About Tacis and GEPLAC
Georgian Economic Trends is a publication which is now funded by the Tacis Programme through the Georgian-European Policy and Legal Advice Centre.
The Tacis Programme is a European Union Initiative for the New Independent States and Mongolia which fosters the development of harmonious and prosperous economic and political links between the European Union and these partner countries.
Tacis does this by providing grant finance for know-how to support the process of transformation to market economies and democratic societies. It is the largest programme of its kind operating in the region, and has launched more than 3,000 projects worth over ECU 4,220 million since its inception in 1991 and through 1999.
Tacis works closely with its partner countries and provides know-how from a wide range of public and private organisations including advice and training, developing and reforming legal and regulatory frameworks, institutions and organisations, and setting up partnerships, networks, twinnings and pilot projects.
Tacis also cultivates links and lasting relationships between organisations in the partner countries and the European Union to promote understanding of democracy and a market-oriented social and economic system.
The Georgian-European Policy and Legal Advice Centre (GEPLAC) was established in 1998 by Tacis in order to support economic and legal reform in Georgia. Activities under GEPLAC’s programme include the production of Georgian Economic Trends and of the Georgian Legal Review, and the provision of economic policy and legal advice to the Georgian Government. One of the major tasks of “GEPLAC III” is the elaboration of the “National Programme of Harmonisation of Georgian Legislation with that of the European Union”, pursuant to the PCA.
Georgian Economic Trends Quarterly Review
2002 No. 2
This publication is financed by the European Union’s Tacis Programme, which provides grants finance for know-how to foster the development of market economies and democratic societies in the New Independent States and Mongolia.
GEORGIAN ECONOMIC TRENDS
Georgian Economic Trends (GET), a quarterly GET also publishes feature articles by outside publication, aims to provide all those interested in contributors: academicians, government officials, the progress of economic reform in Georgia with a members of parliament, independent scholars and review of developments and transition. GET was researchers, etc. on economic issues of established in 1995 and is published in Georgian contemporary relevance in Georgia. Before being and English. This and previous editions of GET are accepted for publication, all articles will be reviewed available on the internet at: by members of GET Editorial Board that may also seek permission to edit such articles. Articles will www.geplac.org be published only if they are deemed to be consistent with GET editorial policy. Contributors The following people worked on this edition (in are requested to submit their papers either in alphabetical order): English or in Georgian by e-mail as an attached Word file to Veronica Schneider, editor-in-chief at George Eradze, Mark Hudson, David Jinjolia, [email protected] or to deliver them as a Word Natalia Kakabadze, Dimitri Kemoklidze, file on a diskette to the address below. Gocha Kereselidze, Vakhtang Marsagishvili, Erekle Natadze, Veronica Schneider, The ideas, opinions, findings, interpretations and Simon Stone, Irakli Tsereteli conclusions contained in the feature articles are those of the author(s) only and do not necessarily GET draws on information from a wide range of coincide with those of GET Editorial Board, neither government and non-government sources including do they represent any official view of the European in particular the State Department for Statistics, the Commission, the Georgian-European Policy and National Bank of Georgia, the United State Social Legal Advice Centre or the Government of Georgia. Safety Fund, the Ministry of Finance, the Ministry of Foreign Affairs, the Ministry of Economy, Industry Readers may quote any information used provided and Trade, the Ministry of State Property it is properly acknowledged. Management, the Ministry of Health and Social Affairs as well as other Government ministries and For further information or comments please contact: departments. Wherever possible every care is taken to ensure that data sources are fully Veronica Schneider acknowledged since without the full co-operation Editor-in-Chief and support of information providers, including Georgian Economic Trends regular consultation, it would not be possible to Georgian-European Policy and Legal Advice Centre produce this review. (GEPLAC) 42, Kazbegi Ave, Tbilisi 380077 The purpose of GET is to offer an independent Tel: (995 32) 53 71 40 / 53 71 42 / 53 71 43 analytical account of economic trends drawing on 53 71 45 / 53 71 46 information made publicly available. As part of this Tel/Fax: (995 32) 53 71 39 (direct) work, commentary and advice are offered on policy Fax: (995 32) 53 71 38 and on the collection and dissemination of E-mail: [email protected] economic and other information. These are always intended to support the process of economic reform To subscribe to GET, please, send an e-mail or fax in Georgia, and also to relate this to the Partnership stating your contact details and language of the and Cooperation Agreement between Georgia and edition to the e-mail address/fax numbers above. the European Union. However, they represent the view of the authors and editors only and do not represent any official view of the European Commission, the Georgian-European Policy and Legal Advice Centre or the Government of Georgia.
GEORGIAN ECONOMIC TRENDS – 2002 No.2
GEORGIAN ECONOMIC TRENDS
Contents
Foreword 2 Part I. Economic Trends 1. Summary 4 2. National Accounts and Main Trends 8 3. Government Finance 14 4. Money and Finance 21 5. International Trade and Foreign Economic Relations 31 6. Privatisation 41 7. Employment, Incomes and the Social Safety Net 46 8. The EU-Georgian Relations 60 Calendar of Events 65 Part II. Appendix: Feature Articles Appendix I: A State Pension System in Transition 76 Address by Johan Verstraeten, President of the International Social Security Association to the International Conference “A State Pension System in Transition” organised by the Georgian Government and the United State Social Security Fund of Georgia Appendix II: Legislation of Social Insurance and Public Pensions 94 Presentation by Irakli Koplatadze, General Director of the United State Social Security Fund of Georgia to the International Conference “A State Pension System in Transition” organised by the Georgian Government and the United State Social Security Fund of Georgia Appendix III: Georgia: A Decade of Transition 98 By Lekso Liparteliani, Galt & Taggart Securities LLC Part III. Statistical Appendix Statistical Appendix 109 Abbreviations 122
GEORGIAN ECONOMIC TRENDS – 2002 No.2 1
FOREWORD
Dear Reader
We usually think of the summer as a time when nothing much happens, especially in the areas of economics and politics. This is rather strange, however, when you consider that, over the last two centuries, this season saw many world - shattering events, including the starting of wars, invasions, major battles and other unwelcome developments.
So it should be no surprise that, this summer also, we saw interesting economic events of varying types, including:
• Continuing accounting and “corporate governance” scandals in the United States. This further weakened the USD (which in fact reached Euro parity), as well as stock markets, resulting in a government demand for senior executives to personally certify the correctness of their companies’ accounts;
• Serious floods in Central Europe. There was major damage, requiring considerable expenditure on rebuilding, in parts of Southern Germany. The Czech Republic was also hit and will receive financial assistance from the European Union;
• Much more positively, The World Summit on Sustainable Development - “the Earth Summit” - in Johannesburg, which was attended by delegates from virtually every country of the world, including Georgia;
But, of course, there are renewed concerns about possible war in the Middle East and the inevitable economic consequences.
Fortunately, GEPLAC’s mission is less dependent on “events”, either positive or negative, since it is determined by more durable relationships, principally that between Georgia and the countries of the EU, as expressed in the Partnership and Cooperation Agreement (PCA), which came into force in April 1996. This may be an opportune time to say something further about PCA and how it does in fact define the activities of the Centre.
Compared with most international agreements and treaties, the PCA is not a long document (62 pages), though it covers a very broad range of subjects. In essence, it records the intention of the signatories to develop political relations, to support the consolidation of democracy in Georgia and to complete the transition to a market economy. The EU has undertaken to provide technical assistance to Georgia, and GEPLAC is one of many projects under this heading.
The coverage of the Georgian PCA, which is similar to that signed by many countries of the former Soviet Union, including Russia, is indeed broad. However, this at least serves the very useful purpose of reminding all interested parties of the scale of the task and the fact that the effort required should not be underestimated.
Of greatest relevance for GEPLAC is Art. 43 of the PCA, the first paragraph of which states: “The Parties recognize that an important condition for strengthening the economic links between Georgia and the [European] Community is the approximation of Georgia’s existing and future legislation to that
2 GEORGIAN ECONOMIC TRENDS – 2002 No.2 FOREWORD of the Community. Georgia shall endeavour to ensure that its legislation will be gradually made compatible with that of the Community”. This intent was reflected in subsequent actions of the Government and Parliament of Georgia, resulting in the decision to elaborate a “National Programme” as described in our last Foreword.
In this programme, experts of GEPLAC and responsible Ministries and agencies are to produce recommendations for new legislation in 13 areas of economic activity. It is important to note that Art. 43 foresees a gradual approximation of laws and that GEPLAC’s role is in part to propose the appropriate sequencing and establish priorities for the enactment of new legislation. The relationship of this activity to “transition” to a market economy should not be overlooked. Such a process is emphasized very strongly by other donors – the European Bank for Reconstruction and Development (EBRD) publishes an annual Transition Report for the whole region (27 countries for which it is responsible, in Central/Eastern Europe and Central Asia) – and GEPLAC aims to monitor progress in this regard as part of its overall mission.
We publish articles by external contributors which have transition as an important theme. The first and second contributions focus on transition in the specific area of pension reform. The third is a timely overview of the transition process in Georgia to date, with some projections for the future. It is intended that general prognoses be increasingly included in future editions of Georgian Economic Trends.
Returning to PCA, and in its widest sense, what should be the real economic benefits for all those involved? We may perhaps identify four:
• A country implementing PCA is, even on its own, modernizing and improving living standards, both material and social.
• PCA enhances its dealings with the European Union, that major potential source of trading relationships and investment.
• It also assists the European Union in its dealings with the countries of Eastern Europe, which it is gradually getting to know and understand.
• Finally, it offers the opportunity to observe and compare experience between fellow PCA participants.
PCA represents the opportunity to communicate in a common language and to build political and economic relationships in an equitable and modern way across a broad spectrum. Furthermore, along with WTO membership, it anticipates a stable process to which all interested parties can commit themselves, and plan for, over the long-term, whatever the short-term “ups and downs” contained in other events.
GEORGIAN ECONOMIC TRENDS – 2002 No.2 3
CHAPTER ONE: SUMMARY
NATIONAL ACCOUNTS AND MAIN TRENDS GDP and main trends GDP growth rate in H1 was 4.2 per cent. Growth was seen in all sectors of the real economy. The economic growth rate in Q2 declined to 1.1 per cent from 6.9 per cent in Q1. Usually in January-March Georgia produces a relatively small part of its GDP (only 21-23 per cent) and so the factors supporting the acceleration of economic growth in Q1 2002 had not the same impact on the growth performance in Q2. The highest growth rates were in construction, financial intermediation and also in health care and social services.
Unfavourable weather conditions, including heavy prolonged rainfall in western Georgia, substantially hampered seasonal works this spring. It has also adversely affected crop production. The average yield of wheat is 17 centner per hectare, while last year it was 27 centner.
USAID has launched a five year programme called Support Value Added Enterprises (SAVE), that will promote economic growth through expanded production and sales of added-value agriculture products on international markets. Total cost of the project is USD 24 million. The first phase of the project started in April.
The acceleration of industrial growth in Q1 seems to have been temporary and related to improvements in electricity supply. A significant event of Q2 was a purchase agreement for 120 thousand tonnes of manganese ore from JSC "Chiatura Manganese" by Singapore Delta Export Ltd. Also JSC "Rustavi Metallurgic Works" has concluded an agreement with Italian "ARES" on delivery of 80 thousand tonnes of tubes.
Balance of Payments Export and import in Q1 2002 have contracted compared with the corresponding period of last year. The trade turnover and trade deficit have also reduced. The main impediment to the development of Georgian trade is the non-diversification of Georgian export. Compared with the previous year, current account deficit in Q1 has increased and its ratio to GDP made up 8.5 per cent. A notable feature of Q1 is the growth of incomes of non-residents from the direct investments in Georgia, that induced the rise in current account deficit. This effect seems to be related with the improvements in accounting. As for the amount of transfers of Georgian workers from abroad, they have increased in this year, while the current transfers to the state sector have fallen.
Foreign debt As of 30 June 2002, Georgia's outstanding state foreign debt, including state guaranteed debt amounted to USD 1,670 million (GEL 3,658 million), that is USD 68.7 million (GEL 110.3 million) more than at the end ofQ1 2002. Credit disbursements made up only USD 9.8 million in April-June. More than half of Georgian debt is nominated in SDR and other currencies (EUR, JPY, KWD) and so the depreciation of USD and GEL against these currencies and the SDR induced the significant rise in foreign debt in USD and GEL terms.
GOVERNMENT FINANCE According to the 2002 State Budget, total revenues in the first half of the year were projected to reach GEL 448.5 million, that is 48 per cent of revenue expectations for the whole year. Actual state budget
4 GEORGIAN ECONOMIC TRENDS – 2002 No.2 SUMMARY revenues were GEL 381.9 million level, GEL 66.5 million less than planned. Not all the anticipated external payments were received. This explains the shortfall of GEL 35.6 million. Another source of shortfall is lower than expected tax revenues. However, overall tax collection has improved by 6 per cent over the year. A sharp rise in profit tax receipts and taxes on imports was accompanied by marginal decreases of all other tax revenues.
The expenditure target for the central budget was set at GEL 454 million. Actual expenditures were GEL 377.3 million, that is 83 per cent of target. Expenditures of special state funds were GEL 113.9 million. The main spending priorities were social security, general government and servicing of state debt.
The deficit of central budget was GEL 82 million. Of this amount, GEL 53 million was borrowed from international financial organisations, while the rest came from domestic sources.
MONEY AND FINANCE During H1 2002, currency in circulation fell by GEL 1.7 million accompanied by lari denominated deposits growth of GEL 4.6 million. The increase in foreign currency denominated deposits was sizeable (GEL 33 million during H1 2002) compared with those in lari. Foreign currency deposits’ growth pushed up M3 broad money by GEL 34.3 million in H1 2002. At the same time, M2 increased only by GEL 0.9 million during the same period.
The share of non-bank investors in T-Bills increased in H1 2002 to 58 per cent against 19 per cent in 2001. One of the explanations ofthis development is the relatively high interest rates of T-Bills compared with interest rates on time deposits offered by commercial banks. The average annual interest rate fixed on T-Bills auctions in H1, 2002 was higher than in 2001 (40.7 per cent against 30.16 per cent).
The devaluation of the lari at the end of 2001 and the beginning of 2002 resulted in relatively high inflation in the beginning of the year and that is why the H1 2002 average inflation rate is higher than targeted. A zero inflation rate in May and deflation in June 2002 were caused by seasonal decline of consumer prices.
Interest rates developments in H1 2002 were characterised by increasing interest rates on lari denominated deposits. The trends for H1 2002 show that banks increased offered interest rates for short-term, medium-term and long-term (more than 1 year) deposits as well. In June 2001, the average net interest margin on the national currency was 12 per cent and fell to 8.6 per cent during the year.
The average monthly nominal exchange rate of the lari depreciated against the US dollar in Q2 2002, but it was less than in Q1. The Lari depreciated sharply against the Euro, especially in May and June, reflecting the trend of strengthening the Euro against the US dollar.
INTERNATIONAL TRADE AND FOREIGN ECONOMIC RELATIONS The Government continues to maintain a liberal foreign trade regime, in line with WTO commitments. Given the potentially serious consequences for the balance of payments, Parliament has not renewed a temporary ban on timber exports that expired at the end of 2001 and, recently, in July 2002, a temporary ban on the export of non-ferrous scrap metals was removed.
GEORGIAN ECONOMIC TRENDS – 2002 No.2 5 SUMMARY
Comparing the results of H1 2002 for foreign trade with those of previous years, a certain deterioration is evident. Total exports of goods decreased, as well as export volumes of goods of Georgian origin. H1 2002 was characterized by a sharp decrease of exports to Russia and Turkey and some export growth to Azerbaijan and Armenia.
The growing negative trade balance trend continued during H1 2002. Recorded external trade turnover was equal to USD 497 million, of which exports were USD 147.5 million and imports USD 349.5 million. The trade deficit of USD 202 million was about USD 6 million more than in H1 2001.
Exports declined by USD 16.5 million, reflecting a decrease of exports of non-ferrous scrap metal, following the introduction by Parliament of a temporary ban on the export of non-ferrous scrap metals.
The export coverage of import ratio decreased during H1 2002 to 42 per cent, while in the first half of 2001 the ratio was 46 per cent.
PRIVATISATION There was little progress in actual privatisation in the second quarter of 2002. However, the Ministry of State Property Management (MSPM) has announced tenders to privatise some medium and large enterprises (MLE). Privatisation tenders of joint stock companies Elmavalmshenebeli and Elektrovagonshemketebeli Plant turned out to be successful in the third quarter of 2002. Some large enterprises are to be offered at zero reserve price auctions later this year and some enterprises are facing bankruptcy procedures. After a failure to privatise Georgian Airlines by international tender, liquidation of the enterprise is under consideration. A tender to identify the future management company of Tbilisi Water Utility is under way and the bidding companies will present technical and financial proposals in November.
EMPLOYMENT, INCOMES AND THE SOCIAL SAFETY NET LABOUR MARKET Unemployment rate figures are in line with those for transition economies (10.3 per cent by the ILO “strict” methodology and 15.1 per cent by the ILO “loose” methodology at the end of Q4 20011), however, they fail to reflect the unfavourable and unstable labour market situation. Underemployment, widespread hidden and disguised unemployment persist, and average salaries across the economy fall way below half the minimum subsistence level for an average family. Long-term unemployment leads to a slow shrinking of the labour force. Labour market problems aggravate the poverty situation, and an increasingly larger number of households experience painful declines in living standards. Legislation-defined extremely low rural unemployement rate figures bias the national unemployment rate figures, that otherwise would have been much higher. The labour market is dominated by self- employment, and the latter by subsistence self-employment in agriculture. Hired employment accounts for just around 20 per cent of the working age population, and over 40 per cent of it is jobs at budgetary organisations paying extremely low salaries.
1 When this issue of GET was being written, Q1 2002 results of the household survey were not yet available.
6 GEORGIAN ECONOMIC TRENDS – 2002 No.2 SUMMARY
SOCIAL SAFETY NET The current social safety net is only able to offer symbolic assistance to those eligible, while the vast majority of the population, including informal sector employees, the self-employed and the unemployed, as well as their family members, have no social protection whatsoever. The state social protection system requires a fundamental restructuring. The existing pension system, has long proven to be insolvent putting the elderly at a growing poverty risk. Currently, social policy is among the top priorities of the national Poverty Reduction and Economic Growth Programme (PREGP), as social reforms are acknowledged by the Government to be a long-term strategic objective. Reform of the pension system, provided for by the Programme, is underway and is aimed at introducing a sustainable multi-pillar pension system, based on insurance principles.
EU-GEORGIAN RELATIONS In H1 2002, Georgia’s trade with the member states of the European Union constituted 24 per cent of the total turnover. In the same period of the previous year this indicator was 24.2 per cent. In the first six months of 2002 Georgia’s trade relations with the Member States of the European Union decreased by 5.5 per cent compared to the same period of the previous year.
The Food Security Programme is one of the European Union’s major projects in Georgia. It aims at supporting and developing the agricultural sector in the country through financing the appropriate items in the budget. The European Union launched the Food Aid and Food Security Programme in 1996 by Council Regulation 1292/95. This regulation deals with the food aid policy and management and specific support to the food security.
GEORGIAN ECONOMIC TRENDS – 2002 No.2 7
CHAPTER TWO: NATIONAL ACCOUNTS AND MAIN TRENDS
GDP AND MAIN TRENDS Economic growth in Q2 2002 declined to 1.1 per cent, from 6.9 per cent in the previous quarter. Growth in the industrial sector induced by improvements in electricity supply and also rises in construction and services caused the revival in the economy in Q1. Although in real terms in Q2 there was much more added value created than in the preceding quarter, the growth rate was rather low. Usually in January-March in Georgia a relatively small part of GDP is produced (only 21-23 per cent)1 and so the factors supporting the acceleration of economic growth in Q1 2002 had not the same impact on the economy performance in Q2. Within the conditions of a drastic lack of investments, such a high economic growth rate as was seen in January-March, is unlikely to be maintained for a long period. The ratio of collected tax to GDP and also the scale of shadow economy operations in the national economy has not changed much in H1 compared with 2001, and that is an indicator of low effectiveness of anti-corruption measures.
Table 2.1: Dynamics and Structure of GDP, H1 2002 H1 2002 vs. H1 2001 Share in GDP H1 2002 (H1 2001=100) (percent) Agriculture, forestry and fishing 103.5 21.3 Industry and construction 108.2 19.5 Industry without food industry and construction 105.4 12.6 Domestic processing of agricultural products 108 3.5 Construction 119 3.4 Services 104.9 53.9 Trade 103.7 12.9 Hotel and restaurant 103.8 2.7 Transport 106.6 10.6 Telecommunication 106 3.8 Financial intermediation 124.4 1.7 Operation with real estate, commercial activities 101 6.3 State management, Defence 101.5 3.6 Education 98.7 4.5 Health care and social service 117.7 4.9 Other services 92.3 2.9
Amendments 138.7 -1.3 Net taxes 101.5 6.6 GDP 104.2 100 Source: State Department for Statistics
The total GDP growth rate in H1 was 4.2 per cent. A positive trend of 2002 is that growth was observed in all sectors of the real economy. The highest growth rate was in construction, financial intermediation and also in health care and social services. The inflation rate in H1 2002 was 3 per cent, while in the corresponding period of last year it was only 0.9 per cent. The rise of the inflation rate seems to be related with the increase of prices of food products and some services.
1 Based on 1997-2001 data.
8 GEOGIAN ECONOMIC TRENDS – 2002 No.2 NATIONAL ACCOUNTS AND MAIN TRENDS
The executive board of the IMF completed its second review of Georgia's economic performance under the economic programme supported under a Poverty Reduction and Growth Facility (PRGF) arrangement. According to IMF assessments, Georgia has moved forward in implementing the three- year economic programme. Some progress has been already reached on structural reforms in some critical areas (fiscal, financial and energy sectors), and the macroeconomic performance is also satisfactory (robust economic growth, moderate inflation rate), which enables Georgia to draw down loans equivalent to SDR 22.5 million (about USD 30 million) from the IMF. So far, Georgia has drawn SDR 27 million (about USD 36 million) under the PRGF.
SECTORS OF ECONOMY
Agriculture Unfavourable weather conditions, including high rainfall in western Georgia, substantially hampered seasonal works this spring. It has also adversely affected crop production. The average yield of wheat is 17 centners per hectare, while last year it was 27 centners.
USAID has launched a five year programme called Support Value Added Enterprises (SAVE) that will promote economic growth through expanded production and sales of added-value agricultural products on international markets. The total cost of the project is USD 24 million. The first phase of the project started in April 2002 and will end in April 2003. The US government will support agriculture development through market expansion, standards on organic food production, distribution, improved credit and whole-chain food distribution networks. SAVE will develop several key products or product clusters, assisting agribusiness enterprises and enterprise associations that produce these products. The first phase of the programme will be oriented to identifying products or product clusters, in demand on international markets, as well as their constraints. The programme will prioritise and formulate intervention strategies and plans to address development constraints that will be implemented in the second phase. SAVE will be implemented by Agricultural Cooperative Development International/Volunteers in Overseas Cooperative Assistance (ACDI/VOCA). The contractor will implement the project based on a Market Chain Approach concept that emphasizes the importance of integrating all stakeholders (from farmers to distributors) in the successful marketing of product.
