not only he) harps on the same tune that economic crisis is over in Georgia, facts show the opposite.
Teptember month ended with consolidated profit of commercial banks, historical maximum of monetary reserves and unprecedentedly high liquidity in banking sector – have become issues of pride for government of Georgia, but they cannot comfort 67 percent of Georgian population that belong to the category of poor people according to World Bank data. IMF and World Bank experts are not anticipating any improvements next year. They forecast that poverty increases in Georgia and every fourth person will be poor. Foodstuffs, medicines and heating appliances are main headaches of Georgian population in winter. So, what is the situation in foodstuff, pharmaceutical and energy carrier markets? And, what the population should expect in winter?
Articles of food
United Nations forecast foodstuff crisis for Mongolia, Armenia, Georgia and eight poorest African countries. This naturally implies increase of prices on articles of food. Under the conditions of world economic crisis, the foodstuff prices have decreased in quite a number of countries, but consumer prices continue to advance in Georgia. Limited import from Russia, after August war was named guilty of grown prices on foodstuffs. Lately, deficit has been filled up by products imported from other countries, but prices still continue to advance time after time. People either limited consumption of foodstuffs or gave preference to cheaper products.
Price of almost every type of food articles rose in the course of 2009Y (e.g. sugar, oil, rice, cocoa). Honey, soya and fruits are in deficit, thus price increase might be expected on these products also. International tendencies are not encouraging either; experts are anticipating price advance on the products such as sugar, rice and wheat.
Demand on rice is rising throughout the world. Export of Vietnamese rice will increase by 20 percent – up to 6.2 tons in 2009Y. This is a record breaking figure. Previous one was observed in 2005Y, when export of Vietnamese rice made up 5.17 million tons. Unfavorable climate conditions are defining increasing demand on rice in whole world. Hurricane in Philippines decreased harvest of rice by 1.3 million tons. India yielded 18 percent less harvest due to lengthy drought. After spread of this information, part of the importers started to talk about possible price increase of rice in Georgia. Rice stocks are reducing in whole world, consequently, demand on product increases that is resulted in advance in prices. At present, the price of 1 kilo rice varies between GEL 0.95 – 1.10. Sugar supplies are exhausting in the world. Demand on sugar will be increased by 2.6 percent – 165.4 million tons within next eleven months. Experts reckon that deficit will be increased up to 6 million tons in 2009-2010 years. There was no deficit of sugar in recent years as accumulated stocks were enough for satisfaction of demand. But, everything changes within next years, as sugar stocks are exhausted. Experts reckon that potential growth of the market is expected after 2010Y.
Wheat harvest started to decrease since last year and this is another determinant for price increase. Wheat yielded in Georgia is only partially satisfying existing demand. Country requires 850,000 tons of wheat a year. Georgia can yield 200,000 thousand tons of wheat at best. Therefore, we depend on foreign countries. This year was quite low-yield. Specialists note that this is one of the hardest years over a long period of time. Drought has destroyed almost all the crops in Kakheti; Shiraki and Javakheti regions received minor harvest this year too. Kvemo Karti (Lower Kartli) twice suffered of hailstorm this year. According to prognosis made by Ministry of Agriculture, farmers should have yielded 1.6 tons of wheat this year. But forecasts appeared to be false and the number of peasants that yielded the harvest of more than one ton per hectare is quite rare. Specialists reckon that, poor harvest is determined not only by unfavorable climate, but by malfunction of agricultural household equipment.
Let’s discuss prices of meat products – are advance in prices anticipated? As the representative of Ioli Group marketing service declared, there were frequent fluctuations in local meat prices at the market. However, the tendencies have changed in opposite direction and prices have started to increase. They also note that demand on meat products is increasing together with approaching of winter season and this will show whether price of meat increases or not. At this stage, Ioli is buying beef with increased price – GEL 4.5 instead of 4.4. The price of meat products varies from GEL 2-10. Despite advance in prices, meat producing companies have not increased price of meat products. The price of products of another meat producing company – “Mitana” starts from GEL 1.5.
Company Nikora declares that separate suppliers have increased price of meat, but the company has its own contract suppliers on a special agreement that restricts price increase of supplied meat for the company. Consequently, Nikora has not increased prices of its products. The price varies from GEL 4 to 10.