The tea industry has suffered a significant decline in Georgia. In many regions of western Georgia tea plantations were uprooted and replaced by other crops. The Georgian government has carried out a state programme of supporting tea exports since 2001, that means the allocation of a GEL 0.4 subsidy per kilogramme of exported tea products2. The state budget for 2002 has provided for the prolongation of the subsidy programme and the allocation of GEL 3 million. It includes payment of arrears from last year of GEL 875 thousand. A tender for the use of the subsidy resources has been already hold by the Ministry of Finance and the Ministry of Agriculture and Food in July, where 23 companies were declared the winners. However, the most urgent problem is the restoration of the tea plantations. Today most existing tea plantations are abandoned and in disorder, and their rehabilitation needs much more investment.
Industry In H1 2002, registered industrial output grew by 0.2 per cent and total output, including non-registered, by 0.1 per cent. The acceleration of industrial growth in Q1 seems to have been temporary and related with improvements in electricity supply. The high growth rate was not continued in Q2 because of the contraction of output in value terms in food and energy sectors compared with the corresponding period of last year. The unequal distribution of production among contributing enterprises indicates
2 See GET 2001 No.1.
GEORGIAN ECONOMIC TRENDS – 2002 No.2 9 NATIONAL ACCOUNTS AND MAIN TRENDS that serious restructuring in industry has not occurred. The social and economic situation in many regions was very much dependent on the performance of a few large enterprises. In H1, 77 per cent of registered production was accounted for by 48 of the more than 2,800 industrial companies. A significant event of Q2 was the conclusion of an agreement on purchasing 120 thousand tonnes of manganese ore from JSC "Chiatura Manganese" (Upper Imereti region) by Singapore Delta Export Ltd. Also JSC "Rustavi Metallurgic Works" (Lower Kartli region) has concluded an agreement with Italian "ARES" for the delivery of 80 thousand tonnes of tubes.
In H1, 37.1 thousand tonnes of oil and 8.7 million cubic meters of gas were produced, but that satisfied only an insignificant part of local demand. Compared with other sectors of economy, foreign investors have already made significant investments in energy resources extraction and also made hopeful announcements about the prospects of oil production in Georgia, however there is no tangible result from their activity yet. Activities of some of them seems to be proved unsuccessful. The closure of LLC Ramco Energy Kaheti followed the abandonment of Karas-1 well on Kakheti Block X. The well was drilled to 2,900 metres but commercial quantities of hydrocarbon bearing sands were not found. A detailed review of data did not encourage the company as to the prospects on the block and so it ended its involvement in Georgia.
A significant step towards the support for the development of domestic industry was the adoption of law "On Lease Financing". Although this law is not a complete code of leasing regulation, it determines the crucial aspects of financing by lease in Georgia. According to the law, leasing agreements allow the transfer of assets into ownership of a lessee through stage by stage payment of the costs with the right of their redemption. The promotion of leasing activities in Georgia will assist the re-equipment of local enterprises and import of modern technologies.
Transport The transportation sector has shown a stable growing trend. Substantial increases in international transportation of cargoes through the territory of Georgia contributed to the growth of turnover of Georgian railway and sea ports. The turnover of cargoes in the Georgian railway increased by 15.7 per cent and the volume of transit cargoes by 16.7 per cent. Eighty per cent of all cargoes transported by railway are in transit. In H1, 6.4 million tonnes of cargoes were processed in Batumi and Poti sea ports (18.3 per cent more than in the corresponding period of last year). Export of crude oil from Supsa sea port in H1 has also increased to 3 million tonnes compared with 2.8 million tonnes in H1 2001), that is related to the growth of output of the Baku-Supsa oilpipeline. Activities of Georgian air companies are also increasing, that is related with the introduction of new international and internal flights.
10 GEORGIAN ECONOMIC TRENDS – 2002 No.2 NATIONAL ACCOUNTS AND MAIN TRENDS
Box. 2.1 The Second Conference of IGC TRACECA
The Second Annual Meeting of the Intergovernmental Commission (IGC) "TRACECA" took place in April 2002 in Tashkent. At the meeting, members of IGC TRACECA supported the intention of the UN World Food Programme to promote humanitarian goods transported for Afghanistan via the Europe-Caucasus-Asia "TRACECA" transport corridor and welcomed the declaration of co-operation, signed by the heads of large transport-forwarding companies in Frankfurt in April, 2002. The participants stressed the necessity to develop legal documents for the implementation of "TRACECA VISA", including a unified document for transit goods transported via the TRACECA Corridor. Also they supported the introduction of the "TRACECA Coefficient" for Railway and Maritime Transport in order to increase the competitiveness of the TRACECA Corridor for international and transit transport. Members of IGC TRACECA adopted the concept of "TRACECA Unified Information System" and also decision "On Maritime Transport Development".
TRACECA was launched in 1993. Its aim is to implement a programme of European Union funded assistance to develop a transport corridor on a west-east axis from Europe, across the Black Sea, through Caucasus and the Caspian Sea to Central Asia. To date the TRACECA programme has financed 39 Technical Assistance projects (EUR 57,405,000) and 14 investment projects for the rehabilitation of infrastructure (EUR 52,300,000) in member countries. Georgia participates in 28 technical and 7 investment projects.
Source: www.traceca.org
BALANCE OF PAYMENTS Export and import in Q1 2002 contracted compared with the corresponding period of the previous year. Trade turnover and trade deficit were also reduced. The main impediment to the development of Georgian trade is the non-diversification of Georgian export. Compared with the previous year, current account deficit in Q1 has increased and its ratio to GDP made up 8.5 per cent. A notable feature of Q1 is the sharp growth of payments to non-residents from direct investments in Georgia3, that contributed to the rise in current account deficit. This effect seems to be related with the improvements in accounting. As for the amount of transfers of Georgian workers from abroad, they have increased this year, while current transfers to the state sector have fallen.
The development of tourism is regarded as one of the best prospects for foreign currency earnings. However, the inflow of foreign tourist and visitors in Georgia is gradually decreasing. In May this year a new 5-star, 127 room, hotel, "Tbilisi Marriott" opened in Tbilisi. In recent years investment in the tourism sector was about USD 150 million; of which two thirds was foreign investments. Since 1999 210 hotels and guest houses with 2,491 bedrooms have started in Georgia. However, the continuing perception of security problems deters foreign visitors.
3 It made up USD 21.3 million in Q1 2002, while in the corresponding period of last year it was only USD 2 million.
GEORGIAN ECONOMIC TRENDS – 2002 No.2 11 NATIONAL ACCOUNTS AND MAIN TRENDS
Table 2.2: Balance of Payments, Q1 2000-2002 (USD million) Q1 2000 Q1 2001 Q1 2002 Current Account -72.7 -55.6 -64.2 Trade balance -128.6 -137.7 -132.4 Export 97.8 112.1 97.7 Import -226.4 -249.8 -230.2 Services 4 19.6 18.7 Export 50.7 73.8 76.2 Import -46.6 -54.2 -57.5 Income 21.1 6 -5.8 Credit 36.2 23.9 28 Debit -15.1 -18 -33.7 Current Transfers 30.8 56.5 55.2 Credit 35.8 61.4 61.2 Debit -5.1 -4.9 -5.9 Capital and Financial Account 25.8 70.8 16.9 FDIs 33 20.1 30.2 Portfolio Investments 2.5 -1.3 0 Other investments -17.9 58.6 2.7 Reserve assets 9.4 -5 10.9 Net errors and omissions 46.9 -15.2 3.5 Source: State Departments for Statistics Note: The above data includes the estimations of non-registered trade.
As for the capital and financial accounts, FDI in 2002 is increasing4, but the amount is too small. There are no foreign portfolio investments in Georgia. Some prospects of improvement in the investment inflow in Georgia are likely to be related with the start of construction of oil and gas pipelines for the transportation of Caspian sea energy resources through the country. External loans and commercial credits both to the state and private sectors have drastically fallen this year, however, the fulfilment of requirements of the IMF and the World Bank by the Georgian government opened the way of receiving new credit amounts in H2 2002.
FOREIGN DEBT As of 30 June 2002, Georgia's outstanding state foreign debt, including state guaranteed debt amounted to USD 1,670 million (GEL 3,658 million), that is USD 68.7 million (GEL 110.3 million) more than at the end of Q1 2002. Credit disbursements were only USD 9.8 million in April-June. However, more than half of Georgian debt is nominated in SDR and other currencies (EURO, JPY, KWD) and so the depreciation of USD and GEL against these currencies and the SDR induced the significant rise in debt in USD and GEL terms. In Q2 2002 Georgia has paid external debt service of around USD 18.6 million; of which USD 7.3 million was to the IMF, USD 1.4 million to the EBRD, USD 1.8 million to Russia and USD 5 million to Turkmenistan.
Up to the present, all bilateral creditors of Georgia, except Turkmenistan, China and Uzbekistan, have already accepted the terms on rescheduling Georgia's debt that were agreed in the Paris Club in March 2001. Due to the conditions of moderate economic growth, weak revenue raising and high debt servicing obligations, Georgian government is going to apply to official creditors of the Paris Club for granting further relief from the debt burden. One of possible solutions is the prolongation of grace-
4 FDI was USD 30.176 million in Q1 2002 and USD 35.817 million in Q2 2002, while in 2001 the corresponding data were respectively, USD 20.045 million and USD 30.757 million.
12 GEORGIAN ECONOMIC TRENDS – 2002 No.2 NATIONAL ACCOUNTS AND MAIN TRENDS period for 2003. It would allow the country to postpone payments of USD 50 million scheduled for the next year.
Box 2.2 Macroeconomic Challenges of EU Membership Candidate Countries
Most candidate countries have considerably improved their position for coping with potential future macroeconomic challenges and for safeguarding macroeconomic stability in the medium term. However, the candidate countries’ real convergence with the current EU member states has so far been relatively modest and growth has been mixed. Average GDP per capita on a (PPS) basis for all candidate countries reached 35.2 per cent of the EU average in 2000 – basically the same level as in 1996. It ranged from below 30 per cent in Bulgaria, Romania and Turkey to 86.2 per cent in Cyprus. Candidates countries’ average real GDP growth rate in the period from 1996 to 2000 stretched from minus 1.6 per cent in Romania to 5.2 per cent in Poland. As a result of initial transition recessions and continuing restructuring in the enterprise sector, unemployment remains a major problem in most countries-with unemployment rates in 2000 varying from 4.9 per cent in Cyprus to over 15 per cent in Bulgaria, Lithuania, Slovakia, Poland. The catching-up process depends on continued high investment and rapid technological changes. In spite of accelerated growth, domestic savings seems not to keep pace with investment needs and this might induce unsustainable savings-investment gaps and corresponding current account deficits.
Candidate countries’ participation in EMU (Economic and Monetary Union) as new Member States sets clear orientation for their monetary and exchange rate policies. Regarding the monetary policy framework, this implies, among other things, the setting up of an independent central bank with the ultimate objective of ensuring price stability and the prohibition of direct financing of general government deficits by the central bank. This framework is being progressively implemented. As for the exchange rate policies, the final goal is Euro adoption. Candidate countries, with the exception of those having currency board arrangements, have been moving towards more flexible exchange rate regimes.
A major macroeconomic policy challenge consists of high current account deficits. The average current account deficit of transition candidate countries in 2000 amounted to 5 per cent of GDP. In the short-term, many candidate countries will still be able to rely, to a considerable extent, on privatisation related FDI inflows as a means to finance their current account deficits. However, as the privatisation process is nearing completion, current account deficit financing may have to rely increasingly on debt-creating, more short-term and easier to reverse capital flows.
Economic policies and the underlying quality of the macroeconomic environment are crucial to sustain stability. A regular in-depth dialogue on a large spectrum of macroeconomic policy and financial stability issues between Member States and candidate countries will assist the latter in coping with the challenges and foster their successful integration into the Union.
Based on: Report on macroeconomic and financial sector stability developments in candidate countries, by European Commission, General-Directorate for Economic and Financial Affairs, 2002.
GEORGIAN ECONOMIC TRENDS – 2002 No.2 13
CHAPTER THREE: GOVERNMENT FINANCE
According to the 2002 State Budget, total revenues in the first half of the year were expected to reach GEL 448.5 million, that is 48 per cent of revenue expectations for the whole year. Actual state budget revenues were GEL 381.9 million, GEL 66.5 million less than planned. Not all the anticipated external payments were received and this explains GEL 35.6 million of the shortfall. Another source of shortfall was lower than expected tax revenues. However, overall tax collection has improved by 6 per cent over the year. A sharp rise of profit tax receipts and taxes on imports is accompanied by marginal decreases of all other tax revenues.
The expenditure target for central budget was set at GEL 454 million. Actual expenditures were GEL 377.3 million, that is 83 per cent of target. Expenditures of special state funds were GEL 113.9 million. The main spending priorities were social security, general government and servicing of state debt.
Central budget deficit financing was GEL 82 million. Of this amount, GEL 53 million was borrowed from international financial organisations, while the rest came from domestic sources.
STATE BUDGET REVENUES Initial revenue projections for the state budget in H1 2001 envisaged collections of GEL 448.5 million, of which GEL 355 million was for the central budget. State budget receipts were actually GEL 381.9 million, 85.2 per cent of planned amount. The shortfall of GEL 66.5 million mainly is explained by lower than projected tax revenues in all tax categories except the 1 per cent social contribution. Another source of shortfall was that some expected external grants were not received. Non-tax revenues were also short of target.
The tax revenue target of the state budget was set at GEL 357.2 million, 46.3 per cent of tax revenue projections for the whole year. Actual tax revenue receipts of GEL 331.3 million is closer to the projected figure compared to the overall budget and indicates a 92.8 per cent collection performance.
GEL 48.7 million of non tax revenues were short of target by 9 per cent. Only 4.3 per cent of expected GEL 37.3 million of external grants were received.
A comparison of 2002 State Revenues with planned and previous year figures is provided in Table 3.1.
14 GEORGIAN ECONOMIC TRENDS – 2002 No.2 GOVERNMENT FINANCE
Table 3.1: State Budget Revenues, H1 2000 (GEL million) Actual revenues Actual Target for Target for Actual H1 compared to the Growth over compared to the year H1 revenues year target the year target
Total Revenues and Grants 928.6 448.5 381.95 85.2 41.1 109
Tax Revenues 771.3 357.2 331.3 92.8 43.0 106
Non-tax Revenue 79.1 53.6 48.7 90.7 61.6 158
Revenues of Special State funds (excluding transfers from Central 198.3 93.5 86.9 93.0 43.8 101 budget)
Grants 77.5 37.3 1.6 4.3 2.1 23 Source: Ministry of Finance
Despite the fact that almost all items of actual revenues were below the projection, the figures show a substantial improvement over the year. Nominal growth of overall budget revenues over the year was 9 per cent. Comparison with the inflation rate between the periods of 5.9 per cent indicates a real growth of public revenues. Nominal growth of most important item of tax revenues was only 6 per cent, in line with inflation indicator. However, growth in revenues of special states funds (which basically comes from taxes included in tax revenues above) is lower compared to inflation, thus a real decline of revenues is observed. The increase of 58 per cent in non-tax revenues over the year is a result of transfer of the National Bank’s profit to the central budget. In 2001, a similar transfer took place later in the year. Another comparison can be made in order to decide whether growth discussed in this paragraph is attributable to economic growth or administrative improvement. Derived from 5.9 per cent inflation and 4.2 per cent economic growth between the periods, 10.3 per cent growth of tax revenues was expected at the same level of administration. Thus nominal growth figures show worsened tax administration.
Detailed breakdown of central budget tax revenues is provided in Table 3.2.
GEORGIAN ECONOMIC TRENDS – 2002 No.2 15 GOVERNMENT FINANCE
Table 3.2: Central Budget Tax Revenues, H1 2002 (GEL million)
Actual Actual revenues Growth Target for Actual H1 Target for H1 compared to compared to the over the the year revenues target year target year
Central Budget tax revenues 573.7 264.104 244.729 92.7 42.7 106. Income Tax 19.9 9.281 8.247 88.9 41.4 98 Corporate income tax 9.6 4.531 3.924 86.6 40.9 124 VAT 374.8 172.255 166.606 96.7 44.5 108 domestic 203.5 94.412 92.815 98.3 45.6 99 imports 171.3 77.843 73.791 94.8 43.1 121 Excise 104.7 48.043 40.338 84.0 38.5 103 domestic 27.1 12.637 10.059 79.6 37.1 94 Imports 77.6 35.406 30.279 85.5 39.0 106 Customs duty 59.2 27.426 21.163 77.2 35.7 102 Other taxes 5.5 2.568 4.451 173.3 80.9 - 1%social tax 5.5 2.568 2.923 113.8 53.1 - fixed tax - - 1.582 - - - Source: Ministry of Finance Note: 1 per cent social tax in previous years was directed to Employment Fund. Fixed tax was introduced in January 2002 and no target was set at budget planning stage. Growth figure for total tax revenues is calculated excluded Other taxes which were incorporated in central budget in 2002
Direct taxes were collected below the target. Revenues of GEL 8.2 million from personal income tax and GEL 3.9 million received under corporate income tax were short of target by 11 and 13 per cent respectively. However, comparison with previous year figures shows a marginal decline of personal income tax revenues, while corporate income tax receipts improved by 24 per cent.
Collection of VAT was better in terms of projected figures. Being critical to overall budget performance (as VAT receipts were 68 per cent of central budget tax revenues) VAT revenues of GEL 166 million were collected at 96.7 per cent of target while nominal growth over the year was 8 per cent. However, growth of VAT revenues was observed only in case of import taxation (21 per cent nominal growth).
A possible development in the taxation system of Georgia is the adoption of a new tax code. One of the proposals for a new tax code which has received substantial political support is being developed by Georgian Economic Development Institute (GEDI). The proposal intends to reduce the number of existing taxes to 4; namely: Income tax, VAT, Excise and Property tax. A new tax code suggests also a significant cut in tax rates and changes in methods of determining tax liability. One of the important changes is a shift from the invoice-credit method of VAT to the Subtraction Method. Although the subtraction method is more vulnerable to fraud and tax evasion and could result in a decline of VAT revenues, the authors of the proposed changes believe that this will improve competition in the Georgian marketplace. At present it is believed that invoice-credit VAT is not adequately enforced so some entities in the production chain which obey the law bear a tax burden not only for the value added by these entities but also for value added at earlier production stages. Shifting towards a subtraction method will reduce the margin between “payers” and “non-payers”. Features of invoice-credit and subtraction methods are discussed in Box 3.1 at the end of this chapter.
The collection of excise duty was 26 per cent short of target. GEL 40.3 million in revenues under this heading was 3 per cent higher compared to previous year. Growth here, as in case of VAT, is
16 GEORGIAN ECONOMIC TRENDS – 2002 No.2 GOVERNMENT FINANCE dominated by taxation of imports. Customs duty collections were only 77.2 per cent of target with a marginal growth over the year.
The overall picture of tax collection is as follows. A sharp rise in profit tax receipts and taxes on imports was accompanied by marginal decreases of all other tax revenues. At the same time, there is no evidence of such important changes in GDP and imports value or structure which could induce tax developments discussed above. One possible explanation might be administrative enforcement. Firstly, administration at the border is much easier as it does not require complex accounting examinations. Secondly for domestic traders it is more convenient to withdraw funds in the form of profit rather than in form of salaries in order to avoid high social taxes. And finally, assuming that unfair tax practice is widespread in Georgia, if traders are forced from the side of tax authorities just to pay more, they prefer to show more profit in accounts rather than real salaries or real VAT sales.
SPECIAL STATE FUNDS Total revenues of the United State Social Security Fund in H1 2002 were GEL 99.6 million. Of this amount, GEL 75.1 million (48.4 per cent of yearly target) came from social taxes and GEL 24 million (47.3 per cent of yearly target) was transferred from the central budget. State pensions were financed at GEL 97.5 million (43.2 per cent of yearly target). GEL 2 million was spent for distribution of pensions and various benefits. Administrative expenses of the fund were GEL 1.9 million.
Revenues of roads fund were expected to reach GEL 19.8 million in H1 2002. Own revenues of the fund (which comes from excise on oil products and other taxes) were GEL 16 million. GEL 1 million was transferred to the fund from the Presidential Fund for rehabilitation of bridges in mountainous regions damaged by heavy rains. The main spending of the fund was on roads maintenance – GEL 6.8 million; payments for works performed in previous periods – GEL 4.5 million; co-financing of projects financed by foreign credits – GEL 2.6 million; repayment and servicing of credits – GEL 1 million.
STATE BUDGET DEFICIT The initial 2002 budget envisaged the mobilization of GEL 80.7 million from internal and external sources for financing the state budget deficit. The actual deficit was GEL 82.8 million (103 per cent of targeted). Growth of state debt to National Bank during H1 2002 was GEL 14 million instead of the planned GEL 20 million. T-bills were issued for GEL 12.7 million, GEL 5.2 million more compared to government plans. Receipts from privatisation of state property were in line with target and amounted to GEL 3.5 million. Credits from international financial organisations for financing investment projects were 52.4 million, 5.3 per cent higher compared to initial projection. The balance on government accounts at the beginning of the year was GEL 14.6 million. These funds mainly were used to cover December 2001 expenditure arrears.
CENTRAL BUDGET EXPENDITURES The central budget envisaged a GEL 454.4 million expenditure target for H1 2002 including expenditure arrears for December 2001. Actual expenditures were GEL 377.3 million, that is 83 per cent of target. The balance on government accounts at the end of period was GEL 15 million which was used in July to cover outstanding expenditures.
A detailed breakdown of central budget expenditures by economic category is provided in Table 3.3.
GEORGIAN ECONOMIC TRENDS – 2002 No.2 17 GOVERNMENT FINANCE
Table 3.3: Central Budget Expenditures, H1 2002 (GEL million) Growth over the H1 2002 H1 2001 year Total 377.4 305.8 123.4 Salaries 39.1 35.3 110.8 Business trips 2.9 2.2 134.4 Social contributions 9.3 7.7 120.7 Other goods and services 45.6 38.5 118.5 Interest payments 64.0 53.9 118.7 Subsidies and current transfers 126.7 107.6 117.7 Capital expenditures 0.3 0.6 42.2 Programme expenses 13.3 11.7 113.5 Net lending 76.2 48.3 157.8 Source: Ministry of Finance
Salaries of state servants were financed at 80 per cent target. The GEL 39 million disbursed under this category were short of target by GEL 10 million but still 10 per cent higher compared to the previous years spending. Social contributions paid by the state as an employer were financed at 84 per cent of planned amount. The excess over that of paid salaries apparently relates to social contribution arrears from the previous period paid in H1 2002. Business trips were financed at GEL 2.9 million instead of planned GEL 3.9 million. This item mainly was financed from the government reserve fund.
Spending under “other goods and services” category was GEL 45 million, 67 per cent of target. The most important item under this category was food supply for military and paramilitary servants, for prisoners and orphan boarding schools. Food was purchased for GEL 8.3 million instead of GEL 10 million. Georgian diplomatic corps abroad are also financed under “other goods and services” category. Spending here was GEL 7.4 million (85 per cent of target). GEL 4.1 million was disbursed for organisation of local elections. Electricity and water supply for IDPs was financed at 6.2 million. GEL 4.3 million was withdrawn from government accounts according to court decisions in favour of companies which have supplied to state goods or services in previous years and were not paid.
Interest payments on state debt were GEL 53.9 million, of which GEL 25.2 million was spent on external debt servicing, while GEL 38.7 million was for interest to the National Bank and treasury bill discount expenses. Subsidies and current transfers were financed at 90 per cent of target. Important sub-headings under this category were: transfers to local budgets of GEL 32 million, salaries of school teachers and other social expenses of GEL 30 million, transfer to social security fund of GEL 24 million, subsidy to energy sector of GEL 12 million, subsidy to State Medical Insurance Company of GEL 8 million.
Programme expenses were financed at GEL 13.3 million. This covers expenses of the state health care programme, state disabled programme and state employment programme of GEL 6.9 million. Expenses connected with the population census were GEL1.8 million.
Total expenses under net lending category were GEL 76.2 million (94 per cent of target). Principal payments on state debt were GEL 16.1 million. Projects financed by international financial organisations were GEL 53.6 million, while co financing of these projects from the Georgian side was GEL 6.5 million. A functional breakdown of state budget expenditures provides more information on the Government’s spending priorities.
18 GEORGIAN ECONOMIC TRENDS – 2002 No.2 GOVERNMENT FINANCE
Table 3.4: State Budget Expenditures by Function, H1 2002 (GEL million) Expenses Per cent in total General Government 91.921 20.1 Defence 16.955 3.7 Law and Order 37.934 8.3 Education 15.19 3.3 Health care 16.678 3.7 Social Security 116.32 25.5 Housing 1.921 0.4 Culture sports religion 10.127 2.2 Energy 12.572 2.8 Agriculture 2.951 0.6 Construction and mining 0.238 0.1 Transport and communications 19.587 4.3 Other economic activities 1.109 0.2 Other expenses 112.969 24.7 Total 456.472 100.0 Source: Ministry of Finance
General government, social security and other expenses remain main spending items in the state budget. General government incorporates current expenses of government agencies (mainly salaries and goods purchased) as well as expenses of programmes financed by international financial organisations of GEL 60 million. Social security covers the purchase of goods and services of GEL 67 million and social transfers of GEL 47 million. Expenditures under the category “other” were interest payments of GEL 64 million, principal payments of GEL 16 million and subsidies of GEL 32 million.
Box 3.1 Methods of Determining VAT Liability
It is a key feature of VAT that tax is charged on the difference between purchases and sales. There are three main ways in which this can be done invoice credit; subtraction; or addition methods:
Under the invoice credit method, each trader charges output tax at the specified rate on each sale and passes to the purchaser an invoice showing the amount of tax charged. The purchaser, if subject to VAT on his own sales, is in turn able to credit such payment of input tax on his own purchases against the output tax charged on his sales, remitting the balance to the authorities and receiving the balance when there are excess credits. Under the subtraction method, tax is levied directly on accounts based on a measure of value added calculated for each firm by subtracting allowable purchases from revenues. Under the addition method tax is levied on an estimate of value added calculated by summing (and adjusting as needed) factor incomes. Practice and consensus heavily favours the invoice credit method. The only national VAT currently implemented using subtraction method is that of Japan. The Italian IRAP, introduced in 1998 is also in effect – although not in name - a VAT levied by the subtraction method.
GEORGIAN ECONOMIC TRENDS – 2002 No.2 19 GOVERNMENT FINANCE
The invoice and subtraction methods have important features in common. Both are robust to omission from taxation of any intermediate transaction: if a vendor fails to tax or report a sale, the loss of tax revenue will be exactly corrected if purchaser also omits to claim the credit (under invoice method) or deduction (under the subtraction method). Indeed, in a closed economy and with a single rate of tax, there is little to choose between two methods. Outside such an idealized world, however, several differences emerge.
Most of these differences reflect the central feature that the invoice-credit method is transaction based and the subtraction method is entity based. This, in turn, means that while the invoice-credit method has a tentative aspect to it – tax at each stage is preliminary, being input into another calculation further downstream – the subtraction method gives rise to a final tax at each stage. Prominent among the specific differences to which this gives rise are:
By explicitly linking the tax credit on the purchaser’s inputs to the tax paid by the purchaser, the invoice method may do more to discourage fraudulent undervaluation of intermediate sales. Thus, in principle invoices should be cross-checked to pick up any overstatement of credit entitlement. Under the subtraction method, in contrast, the seller might simply fail to report sales which the purchaser nevertheless claims as costs. Under the invoice-credit method the same effect could be achieved only by failing to forward tax shown as withheld on an invoice issued to a purchaser.
The invoice method is better suited for dealing with differential rate structures. For example, assume that sales of some good are zero rated – meaning that no tax is charged on output but input tax is credited (if necessary refunded) in the usual way – while all other goods face the standard rate. Under the invoice method this is accommodated by allowing sales of the good to be tax free. Under the subtraction method, achieving the same effect requires omitting sales of such goods from taxable revenues, which requires traders to distinguish between different kinds of sales on their books, after the fact. In the same way, one could in principle accommodate multiple rates under subtraction method. This would transform the subtraction method, however, into something like the invoice method, since traders would presumably be required to keep documentation verifying their claims as to the nature of sales; the only difference from an invoice system is that invoices need not be matchable between buyer and seller.
A particular instance of the previous difficulty arises in connection with international trade. If the VAT is levied on the destination principle, as generally recommended, exports should be zero rated, which as just noted, is somewhat more naturally done under the invoice method. In contrast, the subtraction method accommodates the origin principle (that is, taxes are levied in the jurisdiction in which taxable good is produced) with greater facility, since it is by construction precisely a tax on value added at source.
Further differences arise in the treatment of exempt goods. Achieving exemption is easy in both cases: under the invoice-credit system tax is neither payable on output nor recoverable on inputs; under the subtraction method a rate of zero is applied to the difference between revenue and costs. The issue concerns the purchases of exempt goods by registered traders. Under an invoice-credit system, the purchaser enjoys no credit in respect of purchases of such goods. On the other hand, under a subtraction system, such purchases would be deductible and the tax paid to the exempt trader consequently recovered by the purchaser. Which treatment is superior? This depends on the reason for the exemption. One important form of exemption is that of small traders, on grounds of administrative convenience. Here the treatment under the subtraction method would seem appropriate, in that it places purchases from exempt small traders on the same footing as purchases from the registered traders.
Where there exists an effective income tax (which is not the case in most developing countries) there may be some advantage to the subtraction method in terms of compliance costs, since information and records that it requires are essentially already required for income tax.
Based on: The Modern VAT/Liam Ebrill et.al; IMF 2001
20 GEORGIAN ECONOMIC TRENDS – 2002 No.2
CHAPTER FOUR: MONEY AND FINANCE
MONETARY INSTRUMENTS According to the 2002 Budget, the annual targets for budget deficit financing from domestic sources related to monetary policy are the following: GEL 30 million – net lending from the National Bank of Georgia (NBG), and GEL 20 million – net financing to be received from issuing and placing T-Bills. One of the main common goals for the NBG and the Ministry of Finance is a gradual move from direct lending to the Central Budget toward financing through Treasury Bills. Following that direction, the Ministry of Finance has increased the volume of T-Bills in issue. During 2001, the total amount of T-Bills placed was GEL 60 million, while during H1 2002 that amount increased to GEL 128.7 million. The role of T-Bills as a domestic source of the State Budget deficit financing has become more significant since their introduction in 1997. Figure 4.1 illustrates budget deficit financing through T-Bills during 1997- H1 2002.
Figure 4.1: Amount of the Budget Deficit Dinanced by T-Bills, 1997- H1 2002
25
20
15
10 GEL million
5
0 1997 1998 1999 2000 2001 H1 2002
Source: National Bank of Georgia
The policy of the NBG and the Ministry of Finance to increase investors’ interest in T-Bills has been successful so far. A crucial change occurred in the diversification of the primary market. The structure of market players has changed since the beginning of 2002. In previous years, the T-Bills market consisted mainly of commercial banks. In 2002 the number of non-bank investors increased significantly. The share of non-bank investors in H1 2002 increased to 58 per cent against 19 per cent in 2001. One of the explanations of increasing non-bank investors’ interest is a relatively high interest rates of T-Bills comparing with interest rates on time deposits offered by commercial banks.
GEORGIAN ECONOMIC TRENDS – 2002 No.2 21 MONEY AND FINANCE
Table: 4.1: Comparing Table of Interest Rates Fixed by Banks for Lari Denominated Deposits and on T-Bills Auctions GEL T-Bills Time interest deposits rates (1) interest rates (1) Jan-02 10,56 25,19 Feb-02 11,02 48,91 Mar-02 10,02 47,26 Apr-02 12,02 36,65 May-02 10,59 55,42 Jun-02 10,58 32,58 Source: GET calculations based on data provided by the National Bank of Georgia Note (1): Weighted average annual for all maturities
The average annual interest rate fixed on T-Bills auctions in H1 2002 was higher than in 2001 (40.7 per cent against 30.16 per cent).
The notorious problem of an absence of a realistic approach during the Budget process creates a large impediment in defining the volume and a schedule for issuing T-Bills. Due to the spasmodic character of tax revenues inflows, the bulk of tax revenues is accumulated on the Treasury’s accounts during the last days of each month. This is why the MoF faces difficulties with forecasting possible budget revenues and determining the necessary size of domestic borrowing during a period of time. Under these circumstances, potential investors are unable to create long-term investment strategies, which in its turn hampers the progress of the market’s development. To calculate an amount of domestic borrowing through T-Bills and work out an issuance schedule, a realistic forecast of budget revenues and expenditures and borrowing is required. The MoF should make every effort to set up a unified methodology of budget planning and forecasting. Currently, to help investors to make their T-Bills portfolio more diversified, a special measure is being used. A maturity profile of issued T-Bills can be not just 7, 28, 91 and 182 days as it had been previously but any number of days being a multiple of 7. As of the end of H1 2002, the maturities of issued T-Bills fluctuated from 49 to 140 days.
During H1 2002, 30 T-Bills auctions took place. At 7 of these auctions supply exceeded demand, and that affected the weighted average interest rates of T-Bills and pushed them up. The level of demand at an auction depends on banks’ liquidity positions, which they have at the day of the auction. Usually, by the end of the month and in the very beginning of the next one there is a shortage of lari in the banks. This is caused by a fact that commercial banks’ clients have to pay taxes. At that time demand for T-Bills is relatively lower than in the middle of the month. In the beginning of 2002, there was a continuation of the process of the lari devaluation against the US dollar that began at the end of 2001. That was the reason why potential investors put a high exchange risk on T-Bills. These two factors determined an excess supply at some T-Bills auctions in H1 2002. At the same time, long-term (140 days maturity) T-Bills also are attractive for the investors. It indicates a growing investor confidence.
However, despite growing demand for T-Bills, the total financial instruments’ market has not shown much progress and remains immature. There were no Lombard credit and REPO auctions in Q2 2002.
22 GEORGIAN ECONOMIC TRENDS – 2002 No.2 MONEY AND FINANCE
Table 4.2: Lombard Credits Issued in H1 2002 Date Amount (GEL) Maturity (days) Annual interest rate (per cent) 29.03.2002 650,058 7 57.40 05.04.2002 654,504 7 45.35 Source: National Bank of Georgia
MONEY SUPPLY The well known fiscal and budget problems, a slow development of the domestic production sector and an import-orientation characterise the economy. As in previous years, strict control over money supply is the sole way to guarantee economic stability. Monetary policy remains the same as in the previous years and has been determined by a programme maintaining the annual inflation within a 4-6 per cent band through rigorous control over money creation. Direct Government borrowing should be gradually substituted by issuance and management of domestic debt instruments. The Budget Law of 2002 sets GEL 30 million as the annual target for net lending to the Government. In 2001, annual indicators for the NBG’s international reserves showed 1.25 months of import cover. Following that, the National Bank should maintain its international reserves on the level of 1.05 months’ import in 2002 and keep M1 reserve money indicator at 12.5 per cent of GDP. M3 growth should be no more than 19 per cent of GDP.
The strict control over the issuing of legal tender resulted in a declining currency in circulation and very modest M2 growth in June 2002 compared with December 2001. Currency in circulation fell by GEL 1.7 million, and lari denominated deposits grew by GEL 4.6 million. The increase of foreign currency denominated deposits was sizeable (GEL 33 million during H1, 2002) compared with those in lari. As a result of growth in foreign currency deposits, M3 broad money rose by GEL 34.3 million in H1 2002. At the same time, M2 increased only by GEL 0.9 million during the same period.
A significant growth of foreign currency deposits was accompanied by a high level of deposit dollarisation ratio. Simultaneously the strict control over the money supply and strong preconditions for high deposit dollarisation caused the M2 money multiplier to remain below 1. In Q2 2002 it was 0.93- 0.94 - the same level of previous months. A growth of M3 money multiplier is more impressive. In one year it grew from 1.66 to 1.71 to June 2002.
There are a number of reasons for high level of deposit dollarisation. The first reason is a still low credibility of the national currency caused by inflation and devaluation expectations and political instability in the country. It forces the population to use hard currency as a means of savings. The second reason is an undeveloped domestic financial market. There is no motivation to convert hard currency assets into lari ones, since the possibilities to invest them into domestic financial instruments are very limited. The third reason is that the share of the informal sector in the whole economy is very big (about 60 per cent, according to some estimates). For almost all transactions in the informal sector dollars are used as a store of value and instrument of payment. Deposit holders are both enterprises and individuals. Within the conditions of high level of informal economy the main income of companies is denominated in dollars. There is a liberalised foreign exchange regime in the country and there are no surrender requirements thus that part of companies’ income which is placed in banks’ deposits remains in dollars1. The possibilities to invest the legal tender in domestic financial market instruments is limited. Currently, only investment in T-Bills can create a competitive alternative to deposits. The other part of deposits’ holders is represented by individuals. However, the income of the main part of
1 There are deposits in other currencies and doubtlessly in the Euro. “Dollars” are mentioned for simplification.
GEORGIAN ECONOMIC TRENDS – 2002 No.2 23 MONEY AND FINANCE the population, especially those who receive wages and salaries in lari is too small and leaves no possibility to create any savings.
A high level of deposits’ dollarisation reflects the situation in the domestic financial sector. The high level of deposit dollarisation indirectly proves the fact that there is enough hard currency in the economy (though mainly in the informal sector) to maintain the stable lari exchange rate within the free floating exchange rate policy and the complete absence of international reserve sales by the NBG. The highly dollarised deposits constitute a menace for commercial banks in case of lari devaluation due to a significant share of banks’ liabilities being denominated in hard currencies. And lastly, a high level of deposits’ dollarisation reflects the fact that those sectors of economy that are not characterised by a high inflow and turnover of hard currencies have strictly limited possibilities to obtain credits. Having more than 80 per cent of their deposits in hard currencies, commercial banks avoid issuing loans in lari. The introduction of administrative measures such as changing the exchange rate regime and introduction of surrender requirements would lead to outflow of hard currency from the country. Decreasing of the level of deposit dollarisation requires the improvement of the whole economic situation including long term stability of the national currency, development of domestic financial market instruments and growth of income of the population
Figure 4.2: Money Supply, December 2000 – June 2002
900,000
Depos its in f oreign currencies 800,000 GEL deposits M 3
Currency outside 700,000 commercial banks
600,000
500,000
M2 400,000 M 0
300,000
200,000
100,000
0 Dec 00 Jan 01 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan 02 Feb Mar Apr May Jun
Source: GET calculations based on data provided by the National Bank of Georgia
Table 4.3: Monetary Ratios 2002 Jan Feb Mar Apr May Jun Dollarisation Ratio % 85.6 86.0 85.5 84.9 83.7 85.9 Money Multiplier (M2) 0.93 0.94 0.94 0.94 0.94 0.93 Money Multiplier (M3) 1.70 1.71 1.75 1.74 1.74 1.71 Source: GET calculations based on data provided by the National Bank of Georgia
24 GEORGIAN ECONOMIC TRENDS – 2002 No.2 MONEY AND FINANCE
DOMESTIC INFLATION
Table 4.4: Monthly Consumer Price Index and Inflation, 2001-H1 2002 (December 2000 = 100) Price Index Inflation from previous month 2001 Jan 100.70 0.70 Feb 101.30 0.60 Mar 101.30 0.00 Apr 102.32 1.00 May 101.29 -1.00 June 100.89 -0.40 Jul 100.18 -0.70 Aug 100.48 0.30 Sep 99.88 -0.60 Oct 100.58 0.70 Nov 101.99 1.40 Dec 103.42 1.40 2002 Jan 135.44 2.0 Feb 137,02 1.2 Mar 137,53 0.4 Apr 140,00 1.8 May 140.00 0.0 June 136.70 -2.3 Source: State Department for Statistics
Maintaining a low level of inflation is one of the main directions of the monetary policy under the IMF Poverty Reduction and Growth Facility (PRGF). In June 2002, the accumulated indicator of monthly inflation reached 5.1 per cent. The annual targeted inflation for 2002 was 4-6 per cent, that means 0.42 per cent average monthly inflation. According to the State Department for Statistics calculations, an average monthly inflation for the first four months of 2002 was 0.49 per cent. The devaluation of lari at the end of 2001 and the beginning of 2002 resulted in relatively high inflation in the beginning of the year, and that is why the H1 2002 average inflation rate is higher than targeted. Zero monthly inflation rate in May and deflation in June 2002 were caused by seasonal decline of consumer prices.
The State Department for Statistics has provided some measures to improve the methodology of calculating the Production Price Index. The PPI basket’s main constituents are represented by imported goods such as energy suppliers, machinery, equipment, chemical products etc. It gives an opportunity to monitor prices trends for those commodities and goods, whose price level directly depends on international prices, the exchange rate and also on foreign exchange in circulation within the country. Table 4.4 shows that PPI grew steadily during the first five months of 2002. One can say that due to the import-orientation of the economy, an increasing of US dollars in circulation could have a direct effect on the price level. The US dollar is broadly used as a unit of payment in the informal sector so that in the case of the US dollar devaluation against EUR prices for European goods could be pushed up. It is possible to assume two reasons for the steady rise in PPI: one is a relatively rapid growth of foreign currency denominated deposits (mainly USD and EUR), that are a part of M3, and the other is a fast increase of the M3 money multiplier. Though, for more certain conclusions it is necessary to have PPI data for a longer period.
GEORGIAN ECONOMIC TRENDS – 2002 No.2 25 MONEY AND FINANCE
Table 4.5: Monthly Producer Price Index, H1 2002 (Per cent) January February March April May June PPI growth 0.5 0.9 1.2 2.8 2.9 2.6 Source: State Department for Statistics
BANKING
Figure 4.3: Loans and Deposits Interest Rates, December 1998 – June 2002
70%
60% GEL time deposits GEL loans
FX loans FX time deposits 50%
40%
30%
20%
10%
0% Jul-01 Jul-00 Jul-99 Jul-98 Jan-02 Jan-01 Jan-00 Jan-99 Jan-98 Nov-01 Nov-00 Nov-99 Nov-98 Mar-02 Mar-01 Mar-00 Mar-99 Mar-98 Sep-01 Sep-00 Sep-99 Sep-98 May-02 May-01 May-00 May-99 May-98
Source: GET calculations based on data provided by the National Bank of Georgia
Interest rates trends in H1 2002 were characterised by increasing interest rates for lari denominated deposits. In December 2001, banks paid an average of 6.79 per cent annual interest for deposits in lari; in June 2002, they paid 10.6 per cent annual interest rates. One can assume that commercial banks changed their interest rates policy and started to express more interest for lari deposits. During previous years commercial banks paid substantially higher interest rates for deposits in US dollars and EUR rather than for those in lari, striving to improve their foreign exchange liquidity position by dollarisation of their balance sheets. The trends of H1 2002 show that banks increased their offered interest rates for short-term, medium-term and long-term (more than 1 year) deposits as well. It means that banks put exchange rate risks in interest rates and started to provide an intensive policy to create long-term assets in the national currency. It is a positive trend, because for many years banks have preferred to have highly dollarised balances showing that they were very vulnerable to a devaluation of lari. Strict control over money supply and strong preconditions for high deposit dollarisation resulted in a very low level of M2 money multiplier. Taking that fact into account, it is difficult to say that the deposit structure of commercial banks will be changed dramatically and the share of lari deposits’ will grow.
One could say that changing the interest rates policy of commercial banks indicates an optimistic tendency of growing possibilities to invest in domestic financial market instruments such as T-Bills. The attractive interest rates fixed on T-Bills auctions pushed up commercial banks’ and non-bank investors’ demand for lari.
Interest rates on loans issued in foreign currencies have not changed dramatically, however the trend line in Figure 4.3 indicates a gradual fall since 1998. The interest rates of loans in the national currency
26 GEORGIAN ECONOMIC TRENDS – 2002 No.2 MONEY AND FINANCE also show the same performance. As lari deposit interest rates have grown, the net interest margin between loans and deposits has decreased notably. In June 2001, the net interest margin in the national currency was 12 per cent and fell to 8.6 per cent during a year. It is a positive change, however, the net interest margin in Georgian banking system is still high and is equal to average margin for certain EU candidate countries2 for the period 1995-1999. The net interest margin for foreign exchange denominated deposits remains remarkably high. In June 2002 it was 11.4 per cent. The high net interest margin reflects the problems of the financial system: the undeveloped domestic financial market, limited investment opportunities and sources of banks’ income. In these circumstances, lending is the main source of commercial banks’ income. Commercial banks put a high risk premium in lending interest rates that indicates that problems with collateral still persist and reflects the poor progress in related legal reforms. The relatively high reserve requirements (14 per cent) indicate an undeveloped deposit insurance system. Reserve requirements are the only mechanism for protecting clients’ deposits and that makes banks freeze substantial amounts on the NBG’s account. The high interest rates of lending also reflect a problem of insufficient quality of banks’ management.
THE EURO ON THE GEORGIAN FOREIGN EXCHANGE MARKET
Figure 4.4: GEL/USD and GEL/EUR Average Monthly Nominal Exchange Rate, December 2000 – June 2002
2.3
2.2
2.1
2
GEL/USD GEL/EUR
1.9
1.8
1.7 Dec- Jan-01 Feb-01 M ar-01 Apr-01 M ay- Jun-01 Jul-01 Aug- Sep- Oct-01 Nov-01 Dec- Jan-02 Feb-02 M ar-02 Apr-02 M ay- Jun-02 00 01 01 01 01 02
Source: National Bank of Georgia
The average monthly nominal exchange rate of the lari depreciated against US dollar in Q2 2002, but it was less than in Q1. The Lari depreciated sharply against the Euro, especially in May and June, reflecting the trends of strengthening the Euro against the US dollar.