Just like foodstuff prices, high prices on medicines make them unaffordable for Georgian consumers. There is one of the most expensive pharmaceutical markets in Georgia compared with the prices in other Common Wealth countries. The prices are advancing catastrophically. Specialists reckon that main reason of such growth is unhealthy competition. Despite the fact that several drugstore networks are operating at the market, there are two or three companies that create climate at the market.
Notable advance in price of medicines was observed last year, in November, after sudden decrease of GEL exchange rate. Pharmaceutical companies were explaining this by increase of USD exchange rate. However, USD hardened by 15 percent afterwards, while the prices on medicines increased by 30-50 percent. The price of local production medicines increased either.
Government made a decision to make amendments in the law on “medicines and pharmaceutical activity” for the purpose of settling price increase process. Amendments were aimed to eradicate monopoly at pharmaceutical market, increase competition and as a result fall in price of medicines. According to new rules, in case of importing medicine registered in a country or institution of high reliability, importer does not have to pass registration. He will be obliged only to present documentation in corresponding format. At the same time, if import of medicines was possible only via direct manufacturer, now it is allowed to purchase medicines at the market. Moreover, over-the-counter drugs might be bought at supermarkets. Government declares that this will encourage competition at the market and induces Georgian monopolist pharmaceutical companies to decrease prices. However, this plan will work, only if supermarkets purchase the drugs at foreign markets and not from local companies. New game rules are already operating at the market, but this has not been followed decrease of prices. Extreme increase in drug prices was noticed in August-2009 compared with the same period of last year. Statistics Department of Georgia announced 11.6 percent increase of drug prices. However, only a month has passed since adoption of new law and this it is difficult to talk about some new tendencies.
Founder of pharmaceutical company PSP, Kakha Okriashvili says that after adoption of new law, volume of imported drugs increases, but this might affect quality of medicines instead of decreasing prices.
Drugstore network “Kristal” representatives declare that new law has brought no changes at the market. The medicines are still imported by official importers from manufacturers and parallel import has not been started yet. They noted that in order to achieve fall of prices on medicines, several months must pass since adoption of new law. Healthcare Committee of Parliament proves that inflation processes were quite high in health care field this year. Expensiveness of medicines is encouraged by lack of local production. At present, 85 percent of medicines are imported and local production holds only 15 percent of market.
Gas and energy
Together with foodstuff and medicine prices, the price of community facilities is of essential importance for the population.
Minister of Energy declared that “Georgia has developed as an electricity exporter country and unprecedentedly big amount of electricity has been exported over last five six years. And we are going to expand export scales even more”. It’s strange, but fact that electricity price is being increased for the population of electricity exporter country”. Government of Georgia is negotiating with EnegoPro Georgia” to complete mounting of individual counters in every region of the country up to 2016Y. It is planned to mount individual counters in every big city and village of Georgia until May-2010. After a two-year pause the works continue and in 2016Y individual counters will be installed in every village of the country. Experts reckon that Distribution Company is able to complete mounting of counters across the country till the end of 2010Y, but this will cause 2-3 Tetris increase in rate. EnergoPro Georgia representatives declare that the process is not limited to mounting of counters, as whole electric network that was installed in fifties of last century needs to be replaced. Therefore, this process requires time and ten millions USD. Ministry of Energy reckons that it is unacceptable to increase electricity tariff. However, if the process of counter mounting will be fastened, increased expenses might affect tariff. Enero Pro Georgia is distributing energy in regions of the country, except Tbilisi and Kakheti since 2007Y. The company has 860,000 subscribers. Lithuanian concern “Akhema Group” is supplying Kakheti with electricity, while Russian Inter RAO ES is operating in Tbilisi.
Experts are emphasizing artificially increased tariffs. They prove that the prime cost of electricity production is three Tetris, but despite this, the price of electricity for the population five times exceeds its net cost.