2 Estonia, Latvia, Lithuania, Romania, Slovakia.
GEORGIAN ECONOMIC TRENDS – 2002 No.2 27 MONEY AND FINANCE
Box 4.1 Euro at a Glance
In Madrid, in December 1995, the European Council adopted the name "Euro", after which, on June 1, 1998, the European Central Bank (ECB) was established. It is based in Frankfurt am Main, Germany, and aims to maintain price stability and to conduct a single monetary policy across the Euro area, which includes all EU countries except Denmark, Sweden and the United Kingdom. The abovementioned three countries have a special status which allows them to conduct their own national monetary policies, but not to take part in deciding and implementing monetary policy for the Euro area. The monetary policy is conducted through its own activities and through working with the national central banks. Together, the ECB and the Euro area national central banks are known as the Eurosystem.
The next stage began on January 1 1999, when the exchange rates of the participating currencies were irrevocably set. The Euro area Member States began implementing a common monetary policy, the Euro was introduced as a legal currency and the 11 currencies of the participating Member Stats became subdivisions of the Euro. Greece joined on 1 January 2001 and so 12 Member States introduced the new Euro banknotes and coins at the beginning of the year 2002.
The arrival of the Euro, however, means much more than exchanging one currency for the another. It involves individuals and businesses not only in the countries that have joined the single currency, but all over the world.
The new coins - 50 billion of them - have one side common to all 12 countries and reverse side specific to each country, while the 14.5 billion banknotes look the same throughout the Euro area.
Based on the information from: www.euro.ecb.int
A devaluation of the US dollar against the Euro was a result of a sharp decreasing of foreign investments in the US economy and outflow of foreign capital in 2001 and Q1 2002 to Europe. This trend was stimulated by the “accounting” scandals in some largest American companies. However, experts’ forecasts of a sharp devaluation of the US dollar against the Euro are very pessimistic. More likely is a slow depreciation of the dollar of about 7 per cent in the next year. This assumption is based on the fact that Germany - the leading economy of the Eurozone – is not performing well. German consumers are currently very reserved in their spending, so that the strength of the German economy is based on exports. As soon as the rapidly appreciated Euro starts to hamper the European exports, investors’ behaviour would change in favour of the USA. A slow depreciation of the dollar will also positively affect the US economy’s competitiveness on the international market. Finally, notwithstanding the recent development of EUR/USD, neither EU countries nor the USA will benefit from the rapid devaluation of the American currency.
Following the recent developments of the new European currency, it is important to consider how the Georgian foreign exchange market will react. Will the Georgian population prefer the Euro rather than the US dollar in the immediate future? In this regard it is necessary to take into account a number of factors. First, there is a psychological aspect. The population of those countries where the US dollar is the main measure of savings is not ready to change their preferences. Georgia is not an exception to the list. Also Turkey, Russia and Azerbaijan - the largest of Georgia’s trade partners - are likely to be in the same list. The second reason is that in all those countries the dollar is the main currency of official reserves of the country and savings of the population. Russia and Azerbaijan receive petrodollars since the petrol is the main item of their exports and budget revenues. After financial crises in Turkey, the Turkish lire was pegged to the US dollar that indicates the preference of the population for the US currency at least in the short-run. Also traditionally the image of the US dollar within the population has been very good. In these circumstances, it is likely that those countries will prefer dollars as a currency
28 GEORGIAN ECONOMIC TRENDS – 2002 No.2 MONEY AND FINANCE of payments for export and import operations with Georgia. This explains the inflow of the US dollars in Georgia from trade operations. The capital account’s inflow is mostly constituted by international organisations’ loans and credit lines that are mainly denominated in US dollars. The third factor is that only about 10 per cent of Georgian external debt is to be paid in Euro. It means that the round sum of the country’s official international reserves will be kept in US dollars. Based on the abovementioned factors, one can presume that notwithstanding the devaluation of the US dollar it is unlikely that the dollar will lose its dominant position in Georgia in the short-run.
Box 4.2 Overwiev of Recent Monetary, Financial and Economic Developments of the Euro Area
As of the end of July 2002 there was no indication of a significant reduction in monetary growth over the last few months. From a longer-term perspective, experts do not reflect concern that more liquidity is available in the euro area than would be needed to finance sustainable, non-inflationary economic growth. However, at this juncture, there is less risk that excess liquidity will translate into inflationary pressure, given the environment of subdued demand. The trend in the growth of loans to the private sector also seems to point in this direction. The current level of key ECB interest rates is appropriate.
The latest data confirm a modest recovery in real GDP growth in the euro area in the first half of 2002. In the second quarter of this year real GDP growth is estimated to have grown by 0.3 per cent quarter on quarter, following upwardly revised growth of 0.4 per cent in the first quarter. In contrast to the first quarter, developments in demand appear to have been more broadly based, as activity was supported by private consumption, export growth and inventories. However, overall domestic demand growth remained subdued as a result of the protracted weakness of investment.
The most likely scenario is that of ongoing, albeit modest, growth in real GDP in the second half of year 2002, with growth rates in line with potential growth in 2003. This delay in the acceleration of economic activity in the euro area broadly corresponds with the world economic outlook, given that the expected pace of the recovery has been scaled down over recent months. Sharp declines in stock prices are having negative effects on consumer and investor confidence. Consequently, the strength of the upturn in economic activity has become more uncertain, both inside and outside the euro area. At the same time, however, the conditions for a stronger economic recovery in the euro area remain in place. On the domestic side, private consumption should particularly benefit from lower inflation and improved real disposable income, while investment should be supported by low nominal and real market interest rates. Finally, the gradual recovery of the global economy is also expected to continue. Nevertheless, risks to the economic outlook, both inside and outside the euro area, need to be monitored closely.
Turning to price developments, in July annual HICP inflation was 1.9 per cent, while the inflation rate excluding unprocessed food and energy fell slightly to 2.5 per cent, its first decline in 2002. Eurostat's flash estimate for August, which indicates that annual HICP inflation increased to 2.1 per cent, is fully in line with previous expectations that inflation rates were likely to fluctuate at around 2 per cent for the remainder of the year. However, the short-term trend is also dependent on oil price developments, which have increased significantly over recent months.
Looking further ahead, the recent appreciation of the euro exchange rate, as well as the overall economic environment, should contribute to a reduction in consumer price inflation. Moreover, services price inflation is expected to moderate somewhat, following particularly strong increases in 2002. However, for inflation rates to come down to levels below 2 per cent in 2003, as currently projected by most forecasts, it is crucial that oil prices do not escalate and that wage moderation prevails.
GEORGIAN ECONOMIC TRENDS – 2002 No.2 29 MONEY AND FINANCE
Overall, subdued aggregate demand and the strengthening of the euro should contribute to lower inflationary pressure. At the same time, other factors – in particular monetary developments, but also wage trends and oil price developments – might pose risks to price stability in the medium term and therefore need to be monitored closely.
Regarding fiscal policies in the euro area, flood-related costs should lead to a review of priorities and a reallocation of expenditure. In addition, against the background of recent developments, it seems to be more warranted than ever to call on member countries to remain committed to the Stability and Growth Pact. Countries with sound fiscal positions should safeguard their achievements, while countries with remaining imbalances must avoid deficits in excess of 3 per cent of GDP and implement determined policies in order to progress towards budgets close to balance or in surplus. This is essential for maintaining and further strengthening confidence in the policy framework in the euro area and for establishing fiscal positions in all countries that allow automatic stabilisers to work efficiently without endangering sound fiscal positions in the longer term.
In the field of structural reforms the ECB continue to urge governments to implement, in a determined way, the agenda set in the Broad Economic Policy Guidelines. Structural reforms will contribute to expanding the euro area's potential for non-inflationary growth and to reducing its high level of unemployment. At the same time, they will help to foster confidence among consumers and investors in long-term growth and employment opportunities in the euro area, thereby having a positive effect on spending and investment decisions in the short and medium term. Such confidence is fostered by a determined and broadly based implementation of the reform agenda, focusing, in particular, on labour and product markets.
Source: Introductory Statement of W.F. Duisenberg, President of the European Central Bank and L. Papadermos, Vice- President of the ECB. Frankfurt, 12 September 2002. ECB PRESS CONFERENCE
30 GEORGIAN ECONOMIC TRENDS – 2002 No.2
CHAPTER FIVE: INTERNATIONAL TRADE AND FOREIGN ECONOMIC RELATIONS
The Government continues to maintain a liberal foreign trade regime, in line with WTO commitments. Given the potentially serious consequences for the balance of payments, the Parliament has not renewed a temporary ban on timber exports that expired at the end of 2001 and, recently in July 2002 a temporary ban on the export of non-ferrous scrap metals was removed.
Comparing the results of H1 2002 for foreign trade with those of the preceding years, a certain deterioration is evident. Total export of goods decreased, as well as export volumes of goods of the Georgian origin. H1 2002 was characterized by a sharp decrease of exports to Russia and Turkey and some export growth to Azerbaijan and Armenia
TRADE TURNOVER, TRADE BALANCE AND DIRECTION OF TRADE The figures below suggest that the growing negative trade balance trend continued during H1 2002. Recorded external trade turnover was equal to USD 497 million, of which exports were USD 147.5 million and imports USD 349.5 million. The trade deficit of USD 202 million was about USD 6 million more than in H1 2001.
Exports declined by USD 16.5 million, reflecting a decrease of exports of non-ferrous scrap metal, following the introduction by Parliament of a temporary ban on the export of non-ferrous scrap metals. However, in July 2002 a temporary ban on the export of non-ferrous scrap metals was abolished.
The export coverage of import ratio decreased during H1 2002 to 42 per cent, while in the first half of 2001 the ratio was 46 per cent.
Figure 5.1: Registered Exports, Imports and Trade Balance, Q1 1997 –Q2 2002 (USD thousands) Trade Balance export import 150 100 50 0 19 9 7 Q2 Q3 Q4 1998 Q2 Q3 Q4 1999 Q2 Q3 Q4 2000 Q2 Q3 Q4 2001 Q2 Q3 Q4 2002 -50 Q1 Q1 Q1 Q1 1Q Q1 -100 -150 -200 -250 -300
Source: Data from the State Department for Statistics
The share of the ten main trade partners in the total registered trade turnover was 75.7 per cent. As indicated in Table 5.1, the main partners in the first half of 2002 were Russia, Turkey, Azerbaijan and the UK. These countries together represented about 50 per cent of Georgia’s registered trade turnover.
GEORGIAN ECONOMIC TRENDS – 2002 No.2 31 INTERNATIONAL TRADE AND FOREIGN ECONOMIC RELATIONS
Table 5.1: Registered International Trade Turnover and Direction of Trade, H1 2002 (USD thousands) International Trade Turnover Import (CIF) Export (FOB) Trade Turnover USD Per cent USD Per cent USD Per cent Total 349,526 100 147,504 100 497,030 100 Main partner countries (total) 260,784 74.6 115,282 78.2 376,066 75.7 Russia 66,349 19 24,081 16.3 90,430 18.2 Turkey 44,997 12.9 25,355 17.2 70,352 14.2 Azerbaijan 32,402 9.3 15,335 10.4 47,737 9.6 UK 19,488 5.6 15,873 10.8 35,361 7.1 Germany 27,730 7.9 2,474 1.7 30,204 6.1 Ukraine 22,981 6.6 4,415 3 27,396 5.5 Italy 17,517 5 3,598 2.4 21,115 4.2 Turkmenistan 7,938 2.3 11,446 7.8 19,384 3.9 USA 16,224 4.6 2,669 1.8 18,893 3.8 Armenia 5,158 1.5 10,036 6.8 15,194 3.1 Others 88,742 25.4 32,222 21.8 120,964 24.3 Source: State Department for Statistics
During H1 2002, CIS and EU accounted for 66 per cent of Georgia’s registered imports. Turkey accounted for another 13 per cent. Imports from USA were relatively small.
Figure 5.2: Georgia’s Registered Imports by Regions, H1 2002
Others 16% CIS (including USA CIS (including Russia) Russia) 5% 40% EU Turkey Turkey USA 13% Others EU 26%
Source: State Department for Statistics
H1 2002 was characterized by a sharp decrease of exports to Russia and Turkey and some export growth in Azerbaijan. The export decline to Russia could be explained partially by growing barriers against Georgian small exporters to the Russian market and partially by a stopping of exports of military aircraft (HTS chapter 8802) and ferroalloys (HTS chapter 7202). In H1 2001 the export of aircraft to Russia accounted for USD 7 million, and exports of ferroalloys was USD 3.4 million As for Georgian exports to Turkey, in H1 2002 the reason for the decrease in official export statistics was the interruption of export of electrical energy (in H1 2001 export of this item to Turkey was 4 million USD), ferroalloys (in H1 2001 export of this item accounted 3.6 million USD) and waste and scrap aluminium exports (in H1 2001 USD 3.5 million was exported to Turkey). Export growth in H1 2002 to Azerbaijan could be explained by exports of military aircraft and parts (HTS chapters 8802, 8803), which accounted for USD 9.7 million.
32 GEORGIAN ECONOMIC TRENDS – 2002 No.2 INTERNATIONAL TRADE AND FOREIGN ECONOMIC RELATIONS
Figure 5.3: Georgia’s Registered Exports by Region, H1 2002
Others USA 15% 2% CIS (including CIS (including Russia) Russ ia) EU 46% Turkey Turkey USA 17% Others EU 20%
Source: State Department for Statistics
Box 5.1 EU Developments in Trade - 2001
The value of merchandise exports rose by 4 per cent in 2001, compared with 23 per cent in 2000, while imports were 1 per cent lower in value. Merchandise exports were estimated at EUR 1,051 billion and imports at EUR 1,020 billion in 2001, reducing the EU’s merchandise trade deficit to EUR 46 billion in 2001, from EUR 91 billion in 2000. EU-15 trade flows with its major partners were mixed, with falls recorded in imports from Japan (-13 per cent), from the USA (-3 per cent) and from Norway (-1 per cent), and in exports to Turkey (-33 per cent). On average, EU imports increased by 12 per cent annually from 1996-2001, whereas EU exports only rose 9 per cent annually over the same period. The highest EU trade deficit in 2001 was recorded with China (EUR -45.7 billion). The highest surplus was registered with the USA. The latter increased to EUR +43.6 billion in 2001 from EUR +33.5 billion in 2000. EU-15 trade with Japan showed a decrease in the EU deficit (EUR -30.8 billion in 2001 compared to EUR -42.1 billion in 2000). The EU's largest suppliers are the USA, China, Japan, Switzerland, and Russia. The EU's largest export markets are the USA., Switzerland, Japan, Poland, and China.
The largest relative increases in imports in 2001 were from the Czech Republic (+16 per cent), Turkey (+15 per cent) and Poland (+14 per cent). About three quarters of EU imports are composed of primary products, machinery, and other manufactured products, in roughly equal shares. The most notable increases were in exports to Russia (+39 per cent), China (+17 per cent) and the Czech Republic (+14 per cent). About 87 per cent of EU exports are manufactured products, primarily machinery (30 per cent), transportation materials (17 per cent), and chemical products (14 per cent). The energy deficit stabilised (EUR -117.9 billion in 2001 compared to EUR -118.1 billion in 2000), while the surplus for machinery and vehicles increased (EUR +79.0 billion in 2001 compared with EUR +45.4 billion in 2000).
In 2001, the EU liberalised its trade with Least Developed Countries (LDCs) under the Everything But Arms (EBA) initiative. Although only implemented towards the end of the year, imports from these countries nevertheless considerably increased in 2001 bringing the EU's trade deficit with LDCs to EUR -1.2 billion. Further increases can be expected in the near future as LDCs exploit their preferential access.
The EU is the world's largest importer of services with 24 per cent of total world services imports. The EU maintains only a small surplus in its services balance (EUR +5.2 billion in 2000). EU services' imports come overwhelmingly from the USA. (over 40 per cent of total). Much of the rest is imported from Asia (17.2 per cent), the Mediterranean (8.5 per cent) and the EU accession candidate countries (5.7 per cent). About one half of EU services trade consists of travel and transportation, in roughly equal shares. Other business services account for about another quarter. The fastest import growth in recent years has been in computer and information services, which grew by 24 per cent annually from 1994 to 2000.
Source: WTO, TPRB
GEORGIAN ECONOMIC TRENDS – 2002 No.2 33 INTERNATIONAL TRADE AND FOREIGN ECONOMIC RELATIONS
COMPOSITION OF REGISTERED EXPORTS The share of 10 product groups represented more than 68 per cent of all registered exports during H1 2002. There was slight growth of export of military aircraft during H1 2002, the export of this item took first place at USD 26.2 million (17.8 per cent of all exports). The destination of these exports, together with traditional partner countries, was Turkmenistan (49 per cent of all exports), Azerbaijan (37 per cent), Gambia (10 per cent) and France (4 per cent). Ferrous scrap (HTS chapter 7204) accounted for 12.6 per cent of all exports in the recorded period. Turkey was destination for 91 per cent of this product category export.
Export of gold (HTS chapter 7108) in semi-manufactured forms has become an important export item valued at USD 13.6 million, which was about 9.31 per cent of all exports. The destination for this export item was the UK.
A trend, which has been observed in the previous years, continued in H1 2002. Georgia’s wine industry is still heavily dependent on the Russian consumer market, which puts this industry at risk. Thus, Russia is still the traditional importer of Georgian wines. The destinations of the exports of wine from fresh grapes (HTS chapter 2204) during H1 2002 were Russia (78 per cent), Ukraine (9 per cent), the USA (6 per cent) and Kazakhstan (2.7 per cent).
Waters, including natural ore mineral, accounted for 5.7 per cent of all exports. The destinations of the exports of water (HTS chapter 2201, 2202) during H1 2002 were Russia (80per cent), Ukraine (8 per cent) and the USA (5 per cent). Chemical fertilizers (HTS chapter 3102) represented 5 per cent of registered exports. The destinations of this category of exports were Gibraltar (26 per cent), Turkey (22 per cent), Armenia (15 per cent), Azerbaijan (14 per cent), Greece (9 per cent) and Germany (9 per cent).
The Black Sea Trade and Development Bank (BSTDB) is currently assisting Georgia to expand and diversify its export capability, and develop new export capacity.
According to a Memorandum of Understanding signed in May 2001 between BSTDB and the Georgian Government, the Bank assists the Ministry of Economy, Industry and Trade, to promote an export programme, including consideration of establishing an Export credit and/or Insurance agency in Georgia. In July 2002, the Greek company KANTOR presented the terms of reference for a feasibility study on development of such an agency. An Export Development Concept is necessary for the preparation of the feasibility study.
Upon completion of the feasibility study, BSTDB will take into account the consultants’ recommendations and will assess the need for establishing of an Export Credit Insurance Agency (ECIA) in Georgia. A future agency could play a role of central importance in regional trade, both as regards exports and foreign direct investments; and will work on the basis of international acceptance of sound principles of export credit and foreign investment insurance. Without the active involvement of such an agency, it will often not be possible to organise the financing and credits required for projects on any scale in Georgia.
34 GEORGIAN ECONOMIC TRENDS – 2002 No.2 INTERNATIONAL TRADE AND FOREIGN ECONOMIC RELATIONS
Figure 5.4: Georgia’s Registered Exports by Product Categories, H1 2002 (USD million)
Vegetable Products
Product of The Chemical or Allied Industries
Presious Metals
Mineral Products
Beverages, Spirites, Tobacco, Nuts, Fruit etc.
Aircrafts and associated transport equipment
Base Metals and Articles of Base Metal
Other
0 5 10 15 20 25 30
Source: State Department for Statistics
Other main export items are: copper ores and concentrates (HTS chapter 2603), mineral fuels (HTS chapters 2709, 2710), ferroalloys (HTS chapter 7202), aluminum waste and scrap (HTS chapter 7602), aluminum, unwrought (HTS chapter 7601).
Table 5.3 indicates main registered export items according to the Harmonized Commodity Description and Coding System (HS).
Table 5.2: Composition of Registered Exports According to the Harmonized Commodity System, by HTS 4-digit categories, H1 2002 USD Per cent thousands Total exports 147,504 100 Aircrafts, spacecraft, and parts thereof – 8802, 8803 26, 230 17.8 Ferrous waste and scrap: ingots of iron or steel-7204 18, 573 12.6 Gold, unwrought or in semi manufactured forms, or in powder 13, 648 9.3 form -7108 Wine of fresh grapes, including fortified wines -2204; 11, 615 7.9 Waters, including natural or artificial mineral waters- 2201, 2202; 8, 430 5.7 Mineral or chemical fertilizers, nitrogenous –3102. 7, 385 5 Copper ores and concentrates –2603 6, 163 4.2 Petroleum oils and oils from bituminous minerals, crude-2709, 4, 618 3.1 2710 Ferroalloys -7202 4, 441 3 Aluminum waste and scrap-7602; aluminum, unwrought – 7601 4, 247 2.9 Other 46,401 31.5
Source: State Department for Statistics
GEORGIAN ECONOMIC TRENDS – 2002 No.2 35 INTERNATIONAL TRADE AND FOREIGN ECONOMIC RELATIONS
COMPOSITION OF REGISTERED IMPORTS
Figure 5.5: Georgia’s registered imports by Product Categories, H1 2002 (USD million)
Base Metals and Articles of Base Metal
Vegetable Products
Prepered Foodstuffs; Beverages, Spirites, Tobacco etc.
Product of The Chemical or Allied Industries
Vehicles,Aircrafts, Vessels and etc.
Machinary and Mechanical Appliances
Mineral Products
Other
0 102030405060708090
Source: State Department for Statistics
Imports were dominated by mineral products in H1 2002. Despite the fact that a significant share of Georgian imports was not recorded at all, the figures suggest that Georgia’s dependence on foreign energy continues. The import of petroleum gases, oils, and electrical energy together represented about 23 per cent of total recorded imports. Imports of medicaments (HTS chapter) accounted for 6.6 per cent of recorded imports. The share of food (milling industry, wheat) and tobacco is slowly decreasing. Table 5.4 shows the largest imported product groups that together constituted about 44 per cent of total imports in H1 2002. Other major imported products are sugar (3.7 per cent), tobacco (3.5 per cent), airplanes (2. per cent), and other (see Table 5.4).
Table 5.3: Composition of Registered Imports According to the Harmonized Commodity System, by HTS 4-digit categories, H1 2002 USD Per cent thousands Total imports 349,526 100 Petroleum oils and oils from bituminous minerals (other than crude) 37,588 10.8 – 2710 Petroleum gases -2711 30,173 8.6 Medicaments –3004 23,148 6.6 Cane or beet sugar -1701 12,890 3.7 Tobacco and manufactured tobacco substitutes –2402, 2401,2403 12,383 3.5 Electrical energy – 2716 11,437 3.3 Wheat -1001 8,560 2.4 Airplanes, other aircraft, spacecraft and spacecraft launch 7,928 2.3 vehicles– 8803 Transmission apparatus for radiotelephony, radiotelegraphy, 5,504 1.6 radiobroadcasting or tv-8525 Electrical apparatus for line telephony or line telegraphy-8517 5,051 1.4 Other 194,864 55.8 Source: State Department for Statistics
36 GEORGIAN ECONOMIC TRENDS – 2002 No.2 INTERNATIONAL TRADE AND FOREIGN ECONOMIC RELATIONS
EXPORT AND IMPORT OF SERVICES The share of unrecorded trade is higher in services than in the case of trade in goods. According to balance of payments data1 (see Table 5.5), 55 per cent of registered exports of services in H1 2002 were revenues from transportation. Travel amounted to about 37 per cent of all services. Other services (which includes communication, insurance etc.) accounted for only 9 per cent of exports of all services. There is slight growth in exports of railway transport services.
Table 5.4: Registered Export and Import of Service (USD thousands) H1 2002 H1 2001 Exports Imports Exports Imports Total services 164,641 122,539 157,701 114,903 Transportation services 88,641 50,243 84,811 47,293 - sea transport 19,572 12,280 13,999 16,492 -air transport 9,135 19,484 12,559 15,218 -railway transport 37,633 8,040 33,858 6,163 -auto transport 6,590 10,439 9,550 9,420 - pipe lines 15,731 0 14,845 0 Travel 61,160 51,522 59,020 51,032 Other services 14,603 20,775 13,870 16,578 Source: State Department for Statistics, Balance of Payments
GEORGIAN-UKRAINE-AZERBAIJAN-MOLDOVA (GUUAM) On July 19-20 the summit of the member-states of GUUAM was held in Yalta. Representatives of Russia, Bulgaria, Iran, Greece, Romania, USA, Slovenia, Poland, Brazil, Turkey, UN, BSEC, OSCE and the European Commission attended the summit as guests. Within the framework of the summit a declaration on establishing multilateral Free Trade Agreement among Ukraine, Moldova, Georgia and Azerbaijan was signed. When participating at a summit of the Council of Europe in 1997, the Presidents of the GUAM countries announced their intention to deepen economic co-operation. Uzbekistan joined GUAM on April 24, 1999 – which creates a new acronym, GUUAM.
In September 2000 in New York, the Presidents agreed on institutionalization of GUUAM and began negotiations toward creating free trade area within these five countries. The Presidents stressed co- operation in establishing the Eurasian Trans-Caucasus transportation corridor (TRACECA), in transportation projects, and integration into the Euro-Atlantic and European structures of security and co-operation.
The GUUAM free trade area, since Georgia and Moldova are already WTO members, will not complicate WTO negotiations for Ukraine, Azerbaijan and Uzbekistan because the free trade area does not require member countries to harmonize external tariffs and, thus, foreign trade policies. The result would be that all import tariffs and other trade barriers will be removed between GUUAM members and each country will continue to retain its own international trade measures vis-à-vis countries outside the free trade area. Regional free trade areas are very important in the structure of world trade. With outside countries, trade continues to be governed by bilateral treaties and the WTO/GATT framework. The creation of a regional free trade area allows a group of states to co- operate in increasing their own wealth without waiting for the rest of world.
1 By the time this issue of GET was ready for publication, only preliminary H1 2002 balance of payments data were available.
GEORGIAN ECONOMIC TRENDS – 2002 No.2 37 INTERNATIONAL TRADE AND FOREIGN ECONOMIC RELATIONS
The fact that GUUAM countries have common economic, political and probably military interests strengthens this regional grouping. Among the top priorities, economic cooperation will be of special importance, considering the plans to develop the Europe-South Caucasus-Central Asia transit corridor on the Silk Road in which the GUUAM countries would play an important role. The energy sector is another sphere of cooperation, particularly the development of Caspian oil deposits and the construction of multiple pipelines to the international market.
INTERNATIONALFRAMEWORK FOR REGIONAL INTEGRATION (WTO/GATT RULES) Regional economic integration (REI) means the creation of conditions for extension of trade flows among countries, which are concentrated in a one geographical region. In a development form, REIs may cover harmonization and unification of currency and monetary policy among negotiating parties. Regional economic integration can be carried out either as a formal integration block among countries, or as an informal one. The former means that countries found a block under the charter and agreements (EU, NAFTA, MERCOSUR and others) and the latter means that interested parties arrange to promote integration in region without a formal treaty (East-Asian integration).
Regional integration agreements (RIA) cover a few stages of intensification of economic relations, which reflects the level of integration among countries. The lower level is preferential trade agreement among few countries. It means, that negotiating sides decrease rate of tariff only on mutual flows of goods. Free-trade agreements (FTAs) mean that trade restrictions among member countries are removed, but each country retains its own tariff structure against outsiders. A customs union is free- trade area with common external trade policies. A common market is a custom union that also allows for the free movement of factors of production (labour, capital). An economic union is a common market that includes some degree of harmonisation of the national economic policies of member countries. In this case the national currencies of member countries are fixed to each another.
One of the basic WTO/GATT rules, which provides that trade must not be discriminatory, is embodied in the famous most-favoured-nation clause. In simple terms, the principle means that if a member country grants to another country any tariff or other benefit on any product, it must immediately and unconditionally extend it to the like products of other countries. The obligation to extend such MFN treatment applies not only to imports, but also to exports.
The principle thus implies that, by agreeing to give MFN treatment, member countries undertake not to discriminate among countries and not to treat a country less favourably than another in all matters connected with foreign trade in goods. The WTO/GATT rules, however, recognise that tariffs and other barriers to trade can be reduced on a preferential basis by countries under regional arrangements. The lower or duty-free rates applicable to trade among members of regional arrangements need not be extended to other countries. Regional preferential arrangements thus constitute an important exception to the MFN rule. In order to protect the trade interests of non-member countries, GATT lays down strict conditions for forming such arrangements.
These conditions provide that:
- member countries of regional arrangements must remove tariffs and other barriers to trade affecting substantially all trade among themselves; and
- the arrangements should not result in the imposition of new barriers to trade with other countries.
38 GEORGIAN ECONOMIC TRENDS – 2002 No.2 INTERNATIONAL TRADE AND FOREIGN ECONOMIC RELATIONS
In the frame of the WTO such arrangements may take the form of custom unions or free-trade areas.
In both instances, trade among member States takes place on a duty-free basis, while trade with other countries continues to be subject of MFN tariff rates. In the case of customs unions, tariffs of member countries are harmonized and applied to imports from outside countries on a uniform basis. In free- trade areas, member countries continue to use, without harmonization, the tariffs set out in their individual national schedules. As a result of such regional arrangements, a high proportion of the world trade takes place today on a preferential basis.
As noted above, regional integration agreements may take several forms, depending on the degree of the integration. Two recognized forms of regional integration are: free trade agreements (FTA) and a customs union (CU) – (article XXIV, GATT).
In a free-trade area, trade restrictions among member countries are removed, but each country retains its own tariff structure against outsiders. A customs union is a free-trade area with common external trade policies. A common market is a customs union that also allows for the free movement of factors of production.
A free trade area is a potential precursor of a customs union. A FTA is an agreement between two or more states to permit duty-free trade with other FTA members. FTA partners may maintain separate trade regimes, including safeguard, anti-dumping, and countervailing duty procedures. FTA partners do not need to co-ordinate closely their positions in multilateral trade for such as the WTO and they do not need joint representation at the WTO. A CU is a FTA together with harmonization of external tariffs at a minimum and possibly also non-tariff barriers. It is important to mention, that CU members would have to justify the CU under GATT Article XXIV, which requires that all CU’s be notified to the WTO and that they meet certain criteria (in particular that they cover substantially all trade and that compensation be offered for any resulting increases in tariffs). Further, the CU rather than its individual member states would need to apply for accession, since a CU implies joint WTO membership.
Box 5.2 EU Free Trade Areas
The EU has been linked to all ten Central and Eastern European countries by Europe Agreements since 1999. As a result, industrial products are now in free circulation between the signatories and the EU since the beginning of 2001. Restrictions remain in only a few sectors, such as agriculture. The Europe Agreements also contain provisions regarding the free movement of services, payments and capital in respect of trade and investments, free movement of workers, and co-operation in the field of environment, transport and customs. Furthermore, they provide for legislative approximation with EU legislation, particularly in the areas relevant to the internal market, such as competition and protection to intellectual, industrial and commercial property. The Association Agreements with Cyprus and Malta cover similar fields. The EU has established a Customs Union with Turkey covering industrial products. Steel and coal products are in free circulation, whereas concessions have been exchanged by both parties in trade in agricultural products. Further negotiations started in 2000 to liberalise trade in services and public procurement.
The EU’s bilateral trade relations with Switzerland are based on the existing free-trade agreement of 1972. Since 1994 the EU and Switzerland have been involved in negotiations covering a wide range of specific sectors. Seven new agreements in the sectors of free movement of persons, air and land transport, scientific and technological co-operation, agriculture, conformity assessment and public procurement will enter into force in summer 2002. Since June 2001, negotiations have been underway in the additional areas of statistics, environment, and trade in processed agricultural products and co-operation against fraud, while negotiations on the taxation of savings are about to start. In April 2002 the European Commission decided to propose the start of negotiations with Switzerland in four new areas, including the establishment of an FTA on services.
GEORGIAN ECONOMIC TRENDS – 2002 No.2 39 INTERNATIONAL TRADE AND FOREIGN ECONOMIC RELATIONS
The EU has concluded bilateral association agreements with 8 Mediterranean countries. These agreements contain a political component, a trade component, and a co-operation component. The agreements with Tunisia, Morocco and Jordan have entered into force in March 1998, March 2000 and May 2002 respectively. The trade provisions of the agreements with the Palestinian Authority (signed in February 1997) are being applied on an interim basis. Concerning Israel, a new Euro-Med Association agreement entered into force on 1 June 2000. Agreements with Egypt and Algeria have been signed and need still to be ratified. The agreement with Lebanon has been initialed and the parties intend to implement the commercial part on the basis of an Interim agreement. Negotiations are continuing with Syria. The individual agreements foresee the establishment of a free trade area between each country and the EU for goods and the progressive opening of the agricultural markets. In addition, they contain provisions for liberalisation in the area of services, capital movement, and competition.
The negotiations between the EU and the Cooperation Council for the Arab States of the Gulf (GCC) have also restarted in earnest since the GCC decided to apply a common customs tariff at the latest in 2005 and the adjustment of the original EU negotiating mandate, which dated from 1991.
The EU and Mexico Free Trade Agreement entered into force on 1 July 2000. The FTA covers trade in goods to be fully completed for the most part by 2003 with limited longer transitional periods for Mexican industrial products until 2007 and for agricultural products until 2010. The FTA also covers services, public procurement, competition and Intellectual Property Rights.
Negotiations on an Association Agreement between the EU and Chile, which started with a first round in April 2000, were finalised in April 2002. Apart from a free trade area in goods, services and government procurement, the future agreement is to include provisions regarding investment, customs and trade facilitation, intellectual property rights, competition and a dispute settlement mechanism. The future agreement is currently under internal adoption procedures.
Negotiations on an Interregional Association Agreement with Mercosur started in April 2000. By now, most text proposals on the different negotiating items have been exchanged. In addition, both sides have exchanged their tariff offers. The third stage of negotiations is currently being prepared. Following the conclusion with South Africa of a Trade, Development and Co-operation Agreement in 1999, agreements on trade in wine and spirits were signed in January 2002. They have been applied provisionally since then. Negotiations on fisheries have yet to be concluded.
Source: World Trade Organisation
40 GEORGIAN ECONOMIC TRENDS – 2002 No.2
CHAPTER SIX: PRIVATISATION
OVERVIEW There was little progress in actual privatisation in the second quarter of 2002. However, the Ministry of State Property Management (MSPM) has announced tenders to privatise some medium and large enterprises (MLE). Privatisation tenders of joint stock companies Elmavalmshenebeli and Elektrovagonshemketebeli Plant turned out to be successful in the third quarter of 2002. Some large enterprises are to be offered at zero reserve price auctions later this year and some enterprises are facing bankruptcy procedures. After a failure to privatise Georgian Airlines by international tender, liquidation of the enterprise is under consideration. A tender to identify the future management company of Tbilisi Water Utility is under way and the bidding companies will present technical and financial proposals in November.
MEDIUM AND LARGE ENTERPRISE PRIVATISATION In the second quarter of 2002, there were almost no changes in approving and actual incorporation of state enterprises. Table 6.1 shows that as of 1st July 2002, the number of the MLEs approved for establishment as joint stock companies (JSC) has remained unchanged at 1,426. The total number of such enterprises established as joint stock companies is 1,362. During the first half of 2002, only 3 JSCs were established. The highest numbers of both approved and actually incorporated state enterprises are in the Agriculture and Food sector.
Table 6.1: Corporatisation of MLEs by Sector (MSPM Classification) as of 1st July, 20021
Established in Sector Approved Established 2002 Manufacturing 230 305 2 Bread products 61 45 0 Agriculture and food 391 305 0 Architecture and construction 228 164 0 Retail and Wholesale Trade 86 62 0 Services 22 22 0 Oil products 49 36 0 Gas 60 47 0 Transport and Communications 120 131 0 Social sphere 57 57 1 He althcar e 56 58 0 Energy sector 66 130 0 Total 1,426 1,362 3 Source: Ministry of State Property Management
Privatisation of medium and large enterprises that are still in the state ownership is facing difficulties. Many of the tenders fail to attract bids and the enterprises are left unsold. Even in cases when the price of the majority shareholding in the enterprise was reduced no bids were made. It seems that the conditions of these tenders were too demanding and serious investors refrained from taking on heavy liabilities regardless of the low price. The main obstacles to privatising these enterprises are indebtedness, poor condition of the assets of the enterprise, overstaffing, the size itself, and influential interest groups.
1 The MSPM has introduced some changes in this table. The sector “Mining and Chemicals” is now included in the “Manufacturing” sector. The type of activity of some enterprises has been reconsidered and now they are under a different sector than before. The sector “Services” also has been introduced.
GEORGIAN ECONOMIC TRENDS – 2002 No.2 41 PRIVATISATION
Under the conditions of the Structural Adjustment Credit III (SAC), in order for the release of the second tranche (SDR 14.8 million), at least 20 out of 29 largest enterprises from the first priority list should be privatised or liquidated. As of July 2002 fourteen enterprises have been privatised from the first priority list and in eight enterprises, liquidation/bankruptcy procedures have been started. Thus the conditions for the second tranche of the credit have been fulfilled. To receive the third tranche of the credit, all enterprises of the first priority list should be privatised or liquidated. As for the second priority list of large enterprises, 26 out of a total of 29 have been privatised.
The MSPM restructured some MLEs last year. Since, in the case of the largest enterprises, it was difficult to sell any enterprise without restructuring, the viable parts of the enterprises were separated from the rest. Consequently, the viable parts became more efficient and more attractive to potential investors. The sales of the restructured enterprises with symbolic selling prices or at zero reserve price auctions had been under consideration for several months and finally some progress was achieved and more is expected later this year.
JSC Elmavalmshenebeli, producing electric locomotives, is one of the largest enterprises in Georgia. The majority shareholding of the enterprise has been offered for sale several times but without success. It has been restructured and the assets not related to the production process have been separated from the charter capital of the enterprise. A tender for the shares of the enterprise, offered with a 75 per cent discount, still failed to attract bids. A new tender to privatise 75 per cent of the shares of the enterprise with a symbolic selling price of USD 150 thousand was announced on 24 May 2002. According to the conditions of the tender, the winner has to invest in the enterprise GEL 500 thousand, annually increase output by 30 per cent, annually increase wages by 20 per cent and increase the number of employees. The director of the enterprise won the tender in July.
On 19 July the MSPM announced an international tender to privatise the majority shareholding of JSC Medea (wool cloth factory). The shareholding was offered with a symbolic opening price of USD 5 000.
The majority shareholdings of JSC Kutaisi Automobile Plant and JSC Sakartvelos Traktori have been offered at a zero reserve price auction on 5 July. The auction is to be completed in October.
An international tender announced to privatise the state share in the JSC Georgian Airlines failed to collect bids and an issue of the liquidation of the enterprise is under consideration. The MSPM started liquidation procedures in the JSC Elva and JSC Saktseoliti. Liquidation of the enterprises should be completed until the end of 2002. JSC Saksamtometalurgia is also in the liquidation process. Liquidation of the not viable and unattractive enterprises is a logical end of the painful privatisation process and it has benefits to the economy: some tax and arrears will be paid.
Some large enterprises are going to face bankruptcy procedures. Among them are JSCs Tami, Kimbochko, JSC Tkibulnakhshiri, JSC Azot, JSC Sakabreshumi and JSC Chiaturmanganumi. Bankruptcy procedures lead to reorganisation or liquidation of an insolvent enterprise. In case of JSC Azot, JSC Sakabreshumi and JSC Chiaturmanganumi courts approved to carry out rehabilitation process. If rehabilitation is successfully implemented, the enterprises will be able to service their debts, improve overall performance and contribute to the economy of the country.
Another promising development in the privatisation of MLEs was the privatisation of Elektrovagonshemketebeli Plant by tender in August 2002. The director of the enterprise paid for
42 GEORGIAN ECONOMIC TRENDS – 2002 No.2 PRIVATISATION the shareholding USD 1,300,000. He is to fulfil the conditions of the tender, among them: bring USD 1 million investment, increase output and retain the work force.
Although the privatisation process is in many cases hampered by the different obstacles mentioned above, is not always transparent and in some cases brings no results, it is intended to benefit customers, employees and the economy as a whole. Customers benefit when the greater efficiency that can be achieved through privatisation is passed on to them, for example, in the form of prices which are lower than they would otherwise have been, wider choice and better service. Privatised businesses are likely to be more responsive to changing customer demands, and more innovative in introducing new products to the market. For employees, privatisation means working in a company with clear objectives, the means to achieve them, and rewards for success. This reinforces the concern for the customer that is at the heart of any successful business. The economy benefits through higher returns on capital in the privatised industries, which can no longer pre-empt resources from elsewhere in the economy (via taxation), but must compete for funds in open capital markets.
Telecommunications There was no progress in the privatisation of the telecommunication sector assets in the second quarter of 2002. The MSPM cancelled the agreement with Commerzbank, acting as a financial adviser to the process of privatisation. There is no tender announced to identify a new financial adviser yet. The Norwegian company Telenor is acting as a consultant to JSC Sakartvelos Elektrokavshiri and assists the JSC in drafting a new business plan, which includes preparing a new managerial structure of the enterprise and other recommendations. However, there are no plans either to privatise or transfer Sakartvelos Elektrokavshiri into management yet.
Energy sector There was no progress in privatising the assets of the energy sector in the first half of 2002. The MSPM in co-operation with the IFC grouped state regional distribution companies into one company, which is to be transferred into management. It is also planned to privatise hydroelectric generation companies.
The issue of Tbilgazi (Tbilisi gas distribution company) is under discussion again. The Russian company Itera, which provides gas to Georgia, was interested in purchasing Tbilgazi, but due to aggravated political relationships between the two countries this has become a political issue and the MSPM rejected the proposal. Since there is no other way to rehabilitate the enterprise, now the establishment of a joint venture, (Georgian party – ITERA) is under consideration.
Improvement in the energy sector is extremely important because it affects performance of the other fields of economy and quality of life in the country. Privatised assets show better performance than state owned ones and therefore, rapid and proper privatisation of the energy sector assets is set as a priority by the Poverty Reduction and Economic Growth Programme (PREGP) of Georgia.
Water Supply and Sewage System A tender to transfer JSC Tbiltskalkanali (Tbilisi Water Utility) into management was announced last year. JSC Tbiltskalkanali is 100 per cent owned by the Tbilisi Mayor’s Office and is to be transferred into management for 10 years. After that the contract can be prolonged for 5 years upon the mutual agreement of the parties. To facilitate the rehabilitation of this sector the World Bank is to allocate a credit worth USD 25 million. The credit is for 35 years and has a grace period of 10 years with interest
GEORGIAN ECONOMIC TRENDS – 2002 No.2 43 PRIVATISATION at 0.75 per cent per annum. The credit will allow the water tariff to remain unchanged in the beginning of the reform.
A pre-qualification phase of the tender has been completed. To participate in the tender a company had to have 5 years experience of providing service to 1.5 million customers, an annual turnover of not less than USD 50 million and qualified personnel. 5 companies are participating in the bidding process. These are: Compagnie Generale des Eaux (France), Suez Lyonnaise des Eaux (France), Berlinwasser International GmbH (Germany), ACEA S.p.A. – Acquedotto (Joint Venture, Italy), Anglian Water PLC (UK). A sample management contract was sent to the bidders in August 2002, and after that the bidders have 3 months to present technical and financial proposals according to which the winner of the tender will be chosen.
SMALL ENTERPRISE PRIVATISATION The privatisation of small enterprises continues and as shown in Table 6.2, 295 small enterprises have been actually privatised in the first half of 2002. As of 1st July 2002, 13,819 small enterprises had been approved for privatisation and 16,450 small enterprises have been actually privatised2 since 1993. The difference between the total numbers of actually privatised and approved for privatisation small enterprises indicates that many of them split during the privatisation process. The increasing number of the small enterprises approved for privatisation suggests that many of them had been parts of MLEs and became independent units after restructuring of the latter.
The Figure 6.1 shows the dynamics of the small privatisation in Georgia since 1993 by year. It seems that privatisation is approaching its end because the amount of available companies is diminishing. However, privatisation of large enterprises is still ahead (telecommunications, energy, manufacturing sectors) and presumably there will be new small enterprises created as a result of restructuring. Thus, the privatisation process of small enterprises may last longer.
Figure 6.1: Small Enterprise Privatisation
3000 2765 2500 1881 2000 1810 1371 1361 1500 1315 1317 983 1000 716 500 0 1993 1994 1995 1996 1997 1998 1999 2000 2001
Source: Ministry of State Property Management
In the second quarter of 2002, 136 enterprises were actually transferred to private ownership. Most of the small enterprises are in the trade and service sectors - 34 and 44 per cent respectively. According to the regional breakdown given in the Table A6.2 of the Statistical Appendix, 31 per cent of privatised small enterprises are in Tbilisi. The regional breakdown shows that most regions had some progress
2 The number of enterprises actually privatised can exceed those approved for privatisation since some are split up during corporatisation. The total number of small enterprises, including those not approved for privatisation, is not available. Small enterprises are those with a book value of less than USD 44,000 on April 1st 1993.
44 GEORGIAN ECONOMIC TRENDS – 2002 No.2 PRIVATISATION in privatising small enterprises in the second quarter of 2002. The Autonomous Republic of Achara is still lagging behind other regions since no small enterprises had been privatised during the first 6 months of 2002.
Table 6.2: Small Privatisation by Sector (MSPM classification) as of 1st July, 2002
% of total Privatised Sector Approved Privatised privatised in 2002 1 Manufacturing 400 325 2.0 2 2 En e r g y 72 81 0.5 1 3 Bread products 142 126 0.8 1 4 Agriculture & food 779 955 5.8 48 5 Construction 446 385 2.3 15 6 Trade 4,709 5,502 33.4 69 7 Services 5,614 7,283 44.3 113 8 Oil products 172 174 1.1 - 9 He alth 804 638 3.9 12 10 Social sphere 477 736 4.5 28 11 Transport 204 245 1.5 6 Total 13,819 16,450 100.0 295 Source: Ministry of State Property Management
Even though the privatisation of small enterprises does not necessarily imply their efficient operation in future, the existing resale market seems to be effective enough to ensure the acquisition of assets by more capable owners. This also will increase competition, which is the best way to ensure that goods and services desired by the customer are provided at the lowest economic cost. Giving customers freedom of choice enables market forces to provide sustained pressures on companies to increase efficiency.