Gas Distribution Company and population are facing the problems with installation of counters also. Oil Company SOCAR Georgia doubled the price of gasification for Kakheti population. Local population is claiming that if the price of counter mounting was GEL 140, now it increased to GEL 263. Daughter Company of SOCAR, SighnaghiGas declared that price increase was caused by purchasing of higher quality counters. SOCAR is ready to offer installment paying with increased rate. Population claims that they cannot afford to pay GEL 263 even with installment system. Ministry of Energy Issues declare that population and SOCAR Georgia must find golden mean.
SOCAR is a monopolist of the market and population is unable to choose. Therefore, if one wants to have gas supply at home he/she is induced to accept SOCAR’s offer or to fight for own rights, as state refused to protect rights of its citizens already in 1998Y, when Energy Minister signed a decree that implied deregulation of gas prices for consumers or the price and rate is determined by gas distributor company.
We remind you that SOCAR Georgia Gas is a daughter company of SOCAR Energy Georgia founded by Azerbaijani state oil company. The aim of founding the company was entering natural gas market.
After winning a bidding announced by the ministry of Economic Development of Georgia, company became responsible for gas distribution in the country and implementation of gasification program – construction of gas distribution networks in thirty towns and regions that would connect 150,000 consumers in the network.
According to the data of Ministry of Energy, the agreement concluded with SOCAR states that gas supply price without VAT is $143 for heating stations and $147 for the population. Transportation expenses and other details are not included in this rate, but if tariff increases this will influence consumer rate also. Georgia will consume 1.5 billion c/m of gas this year. SOCAR has concluded five-year contract with Georgia.
What are the gas price future prospects in the world? Gas price reduction is anticipated over next few years, due to decreased demand and new suppliers that flooded the market. This is the prognosis of International Energy Agency published on Nov-2009. Annual report of the agency is used by many governments for elaboration of energy policy. The report suggests that gas price reduction might affect gas exporter countries such as Russia, Iran and Cathar. IEA declared that gas is supplied in excessive amount in the world and this will be resulted in fall of gas prices in the nearest future. New technology of producing gas from shale is developing rapidly and this decreases the cost of gas mining. At the same time, supplies of liquid petroleum gas, such as Cathars have heavily invested in this field as they were hoping to increase export within next years. Report of IEA states that all these efforts will accumulate even more gas than it might be demanded. Agency supposes that excessive supply will be increased even more, if the countries continue to pursue energy-saving policy and develop nuclear power plants. The same report suggests that due to environment protection policy, demand on natural gas will be reduced by five percent in 2015Y and by thirty percent in 2030Y. Naturally, this will be followed by fall in gas prices.
Advance in prices of oil products is expected on contrary to gas price reduction. IEA representatives declare that demand on oil products will gradually increase. The price growth continues in 2010. Oil prices have advanced by 77 percent this year and the price of barrel of oil is $80. Demand on oil products is rising in China – demand rises by 1.6 percent – 96.2 million barrels in 2010. International Energy Agency mentions that under the condition of growing oil prices demand might fall in developing countries.
Oil price increase affected Georgia either. In the beginning of November month, every retail seller companies increased the petrol prices. The price of regular type petrol increased from GEL 1.62 to 1.7. Premium standard petrol price went up from GEL 1.75 to 1.8. The prices of high quality gasoline and diesel were raised also. Average growth of prices on every type of oil products was varying in the range of 5-20 Tetris.
“Euro diesel” and “Premium Avant-garde” prices of Lukoil Georgia increased by 5.5 Tetris and made up GEL 1.6 and GEL 1.75. Wissol increased the price of Diesel Standard and Euro Diesel by 5.5 Tetris (GEL 1.5 and 1.65). Rompetrol increased the price of Euro Diesel by five Tetris. Advance in prices was rather expected as the price of diesel within the last period has increased by $100 and made up $650 per ton.
It is obvious that it will not be easy to pass this winter – experts in Georgia and all over the world are loudly forecasting increase of foodstuff prices. We depend on good will of pharmaceutical companies in case of drug prices. We fully depend on energy carriers also. Thus, companies having the monopolistic power (Energo Pro Georgia and SOCAR) have to decide whether the process of mounting counters will be followed by price increase on electricity and gas products. There are absolutely different tendencies in the world and experts are anticipating fall in gas prices, so what? There is the only regularity especially in economics – irregularity.