GEORGIAN ECONOMIC TRENDS – 2002 No.2 45
CHAPTER SEVEN: EMPLOYMENT, INCOMES AND THE SOCIAL SAFETY NET
Unemployment rate figures are in line with those for transition economies, however, they fail to reflect the unfavourable and unstable labour market situation. Underemployment, widespread hidden and disguised unemployment persist, and average salaries across the economy fall way below half the minimum subsistence level for an average family. Long-term unemployment leads to a gradual shrinking of the labour force. Labour market problems aggravate the poverty situation, and an increasingly larger number of households experience painful declines in living standards. Most of the working age population is either underemployed or non-employed (including the unemployed and those outside the labour force). Legislation-defined extremely low rural unemployment rate figures bias the national unemployment rate figures that otherwise would have been much higher. The labour market is dominated by self-employment, and the latter by subsistence self-employment in agriculture. Hired employment accounts for just around 20 per cent of the working age, and over 40 per cent of them are jobs at budgetary organisations paying extremely low salaries. A large portion of those employed (including the self-employed) are engaged in the informal economy, where majority of jobs are unstable and low-paying.
UNEMPLOYMENT The regular quarterly results of the SDS on-going Household Survey1, unlike the data on registered unemployed, yielding fairly interesting and informative internationally comparable data2, are the only reliable ones to base the analysis of economic status of the population and the processes on the labour market. The survey figures are indispensable and instrumental in estimating trends and changes in the labour force, employment and unemployment, labour force participation rates, the population outside the labour force, and household incomes.
Recently the SDS has introduced new questionnaires for the on-going household survey that are more comprehensive and detailed than the ones that were used up to now (including Q4 2001), and are likely to be more effective and functional to base analysis on. Due to applying the new questionnaires for gathering the results for Q1 2002, the data processing was delayed, however, as new questionnaires show, its coverage is going to be expanded to offer much more data than before. Though a lot will still remain beyond the survey figures, and, in accordance with internationally applied methodology, the survey does not take into consideration the size of remuneration anyway, it now will offer much more complete information on those engaged in informal sector, secondary employment, company size, job stability, part-time employment, and underemployment.
1 The continuous Household Survey has been implemented by the SDS since Q3 1996 with the financial support of the World Bank and in co-operation with Statistics Canada. The SDS was implementing the Labour Force Survey (LFS) in 1998-1999 with the assistance from the ILO and the UNDP and figures for those years come from the LFS (see Statistical Appendix Table A7.1). 2 The household survey data are calculated basing on the ILO principles, methodology and definitions, and, therefore, are intercomparable in international terms. For instance, in accordance with the ILO definition, employment is based on any work done for an hour during the reference period (a week).
46 GEORGIAN ECONOMIC TRENDS – 2002 No.2 EMPLOYMENT, INCOMES AND THE SOCIAL SAFETY NET
Table 7.1: Economic Status, Q1 2000 – Q4 2001 (thousands) Economic Status Q I 2001 Q II 2001 Q III 2001 Q IV 2001 Total population over 15 years old 3, 277 3, 269 3, 139 3, 083 Total economically active population (labour force) (1) 2, 066 2, 197 2, 144 2, 048 Total economically active population (labour force) (2) 2, 195 2, 314 2, 246 2, 165 Employed 1, 818 1, 944 1, 913 1, 838 Hired 681 672 636 630 Self-employed 1, 034 1, 189 1, 194 1, 127 Unemployed (1) 248 253.1 230.8 210.5 Unemployed (2) 377 369.9 332.8 327.3 Unemployment rate (per cent) (1) 12.0 11.5 10.8 10.3 Unemployment rate (per cent) (2) 17.2 16.0 14.8 15.1 Source: Data from the SDS Household Survey Note: (1) ILO Standard (or “strict” methodology), i.e., excluding “discouraged” workers. (2) ILO “Loose” methodology, i.e., including “discouraged” workers. * At the time of writing of this issue of GET, the latest available results of the on-going Household Survey were those for Q4 2001. For a more detailed table and 1998-2000 figures see Statistical Appendix Table A7.1.
The latest currently available data are for 2001. Compared to a year before, the national unemployment rate quarterly indicators in 2001 did not change dramatically (see Statistical Appendix Table A7.1). At the end of 20013 the national unemployment rate was 10.3 per cent by the “strict” standard and 15.1 per cent – by the “loose” methodology. The only difference between the unemployed counted according to the two different ILO measurements is whether they are actively looking for a job, however, both the unemployed job-seekers and the “discouraged” workers are “non- employed”. In the absence of statistical data on “labour market flows”, one can judge from anecdotal evidence that the non-employed migrate between the two categories of the unemployed, however, the bigger the gap between the two, the more people are outside the labour force at a given time. The gap between the two measurements has been quite large for the recent two years fluctuating between 4 and 6 percentage points. A persistently large gap is usually a reflection of long-term unemployment and a tough labour market, when the unemployed are not looking for job, as they do not believe the job they might find is worth active search.
Considering all the above, the labour force participation rate ranging between about 63 and 68 per cent over recent years seems quite high (66.4 per cent at the end of 2001), although it conceals a frequent incidence of underemployment, low remuneration and a large number of pension age workers, who have to remain active on the labour market, to compensate for the token pension assistance. One of the factors contributing both to the relatively low national “strict” measurement unemployment rate and the relatively high participation rate is the artificially low rural unemployment rate caused by the overwhelming largely theoretical4 self employment in agriculture: the rural unemployment rate was 2.9 per cent by the ILO “strict” methodology and 6 per cent – by the ILO “loose” methodology at the end of 2001. In line with the usual trend, the urban unemployment rate is hardly comparable to the rural one: 20.7 and 27.3 respectively by the “strict” and “loose” standards at the end of Q4 2001.
As a part of reorganisation procedure of the State Employment Service, the unemployed registered before have been undergoing re-registration since the beginning of 2002. According to the SDS monthly report, as of the 1st August, 27,800 unemployed were registered, i.e. approximately
3 When this issue of GET was being written, Q1 2002 results of the household survey were not yet available. 4 According to the Law on Employment, each farmer owning at least 1 ha of agricultural land, or his/her family member are considered self-employed. In reality, while land is the basic source of income for most rural households and provides them with a subsistence minimum, many village dwellers, especially those whose lot of land is not very large and those who cannot afford to work their land, are hardly earning a subsistence.
GEORGIAN ECONOMIC TRENDS – 2002 No.2 47 EMPLOYMENT, INCOMES AND THE SOCIAL SAFETY NET
12 per cent of the estimated “strict” measurement unemployed and about 8 per cent of the “loose” measurement unemployed. Before re-registration started, the number of registered unemployed was gradually falling and by the end of December 2001 reached 109,400. It is apparent that the unemployment benefit of GEL 14 (approximately USD 6) per month with eligibility lasting for the first six months of the unemployment only and dim prospects of finding a job are poor incentive for the unemployed to go through the re-registration procedure. It is quite likely that it is those who do register that are the most impoverished, desperate and discouraged job-seekers, those who do not have any other chance of finding a job.
While the unemployed not covered by sound unemployment insurance schemes or any other form of support, providing at least a subsistence minimum, are especially at risk both from an economic and social point of view, prolonged periods of unemployment bring with them not only loss of income, but also diminishing employability of the job-seeker. Being out of practice results in both loss of qualification and lack of access to information on available jobs, and, eventually leads to social isolation and exclusion. Raising the employability of the long-term unemployed and reintegrating them into the labour market are especially important and require special policy measures and programmes, as both the economic and social dimensions of this persistent problem are enormous.
EMPLOYMENT Over the past several years employment has been distinctly characterised by gradually shrinking hired employment and continuously rising self-employment. There is a noticeable trend, whereby self- employment dominates both the total employment and labour force both as a primary and secondary activity: in Q4 2001, it accounted for over 61 per cent of the former and about 55 per cent of the latter (see Table 7.1 and Statistical Appendix Table A7.1). Unlike the on-going household survey’s old questionnaires that qualified self-employment as a main activity only, the recently introduced ones are supposed to enable the upcoming household survey results to expose self-employment as a subsidiary activity too.
Overwhelming self-employment indicates an unfavourable labour market situation where more and more people are either non-employed or engaged in low-income, low-productivity and unstable activities, mostly in the informal sector. Self-employment is dominated by self-employment in agriculture – as explained above, largely a pre-defined status - which is mostly a subsistence activity. At the end of 2001, the share of agricultural self-employment amounted to almost 84 per cent. According to the SDS household survey figures, in Q4 2001 58 per cent of the agricultural self- employed were unpaid family workers. The vast majority of village dwellers in this category, that in Q4 2001 constituted almost half of all the self-employed, 39 per cent of total employment5 and 35 per cent of total labour force, are most likely to be at a high risk of poverty.
While, as discussed above, the majority of the huge army of the self-employed are rural self-employed and are not likely to be earning much more than subsistence, a vast majority of non-agricultural self- employed (the remaining 16 per cent of the total number of self-employed) - over 90 per cent - are the so called “own-account workers”, i.e., self-employed who neither have any employees nor are shareholders or members of co-operatives. They account for almost 12 per cent of total employment and are also hardly earning a subsistence. Therefore, the vast majority of the self-employed, who account for a large share of the total employment and contribute to a relatively moderate unemployment rate, are likely to experience a different extent of poverty. Having no land to work on
5 Within developed economies unpaid family workers typically account for as low as virtually 0 to 4 per cent of employment (“Key Indicators of the Labour Market 2001-2002”, ILO).
48 GEORGIAN ECONOMIC TRENDS – 2002 No.2 EMPLOYMENT, INCOMES AND THE SOCIAL SAFETY NET whatsoever, the urban unemployed, underemployed and unpaid family workers are likely to be in extreme poverty, even worse off than the rural poor. While poverty in the countryside is more associated with a lack of cash income, urban poverty involves insufficient food supply and undernourishment. Proceeding from the above, neither the national unemployment rate, nor the participation rate figures are able to reveal the extent of poverty that people are experiencing.
Hired employment, in marked contrast to self-employment, is shrinking. Wage and salary earners accounted for 34 per cent of total employment6 in Q4 2001. Staff cuts in the state sector that still accounted for 66 per cent in Q4 2001, and limited new investment resulting in poor job creation in the private sector, contributed to this downward trend. However, waged and salaried jobs in state-owned enterprises and organisations are still erroneously largely perceived as a conventional “permanent employment”.
Of those employed or self-employed in accordance with ILO definition, as the SDS household survey results suggest, 39 per cent are rural unpaid family workers, almost 16 per cent are employees at budgetary organisations and 12 per cent are non-agricultural own-account self-employed. Therefore, at least 67 per cent of those employed are the working poor.
The patterns of employment are changing towards the rise in part-time and temporary employment. A substantial share of hired employment is represented by so called “external groups”7 indicating labour underutilisation and underemployment. On the one hand, widespread involuntary part-time employment and recurrent temporary jobs indicate the manner in which people attempt to adjust to downward labour demand choosing to accept short-time work rather than not to work at all. On the other hand, temporary jobs often are the main entry point into the labour market, especially for first- time entrants. However, usually their career prospects and competitiveness on the market are restricted. Much of the part-time and temporary work tends to be poorer quality employment rather than full-time work in respect of pay, benefits, security and access to on-the-job training.8
6 In developed economies, the proportion of hired workers is as high as 80 or even 90 per cent of the total employment (Ibid.). 7 They include agency or firm temporaries, outsourcing, subcontracting and casual workers. 8 Time-related underemployment relates to the number of employed persons “whose hours of work in the reference period are insufficient in relation to a more desirable employment situation in which the person is willing and available to engage.” (Key Indicators of the Labour Market 2001-2002, ILO). A resolution concerning the measurement of underemployment and inadequate employment situations, adopted by the 16th International Conference of Labour Statisticians, Geneva, 1998 calls it “visible underemployment”.
GEORGIAN ECONOMIC TRENDS – 2002 No.2 49 EMPLOYMENT, INCOMES AND THE SOCIAL SAFETY NET
Figure 7.1: Employment characteristics of the population over 15 years old, Q4 2001
Employee in Outside of state sector labour force 14% Employee in 34% private sector 7%
Unemployed Self-employed 7% 38%
Source: Data from the SDS Household Survey Note: Share of the population outside labour force is given according to the ILO ‘strict’ standard of measurement, i.e., including discouraged workers.
As the household survey figures show, the majority of the population over 15 years were distributed, according to the economic status, between the two largest groups: self-employed accounted for 38 per cent and those outside of labour force – for 34 per cent. The share of the unemployed (ILO “strict” standard) remained unchanged over the year at 7 per cent. Of those employed in the state sector, over 66 per cent worked in budgetary organisations, with low and irregular salaries and would have to engage in alternative employment to support the family. Many of the jobs in private sector, with the exception of those at large private companies, are likely to be insecure, unstable and low paid; many of them are very likely to be in the informal sector.
In contrast to a stagnant and shrinking formal sector, the informal sector is dynamic and growing. Where the formal sector fails to grow fast enough to absorb the available labour force, the informal sector continues to expand. However, as measuring informal employment is difficult, due to different definitions and limited data, it is not always possible to get a good handle on the size and the growth of the informal sector. Currently, the informal sector largely acts as a “shock absorber” by providing employment to a large number of displaced formal sector workers and labour market entrants. Informal sector is a primary source of employment for those workers who are relatively disadvantaged in the labour market (e.g., unskilled, low-skilled, pensioners and disabled). While sometimes it is fairly difficult to distinguish between a purely informal and purely formal employment arrangement, the concept of the “informal labour market” clearly relates to the notion of non-participation in the tax system, in the social security system, and meeting regulatory requirements. The informal sector typically includes three types of people: employees operating in informal-sector firms or in employment arrangements within registered firms, micro-entrepreneurs and self-employed. According to anecdotal evidence, the scope of informal sector activities in urban areas, that usually constitutes a significant proportion of urban employment, includes trade, manufacturing, services, construction, and transportation.
The majority of jobs, especially in cities, are created in the informal sector. The informal economy, dominated, as overall employment, by irregular self-employment, is represented largely by unrecognised, unrecorded and unregulated small-scale activities. Underemployment is widespread.
50 GEORGIAN ECONOMIC TRENDS – 2002 No.2 EMPLOYMENT, INCOMES AND THE SOCIAL SAFETY NET
The majority of the employed are engaged in low-paying and insecure segments of the labour market and working under poor conditions. Stable long-term full-time jobs are rare, both in the formal and informal sectors. Hidden and disguised unemployment are widespread, and growing long-term unemployment leads to the downsizing of the labour force, and, hence to the misleadingly low unemployment rate. The economic status figures fail to reflect all the drama of the situation, since the ILO methodology of counting the unemployed ignores the size of labour remuneration and its consistency with the size of the minimum subsistence.
The draft Poverty Reduction and Economic Growth Programme (PREGP)9 prepared by the Government, with support of international organisations, states the following main goals: the reduction of poverty through support to the economic growth leading to the creation of new jobs; a higher living standard; and ensuring the participation of all citizens in the country's development process. Fully and effectively addressing the issue of poverty reduction, being the main goal of the PREGP, and considering it from a long-term perspective is impossible to achieve without promoting the creation of new jobs, which in turn requires improvement of the country's investment climate and small and medium business development.
SALARIES AND WAGES The average monthly nominal salary of hired employees across the economy was GEL 98 in Q4 200110, according to the SDS household survey figures. The share of the average monthly salary in the minimum subsistence of a family of four was 45 per cent in Q4 2001.
Over 43 per cent of all waged and salaried workers – budgetary organisations11 employees – were earning on average GEL 58.5 per month in Q4 2001. In accordance with a presidential decree that re- introduced the concept of a minimum salary in 1999, after a 4-year gap, salaries of this category of hired workers range between GEL 20 and GEL 66. Employees of public enterprises and organisations accounting for over 22 per cent of hired workers were paid GEL 107.4 per month on average in Q4 2001. Monthly remuneration of another category of wage and salary earners (almost 29 per cent) - private sector employees - was GEL 115 on average, hired employees under “other” category (about 3 per cent) were earning monthly GEL 106.9 and just over 2 per cent of hired workers – those working in foreign organisations or joint ventures – had a monthly salary of GEL 474.4 on average.
Average monthly salaries of transport and telecommunication employees (GEL 154.4), construction workers (GEL 141.7) and employees engaged in electricity, gas and water supply (GEL 131.8) were among the highest, whilst those of education employees (GEL 62.3) and healthcare employees (GEL 59.8), as usual, among the lowest. While the three sectors characterised by relatively higher salaries accounted for 23.5 per cent of the total number of hired employees, the share of those working in two others with the lowest salaries was 32.5 per cent. Wages and salaries in the sectors where the remaining 44 per cent of hired workers were engaged ranged between GEL 84.2 and GEL 145.3.
Salaries of public sector employees (65 per cent of hired workers) as well as remuneration of the majority of private sector employees remain predominantly way below subsistence minimum. Whilst
9 The Secretariat to the Governmental Commission for Elaborating PREGP is currently working on the final document of PREGP. 10 At the time when this issue of GET was being written, the Household Survey figures for Q1 2002 where not yet available. 11 A budgetary organisation is a public organisation fully financed by the state budget.
GEORGIAN ECONOMIC TRENDS – 2002 No.2 51 EMPLOYMENT, INCOMES AND THE SOCIAL SAFETY NET hired employment remains the primary source of income for urban households, it is as unstable as any other source of household income in the country. Instances of non-payment of salaries are frequent, resulting in building up budgetary arrears, and the growth of salaries in real terms is eroded by inflation.
MINIMUM SUBSISTENCE LEVEL Since a governmental decision ”On Introducing Changes into Calculation Methodology and Re- calculation of the Minimum Subsistence Level” was passed in August 1999 and a draft presidential decree “On Defining and Applying Subsistence Minimum” was drawn up, no other formal steps have been taken to put it into practice. Though a new methodology to calculate the minimum subsistence is ready at the SDS and is published as an “alternative” minimum subsistence, the methodology, introduced in early 1990s, is still being used and published as an “official” one. It can be argued which of the methodologies better takes into consideration the real basket that can secure a reasonable minimum subsistence, however, it is clear that the minimum subsistence levels, calculated in accordance with the new “alternative” methodology are closer to the average salary levels in the economy, i.e., are much lower than the “official” level. If the share of the average monthly salary in the minimum subsistence of a family of four, calculated by the old “official” methodology was, around 48 per cent in Q4 2001, the same share in the minimum subsistence, calculated by the new “alternative” methodology would be almost 77 per cent. The SDS survey results suggest that on average the remuneration of 76 per cent of hired employees across the economy was below even the “alternative” measurement of minimum subsistence for a family of four in Q4 2001 (GEL 127.8). Subsisting on an equivalent of about USD 60 per month for a family of four does not seem to be an easy task. However, even a family of four with only one member working and the rest being dependents would not be considered among the most vulnerable, therefore subject to be receiving a state social allowance (see below), since to fall under this category, a household has to consist of non- employed pensioners and/or orphans only.
Table 7.2: Minimum Subsistence Levels, 2001 (GEL) Minimum Subsistence Official Minimum Alternative Minimum as of end of period For a For an For a For a For an For a working average family working average family of man consumer of four man consumer four Q1 2001 115.8 101.6 201.6 73.8 65.4 123.9 Q2 2001 119.2 104.5 207.3 77.3 68.5 129.6 Q3 2001 113.9 100.0 198.2 74.0 65.5 124.1 Q4 2001 118.0 103.5 205.2 76.2 67.5 127.8 Q1 2002 124.8 109.5 217.2 79.7 70.5 133.7 Q2 2002 125.4 110.0 218.1 n.a. n.a. n.a. Source: State Department for Statistics Monthly Reports
SOCIAL POLICY AND THE SOCIAL SAFETY NET The vast majority of the population, including informal sector employees, the self-employed and the unemployed, as well as their family members, have no social protection whatsoever, and the assistance for those covered by the social safety net is symbolic. The state social protection system requires a fundamental restructuring to create an economically viable, affordable and equitable social safety net that would be fit to alleviate poverty effectively, especially for the most vulnerable. In conditions of inadequate pension assistance, alleviating poverty in old age is of vital importance.
Currently, social policy and reforms are among the top priorities of the national Poverty Reduction and Economic Growth Programme (PREGP), and acknowledged by the Government to be a long-term
52 GEORGIAN ECONOMIC TRENDS – 2002 No.2 EMPLOYMENT, INCOMES AND THE SOCIAL SAFETY NET strategic objective. The main goals PREGP are the elimination of poverty through support to economic growth leading to creation of new jobs; raising the living standards of the population; and ensuring the participation of all citizens in the country's development process. It is necessary, the PREGP says, to develop targeted social protection mechanisms to cover as many of the unprotected as possible. Reform of the pension system, provided for by the Programme, is underway and is aimed at introducing a sustainable multi-pillar pension system, based on insurance principles.
A presidential decree “On First Priority Measures Aimed at Realisation of the Social Development Concept” of 7th April 2002, provides for measures to be taken to regulate labour relations, raise the effective use of labour force and improve the employment situation; as well as improve the pension system; and facilitate drawing up and implementation of state programmes in the social sphere. As reflected in the decree, the task of alleviating the difficult social situation of the population is considered to be of paramount importance.
State Social Allowance In accordance with a presidential decree of 26th March 2002, the Social Allowance for vulnerable families, provided for by the 2002 Budget Law, is now targeted at households comprised exclusively of “poor non-working pensioners” or of orphans, disabled children and invalids, and families with at least 7 children. In fact, it represents a topping-up of symbolic pensions of the poorest elderly and a modest child allowance for the most destitute families. The State Social Allowance payable to recipients, in accordance with the decree, is GEL 22 for a qualifying household consisting of one member, or for each orphan under guardianship, and GEL 35 for a pensioners’ family of two or more, and for a family with at least 7 children.
Unemployment Benefit In accordance with a presidential decree of 22nd April 2002, the amount of the standard monthly Unemployment Benefit payable for the first six months of registered unemployment is raised for the second two months and third two months of unemployment by GEL 2 and GEL 3 respectively and is fixed at GEL 14 for the duration of the eligible period. To become an official benefit recipient, a person should be registered as unemployed, therefore should have a certain working record in the official sector. As a result, the number of the unemployed who bother to register is usually way below the actual one and the number of the benefit recipients is insignificant. Currently, the State Employment Service is being reorganised, and the unemployed job-seekers are to undergo a re-registration procedure.
Pension System The current public pension system inherited from the Soviet past, in the conditions of a transition economy, has long proved to be unsustainable and insolvent. A flat rate old age pension currently payable to the majority of pensioners countrywide does not take account either of the years worked or the salary history, and, at a monthly GEL 14 (approximately USD 6.5) on the one hand, is a poor incentive for tax compliance, and on the other, falls far below any minimum subsistence level (about 13 per cent of the official minimum subsistence of an average consumer in Q2 2002).
The state pension fund - United State Social Security Fund (USSSF) - managing the pay-as-you-go pension system covering all the population of the pension age has long encountered a number of problems. Under the conditions of a narrow tax base, a big informal economy, and constant tax
GEORGIAN ECONOMIC TRENDS – 2002 No.2 53 EMPLOYMENT, INCOMES AND THE SOCIAL SAFETY NET under-collection and non-compliance, the pensions financed by the payroll tax proceeds12, fall short of the target and the system has been accumulating arrears for several years already. As of 1st June 2002, according to the Fund data, the USSSF had accumulated debt to pensioners in the amount of GEL 103.3 million, of which GEL 16 million was accumulated since the beginning of 2002.
The prerequisites necessary for the smooth functioning of a PAYG system fully dependent on the level of tax collection under the diminishing tax base and widespread tax avoidance and evasion cannot be working smoothly. The dependency ratio13 at an unsustainably low 1:1.4 is a reflection of shrinking hired employment and growing informal economy, resulting in extremely low number of contributors to the fund. Low wages and no link between the current contributions and future benefits are a poor motivation for those in employment to pay social tax, and a relatively high payroll tax rate, inadequate law enforcement and widespread corruption discourages tax compliance on the part of the employers. Since the tax collection function currently rests with the Tax Inspection, the USSSF does not have the right to sue persistent non-payers. The aggregate arrears of the non-payer companies to the fund as of June, according to the fund data, amounted to GEL 172.6 million, of which GEL 89.2 million is the principal debt of non-paid payroll tax and GEL 83.4 million is fine on arrears. According to Fund officials and experts, who have worked out proposals on repaying the pensions arrears accumulated in 1998-2000, improvements would follow from planning debt restructuring and writing-off bad debts, as well as from improved tax administration. Among other proposals a possibility of the fund to become a shareholder of the debtor companies is discussed.
The existing pension system fails to carry out its basic function: a PAYG system based on a solidarity contribution principle should provide basic minimum pensions to the elderly. Average taxable salaries/wages are low resulting in the low replacement rate14 of the current PAYG universal pension. The average pension flat rate of the majority of pensioners is around 15 per cent of the average hired employees’ monthly salary. Majority of the pensioners are either relying on the extended family ties, or try to engage in any kind of employment providing them with a subsistence minimum.
The economic, political and social consequences of the crisis that the current pension system has been experiencing cannot be neglected as it places the most vulnerable elderly at poverty risk, that may further result in social disintegration, marginalisation and social exclusion.
Pensions System Reform Reform of the pension system is on the PREGP agenda as a top priority. As acknowledged in the PREGP, the current system is “unable to accomplish two main objectives of the state pension system: diminish the poverty level among the elderly and ensure an adequate consumption rate for senior citizens”. A principal goal, the programme states, is to introduce a new pension system, which will safeguard the achievement of both objectives. The PREGP, under the main directions of social policy, outlines the reform of the pension system, aimed at establishing a financially sustainable modern pension system suited to changing demands of a transition economy.
Substantial work directed to implementing the goals set by the PREGP in the field of pension reform has been carried out at the USSSF. Certain measures have already been taken, while others are underway. After double entries and non-existent recipients have been eliminated as a result of adjusting the lists of benefit recipients, the number of the pensioners on record has been reduced to
12 The contributions from workers’ wages that form the United State Social Safety Fund (USSSF) revenue are 26 per cent of gross wages for budgetary organisations and 27 per cent for others paid by the employer and 1 per cent paid by employees. 13 The number of pensioners as a percentage of the number of people employed, or contributor to beneficiary ratio. 14 The average pension in terms of the average wage.
54 GEORGIAN ECONOMIC TRENDS – 2002 No.2 EMPLOYMENT, INCOMES AND THE SOCIAL SAFETY NET approximately 860,000. Further verification of registered pensioners and, finally, introduction of personal identification cards is envisaged.
The five-year programme of introducing a multi-pillar system is to be carried out step by step (see Table 7.3). According to the programme, it is essential to guarantee a transparent environment in the pension system; to draft appropriate legislation and improve existing normative acts; to ensure continuous payment of current pensions and gradual repayment of accumulated arrears; to implement personification and to introduce identification cards; and, finally, to ensure step-by-step transfer towards insurance principles and a differentiated pension system.
Table 7.3: Programme of a Three-pillar National System for Social Welfare and Retirement Insurance, 2001 - 2005 Characteristics Pillars I II III Timeframe 2001-2004 From 2005 From 2002 Description Mandatory Mandatory Voluntary Form of management Managed by the state Privately managed Privately managed Objectives Distributive plus insurance Accumulative plus insurance Accumulative plus insurance Type Minimal pension guarantee Individual savings of an Individual savings of an defined by incomes or employer and/or an employee employer and/or an employee preliminary defined Financing Financed from taxes Managed, fully funded Fully funded Source: Poverty Reduction and Economic Growth Programme of Georgia, Version for Discussions, Final Document, Draft
Implementation of the pension reform programme that provides for the transition of the pension system to insurance principles has already started, with the support of the World Bank and other donors. A number of draft laws, providing the necessary legal framework for introducing the social insurance system and new pension system based on insurance principles, prepared by the USSSF and the Ministry of Labour, Healthcare and Social Affairs, in consultation with the World Bank, have been submitted for consideration to the Government and are supposed to be submitted for consideration to the Parliament to be passed at its autumn session. They are: draft laws “On Mandatory Insurance Pensions”, “On Mandatory Social Insurance”, and “On Introducing Individual (Personalized) Registration and Individual Accounts in the System of Mandatory Social Insurance”.
On 18-20 September 2002, an international conference “A State Pension System in Transition”, organised by the Georgian Government and the United State Social Security Fund was held in Tbilisi, with the participation of the International Social Security Association and the Association of Pension and Social Funds top officials. The processes going on in the pension and social security systems in different countries were discussed, and the pension reform taking place in Georgia and the above- mentioned draft laws were presented to the participants of the conference. (See Appendices I and II.)
The reformed social protection of the population, including pension system, is to be based on insurance principles that is essential for a socially oriented society in the conditions of transition to a market economy. The draft law “On Mandatory Social Insurance” provides for transition of the social safety net to insurance principles that would build a basis for real guarantees of the social protection. According to the draft law, the social insurance is going to be universal and mandatory; the social insurance funds will be distributed based on a solidarity principle; the insurance benefits will be differentiated, based on the size of insurance contribution and length of insurance period; and payment of the insurance benefits will be guaranteed. The following cases are stipulated for by the draft law: old age, disability, and the loss of the breadwinner; temporary disability; pregnancy and childbirth; taking care of a child of up to 18 months of age; unemployment insurance; assistance in
GEORGIAN ECONOMIC TRENDS – 2002 No.2 55 EMPLOYMENT, INCOMES AND THE SOCIAL SAFETY NET case of death of the insured (survivor’s pension); health rehabilitation; and mandatory medical insurance.
The draft law provides for a distinct demarcation between the insurance and state obligations that is supposed to guarantee the viability of the insurance system. In accordance with the new system of social protection, the non-insurance benefits (e.g., family assistance) will be financed from the state budget. Currently the annual state budget transfer to the USSSF covers hardly half of the sum necessary to pay the non-pension benefits, and the fund has to fill the gap using social tax proceeds, that, in its turn has been contributing to growing pension arrears (For more details see Chapter 2. p. 17).
In accordance with the draft law “On Mandatory Insurance Pensions”, the following persons will be eligible to receive mandatory insurance pensions after the law is passed and comes into effect: Georgian citizens, that will have been insured in accordance with the draft law “On Mandatory Social Insurance” and will be meeting the conditions provided for in the law, their disabled family members, and permanent residents – foreign citizens or persons without citizenship. Pensions of those persons who will have been registered as pension recipients before the law “On Mandatory Insurance Pensions” comes into force will not be regulated by this law, with the exception of those, who would have been eligible for old-age pension before the draft law would have taken effect, but who would continue working past its enactment for at least 3 years. The draft law differentiates among the three types of mandatory insurance pension: old age pension, disability pension and pension for the loss of the breadwinner (survivor’s pension). The mandatory old age insurance pension will be granted to persons having reached pension age15 and having at least 15 years of work record and/or insurance history, and will be comprised of a basic part and of a defined-contribution part16.
According to the draft law, mandatory insurance pension will be financed out of insurer’s (United State Social Insurance Service, i.e., pension fund) budget that will be formed out of the mandatory social contributions paid to the insurer’s budget by the insured and the insurants. The pension capital accumulated on an individual (personalized) account will be calculated on the basis of the mandatory insurance contribution paid to the insurer’s budget. The defined-contribution part of the mandatory insurance pension will be granted on the basis of the funds accumulated on the insured’s defined- contributions individual account. The state will undertake the obligation of subsidizing the liabilities of the insurer – the United State Insurance Service (State Pension Fund).
The draft laws “On Mandatory Social Insurance” and “On Mandatory Insurance Pensions”, provide for the pension insurance tariff equal to 28 per cent, of which 27 per cent is to be paid by the employer (insurant) and 1 per cent by the employee (insured). For the self-employed (self-insurants) a 14 per cent tariff will apply. The tariff will be distributed as follows: 20 per cent (from the 28 per cent tariff) is meant to cover the basic part of the pension (that is to be financed in accordance with the PAYG (pay-as-you-go) principle) and 8 per cent (from both 28 per cent and 14 per cent tariffs) – the defined-contribution part (i.e., insurance part to be financed in accordance with the PAYE (pay-as-you- earn principle) of the mandatory insurance pension. The overall payroll tax will be comprised of 33 per cent, of which 31 per cent will be to be paid by the employer (27 per cent – social insurance contribution, 3 per cent – medical insurance contribution and 1 per cent – employment fund
15 Currently, the pension age is 60 years of age for women and 65 years of age for men. The draft law “On Mandatory Insurance Pensions” provides for raising the pension age for women to 65 year of age. On the one hand, this would facilitate growth in the number of contributors, and on the other hand women will have equal rights with men to continue working. 16 Defined-constiburion schemes (DC) specify in advance the contribution, but not the benefit, which depends on the accumulated contributions (and the rates of return on investments).
56 GEORGIAN ECONOMIC TRENDS – 2002 No.2 EMPLOYMENT, INCOMES AND THE SOCIAL SAFETY NET contribution), and 2 per cent by the employee (1 per cent – social insurance contribution and 1 per cent – medical insurance contribution).
Persons eligible for mandatory insurance pension will not have the right to claim this pension during the period of their employment, during which the size of their insurance contribution will be reduced from 28 to 8 per cent to be paid by the employer (insurant) of the pensioner engaged in hired employment or by the self-employed pensioner (self-insurant).
As part of the social reform programme, a three-year draft programme on introduction of personalized registration has been worked out. A draft presidential decree “On Approving the Procedures of Individual (Personalized) Registration of Citizens Capable of Working” has been prepared and is supposed to be signed by the end of 2002.
To be able to build successfully a new system of state social protection based on insurance principles a sophisticated and smoothly functioning registration system must be in place. A draft law “On Introducing Individual (Personalized) Registration and Individual Accounts in the System of Mandatory Social Insurance” is to provide legal framework for introducing insurance principles basing on defined- contribution individual accounts in the system of the social safety net. Overall individual registration would contribute to broadening the insurance contribution base, and, therefore legalisation of the informal economy (as incentives to report income will grow), by encouraging payment of contribution that, unlike the present payroll tax, would be directly linked to future benefits. The World Bank is expected to allocate USD 1.5 million for introduction of individual registration and equipping the fund with automated system of management of individual accounts.
By the time the new pension system is in place, the fund is to be merged with the State Medial Insurance Company. The United Social Insurance Company will be collecting the payroll tax17 incorporating the social insurance contribution – 28 per cent, medical insurance contribution – 4 per cent and employment fund contribution – 1 per cent. The fund management considers that when the function of payroll tax collection is exercised by the fund itself, the proceeds directed to the fund would grow as the fund would be able to work on increasing the tax base coverage and strengthening tax administration, and the possibility of re-directing social tax proceeds to cover other tax undercollection would be eliminated. The fund proposals for repaying the pensions arrears accumulated in 1998-2000 considers introduction of a fixed tax for self-employed and farmers as a possibility to expand the tax base.
A multi-pillar system is to provide a plurality of possibilities and availability of choice for those who can afford to make provisions for their future pensions, as well as increase personal responsibility and create savings funds for investment. However, putting the system in place and reaching its smooth functioning will require time, effort and investment. The success of the reform will largely depend on the overall economic situation in the country and the rate of economic growth, as well as the legislative process. Currently, only a tiny share of the population would be able to afford participation in private voluntary schemes, and it is a long way to go until those who can afford it have confidence in the private schemes. However, for those who choose to, it is already possible to provide for one’s private pension18. In the conditions of Georgia, where household incomes are currently extremely low, privately managed retirement savings systems could not substitute for universal social insurance schemes and can only serve as an option for those who can afford to save for higher retirement income. After the pension reform is implemented, state pension system is supposed to provide a
17 In 1998, this function was transferred from the fund to tax inspection.
GEORGIAN ECONOMIC TRENDS – 2002 No.2 57 EMPLOYMENT, INCOMES AND THE SOCIAL SAFETY NET mandatory insurance pension for those eligible, topped up by voluntary private schemes. In the meantime, however, improving payroll tax collection and compliance, broadening the tax base and paying the pension arrears remain the most important short-term goals.
Box 7.1 EU Social Policy Agenda
PREFACE European social policies have played a central role in building Europe’s economic strength, through the development of a unique social model. This has proven to be both flexible and dynamic in responding to rapid changes in Europe’s economy and society over the past decades.
The Lisbon European Council has identified a fresh set of challenges which must be met so that Europe can become “the most competitive and dynamic knowledge-based economy in the world capable of sustainable economic growth with more and better jobs and greater social cohesion”.
The Social Policy Agenda forms part of the integrated European approach towards achieving the economic and social renewal outlined at Lisbon. Specifically, it seeks to ensure the positive and dynamic interaction of economic, employment and social policy, and to forge a political agreement which mobilises all key actors to work jointly towards the new strategic goal.
THE CHALLENGES AND OPPORTUNITIES AHEAD Employment The European Union has made considerable progress in strengthening its economic fundamentals and fostering job creation. However, unemployment remains high. At present, around 9 per cent of the European workforce is unemployed. The average employment rate was only 62 per cent in 1999.
Employment is still relatively low in certain activities – like services. Participation among women as well as certain groups like elderly and disabled people is too low. The Commission’s contribution to the Lisbon European Council identified in clear terms the main features of Europe’s employment deficit. These are:
- A services gap – the European Union has a much lower level of employment in the services sector than the US. - A gender gap – only half of the women in the European Union are in work compared to two-thirds in the US. - An age gap – the rate of employment in the 55-65 age group is too low. - A skills gap – skill requirements in the European Union are not matched by existing supply. This is particularly noticeable in information technology across Europe. - Long-term structural unemployment – half of those out of work have been unemployed for more than a year. - Marked regional imbalances both in Europe and within Member States – European Union unemployment is concentrated in Eastern Germany, France, Southern Italy, Spain and Greece. It is highest in certain less developed regions, outlying regions and declining industrial areas.
The European employment strategy has proved over the last three years to be an effective tool for structural reform in the national labour markets. Strengthening this Strategy will be essential for creating more and better jobs. As is apparent already in some Member States, once the levels of employment are rising, the availability of a labour supply which reaches the standards demanded by the market is of crucial importance for sustained economic development and non-inflationary growth.
18 The law “On Non-State Pension Insurance” was passed in 1998. Georgian Pension Investment Holding (GPIH) founded in May 2001, offers, in addition to the existing universal PAYG scheme, voluntary private pension insurance.
58 GEORGIAN ECONOMIC TRENDS – 2002 No.2 EMPLOYMENT, INCOMES AND THE SOCIAL SAFETY NET
The social situation While the essential role of the Member States’ social system in creating a cohesive society must be recognised, they now face a series of significant common challenges such as the need to adapt to the changing world of work, new family structures, persistent gender inequalities, demographic changes and the requirement of the knowledge-based economy. In the longer term, demographic changes will strongly affect the structure of the labour market and labour supply and will put heavy pressure on pension and health systems. This calls for a reflection on the role of immigration as part of a strategy to combat these trends. Failure to adapt and modernise social protection systems would increase the risk of more unemployment, poverty and social exclusion.
The modernisation of social protection systems is essential to underpin the transformation to the knowledge- based economy and to cater for the new needs in society. Whilst social protection remains Member States’ competence, co-operation at European level will facilitate a collective reflection on how best to address the challenges in modernising and improving the various social protection systems.
A key challenge is now to move from an agenda of tackling social exclusion to one which fosters social inclusion and mainstreams it into the heart of all policy making.
Unemployment is the single most important reason for poverty. Nearly two out of three of those unemployed are at risk of poverty. This is why a job is the best safeguard against social exclusion. However, employment alone does not solve all problems.
A comparison of employment rates with poverty rates19 shows that poverty may be relatively widespread even in some Member States with high employment rates. Raising employment rates and lowering unemployment would reduce significantly poverty and social exclusion, especially in those Member States which have low employment rates at present. In this respect, it is important to focus attention on those at the margins of the labour market, by investing in people to increase their employability and by reducing barriers for labour market entry. Confronting these challenges requires multi-faceted policies, which go beyond labour market issues, and which aim to increase social inclusion and participation.
Enlargement In seeking to join the Union, the candidate countries aim to develop their economies, societies and social systems along similar lines to the Member States. Their aim is to raise living and social standards and enhance economic and employment performance over the long run. By preparing for European Union membership, the candidate countries are already in the process of adopting a comprehensive body of laws and rules, which should ensure the compliance with the European Union social acquis by the time of accession. The candidate countries not only face major challenges in transforming and adapting their systems but also have to confront many of the problems which are being tackled by current Members of the European Union.
Internationalisation Internationalisation and globalisation are important facets of the changing financial, economic and trading conditions confronting Europe and its social systems. Embracing change does not imply abandoning social objectives. Rather, it reinforces the economic need for social investment by way of well-designed social policies. More than ever, Europe’s economic performance will depend on the productive and innovative potential of its people. Investing in knowledge, creating added value, attracting new economic activity and managing change will be strongly influenced by the skills and adaptability of its workforce.
Source: Communication from the Commission to the Council, the European Parliament, the Economic and Social Committee and the Committee of the Regions, Social Policy Agenda, Brussels, 28.6.2000, COM (2000) 379 final, Commission of the European Communities
19 Poverty rates are defined in this illustration as 60 per cent of the median household-adjusted income of the country concerned (Eurostat definition). Improving indicators and statistics will be important for facilitating Member States in reducing poverty and exclusion.
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CHAPTER EIGHT: THE EU-GEORGIAN RELATIONS
GEORGIA’S TRADE WITH THE EU In H1 2002 Georgia’s trade with the Member States of the European Union decreased by 5.5 per cent compared to the same period of the previous year. During the current year Georgian exports to the EU market remain almost the same as in 2001. In H1 2002 European exports to Georgia decreased by 7.1 per cent.
Table 8.1: Georgia’s Trade with the EU Countries (USD thousand) Year Turnover Exports Imports Balance H1 2002 119,665 29,318 90,347 -61,029 H1 2001 126,702 29,663 97, 039 -67,376 Source: State Department for Statistics
In the first half of 2002, Georgia had a negative trade balance with the all EU Member States except the UK. Compared to the previous year, Georgia’s trade deficit with the EU countries decreased by 9.6 per cent. Germany, the UK and Italy remain the largest trade partners for Georgia. Turnover of these countries with Georgia constituted about 64.9 per cent of the total amount of Georgia-EU trade in Q1 2002.
Table 8.2: Georgia’s Trade with the EU Countries (USD thousands) H1 2002 H1 2001 Countries Turnover Export Import Balance Turnover Export Import Balance Austria 6,127 6,035 92 -5,943 6,575 6,081 495 -5,586 Belgium 4,234 3,232 1,002 -2,230 10,450 3,875 6,575 -2,700 Denmark 4,006 3,706 300 -3,406 2,794 2,459 335 -2,124 France 7,282 6,111 1,171 -4,940 10,530 10,334 196 -10,138 Germany 30,203 27,730 2,474 -25,256 38,810 34,806 4,004 -30,802 Greece 6,586 4,387 2,199 -2,188 3,354 1,772 1,582 -190 Ireland 316 244 72 -172 646 646 - -646 Italy 21,114 17,517 3,598 -13,919 14,372 8,917 5,455 -3,462 Luxembourg 83 83 - -83 112 112 - -112 Netherlands 7,715 5,581 2,134 -3,447 7,059 4,555 2,504 -2,051 Portugal 355 333 21 -312 644 568 76 -492 Finland 1,115 1,115 - -1,115 8,365 8,365 - -8,365 Spain 1,352 981 371 -610 1,726 847 879 32 Sweden 2,817 2,805 12 -2,793 1,704 993 710 -283 UK 26,361 10,488 15,873 5,385 19,562 12,710 6,852 -5,857 Total 119,665 29,318 90,347 -61,029 126,702 29,663 97,039 -67,376 Source: State Department for Statistics
In 2002 Georgia’s trade with the member states of the European Union constitutes 24.0 per cent of Georgia’s total trade turnover (USD 497,030 thousand). In the same period of the previous year this indicator was 24.2 per cent.
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THE EU ASSISTANCE TO GEORGIA: THE FOOD SECURITY PROGRAMME1 The Food Security Programme is one of the European Union’s major projects in Georgia. It aims at supporting and developing the agricultural sector in the country through financing the appropriate items in the budget.
Agriculture as a sector contributes only 2.5 per cent to GDP and 5.7 per cent to total employment of the European Union, yet it is considered a crucial element in EU politics. It is difficult to examine agriculture in the same way as other spheres of the European economy. Agriculture differs and is totally separated from the other EU policies by European policy-makers. The European Union implements policy-making and decision-making responsibilities for agriculture through the Common Agricultural Policy (CAP). Agriculture is the major recipient of EU funds and there is a greater institutional activity in the agriculture sector than in any other (for more detailed information about CAP see Box 8.1 below).
The European Union launched the Food Aid and Food Security Programme in 1996 by Council Regulation 1292/95. This regulation deals with the food aid policy and management and specific support to food security. This regulation covers three major directions in the agricultural sector. These directions are: Stronger Partnerships with Beneficiary Countries; Appropriate Responses to the Specific and Dynamic Nature of Food Insecurity; and Integration in Development Co-operation Policy.
The policy of Stronger Partnership with Beneficiary Countries examines the co-responsibility of the beneficiary country. Co-responsibilities should be formulated in the food security policy, which aims at transparency and effectiveness of the subsequent sector in the beneficiary country.
Appropriate responses to the specific and dynamic nature of food insecurity are directed to deal with the causes of food insecurity, so the policy is enacted before crises happen and does not attempt to contain the consequences.
Integration in development co-operation policy is designed to use effectively local resources and to ensure co-ordination with other outside players, thus helping to establish and strengthen stable and worthwhile economic and political conditions in the beneficiary country.
The EU Food Aid and Food Security Programme is based on analyses of food insecurity situations. This programme is integrated into a coherent development co-operation policy. The programme is intersectoral and it covers poverty reduction, farming, the environment, transport, and support for the private sector.
The EU Food Aid and Food Security Programme is coordinated within the European Commission and with outside partners and donors. The programme is coherent and complementary to other sectoral policies of beneficiary countries and also to other national and regional activities.
The Food Security Programme started in Georgia in 1996. The main objective of the food security programme in Georgia was to support agricultural services, which are aimed at increasing productivity, supporting primary irrigation rehabilitation, veterinary services and crop protection.
In 1996, in order to meet these objectives Georgia received EUR 18 million from the European Commission. In the following year the European Commission decided to allocate a further
1 In this section materials from the European Commission have been used as a reference.
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EUR 16 million to the Georgian agricultural sector. To receive this money in 1998, the Georgian government was obliged to fulfill several economic conditions required from the European side. In 1998 the Georgian government did not fulfill the obligations and the European Commission delayed the transfer of the above-mentioned amount. The main reasons for this failure were impediments to the implementation of budget expenditure policy, also violations in privatisation process and problems in implementation of the taxation policy.
The situation was aggravated by the financial crisis that occurred in Georgia, in summer 1998. During that period the budget deficit increased significantly and to fulfill the requirements of the European Commission became more difficult, especially in terms of financing the priority sectors.
Despite this, the European Commission expressed its readiness to transfer money at the end of 1998, but only EUR 6 million instead of EUR 12 million. The transfer of the rest was postponed for the next year.
From mid-1999 to end 2000 the Georgian government had difficulties with the International Monetary Fund (IMF) in reaching agreement on a reform programme. During that period the Food Security Programme was interrupted, and because of this the Georgian agricultural sector lost EUR 14 million.
In 2001, the European Commission resumed the Food Security Programme in Georgia. During that year, the Georgian government received EUR 12 million. In 2001 the European Commission partially reoriented the programme in favour of complementary poverty reduction through the social safety net. This component took the form of allocation of resources and further targeting of the family poverty benefit and institutional changes.
In 2002-2003 the European Union decided to prolong the Food Security Programme for Georgia. The programme allocates EUR 25 million. This money will cover the budgetary needs of the agricultural sector and social sector.
Box 8.1 The EU Common Agricultural Policy (CAP)
Agriculture sat high on the agenda of European policymakers, especially at the time when the Treaty of Rome was being negotiated. The memory of postwar food shortages was still vivid and, thus, agriculture constituted a key element from the outset of the European Community.
The Treaty of Rome defined the general objectives of a common agricultural policy. The principles of the Common Agricultural Policy (CAP) were set out at the Stresa Conference in July 1958. In 1960, the CAP mechanisms were adopted by the six founding Member States and two years later, in 1962, the CAP came into force.
The Common Agricultural Policy (CAP) is comprised of a set of rules and mechanisms, which regulate the production, trade and processing of agricultural products in the European Union (EU), with attention being focused increasingly on rural development.
Among the European Union's policies, the CAP is regarded as one of the most important policy areas. Not only because of its share of the EU budget (almost 50 per cent, decreasing over the years), the vast number of people and the extent of the territory directly affected, but also because of its symbolic significance, and the extent of sovereignty transferred from the national to the European level. The significance of the CAP, nowadays, is also portrayed by the fact that it is directly related to the Single Market and the EMU, two key areas in achieving the European integration.
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The objectives of the CAP, as set out in Article 33 of the EC Treaty, are:
• to increase agricultural productivity by promoting technical progress and by ensuring the rational development of agricultural production and the optimum utilisation of the factors of production, in particular labour; • to ensure a fair standard of living for the agricultural community, in particular by increasing the individual earnings of persons engaged in agriculture; • to stabilise markets; • to assure the availability of supplies; • to ensure that supplies reach consumers at reasonable prices.
In order to attain these objectives, Article 34 of the EC Treaty provides for the creation of the common organisation of the agricultural markets (COM) which, depending on the product, shall take one of the following forms:
• common rules on competition; • compulsory co-ordination of the various national market organisations; • a European market organisation.
The COMs were introduced gradually and now exist for most EU agricultural products. They are the basic instruments of the common agricultural market in as far as they eliminate the obstacles to the intra-Union trade of agricultural products and maintain a common customs barrier with respect to third countries.
Three main principles, defined in 1962, characterise the common agricultural market and thus the COMs:
• a unified market: this denotes the free movement of agricultural products within the area of the Member States; for the organisation of the unified market, common means and mechanisms should be used throughout the EU; • Community preference: this means that EU agricultural products are given preference and a price advantage over imported products; also, the protection of the internal market from products imported from third countries at low prices and from considerable fluctuations in the world market; • financial solidarity: all expenses and spending which result from the application of the CAP are borne by the Community budget.
The CAP is financed from the European Agricultural Guidance and Guarantee Fund (EAGGF), which accounts for a substantial part of the Community budget. The EAGGF was set up in 1962 and separated in two sections in 1964:
• the Guidance Section, one of the structural funds, which contributes to the structural reforms in agriculture and the development of rural areas (e.g. investing in new equipment and technology); • the Guarantee Section, which funds expenditure concerning the common organisation of the markets (e.g. to buy or store surplus and to encourage agricultural exports).
The Guarantee Section is by far the more important one and is classified as compulsory expenditure within the Community budget. The Guidance Section is one of the structural funds aimed at promoting regional development and reducing disparities between areas in Europe.
Agricultural trade is of particular significance for the EU, as it is the world's biggest importer as well as the world's second biggest exporter of agricultural products.
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The EU is a member of the World Trade Organisation (WTO). In October 1999, the EU Agricultural Ministers agreed on their common position for the forthcoming "Millennium Round" of WTO negotiations. The agricultural negotiations in the WTO framework began in March 2000.
The EU's objectives and interest in these negotiations lie in the following:
• that the non-trade aspects of agriculture should be addressed: agriculture has a multi-functional role to the extent that, apart from food production, it is involved in preserving the countryside, environmental protection, food safety and quality, animal welfare etc.; a balance is, thus, needed between trade-related and non-trade issues of agriculture; • the need for special and differentiated treatment for developing countries, taking into account in particular the great importance of food and agriculture in these countries; • the improvement of access to market opportunities: the EU, being a major food exporter, seeks to obtain improvements in opportunities for its exporters and to reduce unjustified customs barriers. In this way, the EU seeks to share in the expected expansion of world trade in agricultural products.
On the whole, the EU's approach in the agricultural negotiations is based on its Agenda 2000 package. The EU's expectation, with regard to the negotiations, is to achieve its long-term objective of fundamental reform of the agricultural sector, making use of the experience gained from the implementation of the 1994 WTO Agreement.
The enlargement of the Union is well underway. Accession negotiations have been formally opened with twelve candidate countries. The accession of the Central and Eastern European countries (CEECs) is significant from an economic perspective in general.
In terms of agriculture, the enlargement is expected to double the agricultural labour force as well as the arable area of the EU, and to add over 100 million food consumers to the internal market. It is worth mentioning that the EU is already the most important trade partner in agricultural products for many of the candidate countries.
On the other hand, enlargement will offer considerable opportunities to the candidate countries and help them to use their potential for agriculture production efficiently. However, candidate countries have a long way to go before reaching this point. Agriculture in the applicant countries has many deficiencies and requires substantial restructuring and modernisation.
The EU has intensified activity to support the restructuring process in the candidate countries in Central and Eastern Europe and, among other measures, has introduced pre-accession instruments. The agricultural instrument for pre-accession aid is SAPARD (Special Accession Programme for Agriculture and Rural Development), developed in the framework of Agenda 2000. SAPARD, which is designed to assist the candidate CEECs with agricultural development, will have an annual budget of EUR 520 million for the period 2000-06. The objectives of this Programme are:
• to establish a Community framework for supporting sustainable agricultural and rural development in the applicant countries during the pre-accession period; • to solve problems affecting the long-term adjustment of the agricultural sector and rural areas; • to help implement the acquis communautaire in matters of the agricultural policy and related policies.
The adjustment of agricultural policies in candidate countries is a complex undertaking but the ongoing reform of the CAP, within the framework of Agenda 2000, facilitates this process.
Source: The European Commission
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CALENDAR OF EVENTS
JANUARY 2002
4 Fight against smuggling On the decision of Avtandil Jorbenadze, State Minister, an independent commission was formed for the fight against smuggling. It involves three presidential advisors and deputy ministers of economic services. The aim of the commission is to work out measures for eliminating import of smuggled goods into the country.
14 Energy Minister of Fuel and Energy, David Mirtskhulava, has become a member of the International Council in Energy. This organisation has existed for 95 years and 90 countries are members.
21 Business A constituent session of the confederation of Georgian Businessmen was held. The confederation involves the Taxpayers’ Union, Investment Fund of Georgia, International Chamber of Commerce and AmCham (American Chamber of Commerce). Niko Lekishvili, chairman of the Taxpayers’ Union, was elected the Confederation chairman.
31 State Budget The Parliament of Georgia approved a state budget for 2002 at a special session. The budget revenue part of 2002 is determined at GEL 1,039,869,000; that of expenditure – GEL 1,259,527,500.
FEBRUARY
8 Customs/Technical Assistance Avtandil Jorbenadze, Minister of State, Phillip Remler, Deputy Chief of Mission, US Embassy to Georgia and James Kelly, a representative of the US Customs Department, director of the programme on border protection and security of Georgia, discussed issues of reform and reorganisation of the customs service of Georgia. Mr. Kelly mentioned that the US government, at the present stage planned to assist the Customs Department of Georgia. In particular, a pilot project will be implemented for improving customs procedures in Tbilisi airport.
11 Customs The government of Poland agreed to meet a request from the Ministry of Economy, Industry and Trade of Georgia and from 2002 lifted customs duties from tea imported from Georgia to Poland. Until this decision by the government of Poland, Georgian tea was taxed at 15 per cent.
12 Foreign Debt An agreement on rescheduling a debt of Georgia to Armenia in the amount of USD 19.6 million was signed during an official visit to Tbilisi of Vardan Oskanian, Foreign Minister of Armenia. The debt will be repaid over 20 years with annual rate of interest of 3 per cent.
22 Gas Transit Final agreement was signed between Azerbaijan and Georgia in Baku within the Azeri gas transporting from the Shah-Deniz deposit. After the pipeline starts operation, Georgia will get 5 per cent of the natural gas volume transported through it in the form of a tariff for transit.
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24 Securities markets/Currency Meeting of International Association of CIS Exchanges was held in Baku, with participants from Kazakhstan, Georgia, Ukraine, Azerbaijan, Russia and Uzbekistan. Participants discussed issues connected with the securities market and changes that took place at CIS currency markets in connection with the introduction of the EURO.
27 Customs/WCO Due to non-payment of participation fees for two years, from 1997 the World Customs Organization (WCO) moved Georgia’s Customs Department to passive member status, after being an active one since 1995. Georgia fully covered the indebtedness and paid participation fees for this year, thus regaining active member status.
MARCH
4 Export Agency of Export Credit and Insurance was formed in Georgia, the objective of which is to promote the formation and development of small entrepreneurship and to support export policy. The agency was formed with the support of the Black Sea Trade and Development Bank (BSTDB) and the Ministry of Economy, Industry and Trade.
14 Oil and Gas International Conference "Oil, Gas, Energy and Infrastructure" was held in Tbilisi. During the conference, an agreement was signed between the investors in the project on South-Caucasian pipeline system (gas pipeline Baku-Tbilisi-Erzrum) and the Georgian government. The agreement was signed on behalf of Georgia by Giorgi Chanturia, GIOC president and on the part of the investors by representatives of SOCAR, BP, TotalFinaElf, LUKAgip, Statoil, Nico and TPAO.
15 Foreign Affairs Parliament confirmed Levan Mikeladze’s candidacy to the post of extraordinary and plenipotentiary ambassador of Georgia to the USA. Mr. Mikeladze will also fulfill the functions of the Ambassador to Canada and Mexico.
19 Transport Poti port received international certificate of license from Russian Marine Shipping Register. The decision was based on the positive results of inspection of the system of quality.
26 Social Safety Net A presidential decree ”On Social Allowance for Vulnerable Families” was passed. According to the decree, the Social Allowance for vulnerable families, provided for by the 2002 Budget Law, is targeted at households comprised exclusively of “poor non-working pensioners” or of orphans, disabled children and invalids, and families with at least 7 children.
APRIL
2 Customs Levan Dzneladze, the Tax Revenues Minister, announced at a press conference that the British company ITS suspended its activities in Georgia. He advised that from April 1st pre-import inspecting will be conducted by the Customs Department.
5 Customs As mentioned at a meeting of President Eduard Shevardnadze with Mehmet Kececiler, a Turkish State Minister, a new checkpoint at the Georgia-Turkey border was opened. A systematic growth of goods turnover between the two countries has made a new border checkpoint in Kartsakh necessary, which unlike the one at Vale-Akhaltsikhe, will work
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all the year round. The Turkish side is ready to allot a USD 10 million credit for finishing the construction of the Georgian section of the road up to the Kartsakh checkpoint. The construction works are to start in June.
5 Customs An agreement on co-operation in the customs sphere was signed between Georgia and Turkey. Minister of the Tax Revenues of Georgia Levan Dzneladze and State Minister of Turkey Mehmet Kececiler signed the agreement on mutual aid and co-operation on customs issues.
5 EBRD At April 5th session of the Presidential Investment Council, Temur Basilia, presidential adviser on economic reforms issues, delivered information on the strategy of activities of the European Bank for Reconstruction and Development (EBRD) in Georgia over 2002-2003, approved by the Bank Board of Directors on the 26th March. The EBRD plans to concentrate its investment activities on such spheres of the private sector as energy, transport, banking system and communications.
7 Economics A decision continuing the programme has been reached between the government of Georgia and the US which finances the work of the former prime Minister of Poland, an author of the “Shock therapy”, Leszek Balcerovicz and his group in Georgia.
7 Social Development A presidential decree “On First Priority Measures Aimed at Realisation of the Social Development Concept” was passed providing for measures to be taken to regulate labour relations, raise the effective use of the labour force and improve the employment situation; as well as improve pension system; and facilitate the drawing up and implementation of state programmes in the social sphere.
8 European Parliament A resolution adopted by the European Parliament “EU Relations with South Caucasus” highlights the need for supporting and continuing the financing of all programmes on regional co-operation in the South Caucasus. The document stresses that the European structures should take part in the implementation of economic projects in the South Caucasus, especially in the energy sector.
9 Privatisation The Ministry of State Property Management worked out a draft presidential decree “On Forming an Agency for Development of Enterprises with State-share Participation”. The State Property Management Ministry will conduct control over this agency. The major task of the agency will be development of the enterprises with state share participation; protection of state interests in these enterprises; optimisation of dividends mobilisation in the state budget; co-ordination and implementation of state share and stocks management; rational use of the property; increase cost efficiency; promotion of the privatisation process.
10 EU Assistance On April 10th, a document was signed in Tbilisi, according to which the Customs Department will receive EUR 850,000 from the EU. The sum will be spent on the services of foreign and local experts, who will work on elaboration of the Georgia’s customs legislation and its harmonization with the European legislation in the customs sphere. Last summer, a comparative analysis of the customs legislation of Georgia and the EU was conducted with the participation of Austrian customs experts, in the framework of Tacis programme.
11 Small and Medium Enterprises Mevlud Tsiklauri, director of the Agency for Small Business
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Promotion, presented the Programme for Supporting Small and Medium Enterprises of Georgia for 2002-2004 at a press conference on April 11th. The programme foresees support of small and medium enterprises. However, before that, changes should be introduced into the law of Georgia “On Support of Small Enterprises”. The draft law has been prepared and presented for discussion to the government. It foresees the introduction of the concepts of small and medium enterprises, establishment of criteria of the number of employees engaged and capital turnover.
15 Energy Parliament ratified a credit agreement with the World Bank on allotting USD 27.4 million for developing the energy sector. The credit agreement for the World Bank project on power market maintenance totalling USD 55.7 million was signed between the government and the International Development Association of the World Bank (IDA) on June 18th 2001. Under the contract sources of financing are IDA – USD 27.4 million, German Credit Bank for Reconstruction KfW – USD 12.4 million, European Bank for Reconstruction and Development – EUR 1 million, JSC Electrogadatsema - USD 8.7 million, LLC Electrodispetcherizacia – USD 2.2 million, and LLC Wholesale Electricity Market of the electric power - USD 4.2 million.
16 Tax System A concept of a new taxation system of Georgia should be ready by 10th of June. As stated at the April 16th presentation of a new taxation system of Georgia, this document was worked out in the Institute of Economic Development of Georgia on the initiative of the Parliamentary faction “Entrepreneurs”, with the financial support of Gogi Topadze, head of the faction and entrepreneur. The faction, in co-operation with the Open Society Georgia Foundation, foresees introduction of essential changes into the Tax Code of Georgia. 42 experts took part in the elaboration of a new alternative project. The group involved both Georgian and foreign economists and financial experts.
19 Gas Pipeline The final agreement on Baku-Tbilisi-Erzrum Gas Pipeline was signed at an international conference, launched in London, with participation of fuel and energy departments of Azerbaijan, Georgia, Kazakhstan, and foreign companies such as Chevron Texaco, BP, Pricewaterhouse Coopers, Schlumberger, Burren Energy, Statoil, Parker Drilling, AMBO, EBRD, and CPC, dedicated to issues of Central Asian and Caspian fuel-energy complex development. After the pipeline starts operation, Georgia will receive, in the form of tariff for transit, 5 per cent of the natural gas volume, which will be transported through it. At full loading of the pipeline Georgia will get 1.5 billion m3 of natural gas, when at present the country consumes annually not more than 750 million m3 of gas. Georgia will also have an opportunity to sell annually 500 million m3 of gas at privileged prices.
19 Transport On April 18-19, at a European conference of transport ministers (ECMT) in Tbilisi, launched under the aegis of the World Bank, a seminar was held on the issues concerning transport policy in the South Caucasian countries. The seminar discussed questions of transport policy in the region, development of transport lines, co-operation and sharing of international experience.
20 Tourism On April 18-20, the fourth international exhibition-fair of the Silk Road Countries was held in Tbilisi. 60 organizations and companies from 10 countries participated. The organiser was Expo Georgia exhibition centre with the support of Georgia’s State Department on Tourism and Resorts.
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22 Social Safety Net A presidential decree “On Additional Measures in the Field of Social Safety of the Unemployed” was passed. According to the decree, the amount of the standard monthly Unemployment Benefit payable for the first six months of registered unemployment is raised for the second two month period and the third two months of unemployment by GEL 2 and GEL 3 respectively and is fixed at GEL 14 for the duration of the eligible period.
25 IMF/Georgia A regular visit of the IMF Mission headed by David Owen, head of Southern Division of II European Department, started on April 25th. During the visit, the IMF experts conducted an analysis of the fulfilment of its recommendations. Special attention was paid to the issues of improving the macroeconomic situation and the development of fiscal and monetary-credit policy of Georgia. During this regular visit, the IMF Mission familiarized itself with the course of structural changes, the situation in the budgetary sphere, the fulfillment of obligations on external debt and related issues. On a preliminary assessment, the IMF is ready to allocate USD 60 million to Georgia instead of an earlier proposal of USD 48 million. The sum will be received in two equal tranches in the end of May and in December if the IMF Mission positively evaluates how Georgia has fulfilled the IMF recommendations. Georgia has been co-operating with the IMF since 1994. Over that period USD 390 million in credits has been received from this international financial organisation.
27 IMF and the World Bank At the spring meetings of the World Bank and the International Monetary Fund a decision was adopted on additional support to the initiative on assisting seven former Soviet Union republics (members of CIS) with the lowest level of income: Azerbaijan, Armenia, Georgia, Kyrgyzstan, Moldova, Tajikistan and Uzbekistan (CIS-7). The aim of this initiative is “to strengthen the measures directed at the reduction of poverty and stimulating economic growth while simultaneously providing stability of the fiscal and foreign debt situation”. The press release says that the initiative is based on the principle of “intensification of the process of development and reforms and greater independence of CIS-7 in implementing this process” in relation to the international community, which is ready to support “the countries conducting the subsequent policy of reforms”.
30 US Assistane to Georgia USA government alloted to Georgia a USD 20 million grant for food and processing industry rehabilitation. In summer the first stage of the project will start during which foreign and Georgian specialists will study the situation in the food and processing industry of Georgia. The first phase will last a year. After that a plan will be made for second phase, which will be longer.
MAY
7 Parliament/Lawmaking A draft law “On Financial Leasing”, adopted at the May 7th plenary session in the third hearing, determines the forms of leasing, powers of leasing relations participants and a concrete mechanism of legal regulation in this sphere.
13 World Bank During the visit to the World Bank headquarters in Washington, which finished on May 13th, Giorgi Isakadze, Deputy State Minister, head of the delegation, launched talks on the possibility of continuing the municipal development and decentralisation project. A protocol of intent was signed, allocating USD 19.4 million within a second project of municipal
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development and decentralisation. The total cost of the project is USD 28 million. The two sides discussed the terms of the credit agreement.
13 Co-operation Control Chamber of Georgia and Control Chamber of the Ukraine signed an agreement on co-operation. This was signed by heads of these services Sulkhan Molashvili and Valentin Simonenko. The agreement foresees co-operation in such issues as sharing of experience, improving a system of staff training for the audit structures in a single educational centre, which has to be formed.
14 Parliament/Minister of Finance On May 14th the Parliament of Georgia at its plenary session unanimously confirmed the candidacy of Mirian Gogiashvili to the post of the Minister of Finance. Before that he worked as a secretary of the Co-ordination Council in Anticorruption Policy. Gogiashvili’s candidacy was put forward by President Eduard Shevardnadze and was approved by 14 parliamentary factions.
14 Energy/Staff President appointed an ad hoc commissioner on energy. It is said in the presidential instructions that the introduction of a new post is aimed at forming a long-term conception of stable energy development, the introduction of new high-efficient technologies and mobilization of foreign investments. Archil Prangishvili, professor of the Technical University, a correspondent-member of the Georgian Academy of Science, is appointed to the post of emergency representative in the energy sphere. Georgia’s state bodies are charged with the task of assisting him in organisation issues
15 Earthquake USD 150 million is required for repairs of damage in the April earthquake in Tbilisi. This is pointed out in an emergency appeal to the population of Georgia and its allied countries and international organisations, prepared by the Georgian experts with the support of UNDP. It is mentioned that USD 30 million are required for first priority emergency works.
15 Banks Microfinance Bank of Georgia (MBG) celebrated its third anniversary. Ms. Doris Koehn, the new chairman of the MBG Board, said at May 15th press conference that over this period the Bank managed to be among the five leading banks of Georgia. In 2001, the bank had assets of USD 35 million. The loan portfolio at the end of 2001 was USD 23.5 million, which was lent to 5,350 clients. By April 30th 2002 the Bank loan portfolio had increased to USD 25 million, and the number of clients increased to 6,305. Since 1999 the bank has made 13,044 loans. The average loan of GEL 8,000 makes it clear that MBG mainly serves the group of micro and macro enterprises operating in Georgia. 98 per cent of loans allocated are being repaid by the clients on time.
18 EU Days in Tbilisi May 14-18 Georgia hosted ceremonies dedicated to the Days of the EU in Georgia and the 10th anniversary of the European Union’s Tacis Programme. Tacis Programme provides grant finance for know-how to foster the development of market economies and democratic societies in the New Independent States and Mongolia. Within the programme 300 projects have been implemented in Georgia in such important spheres as policy advice, energy, agriculture, transport, statistics and education. The programme enables such significant projects as the Europe-Caucasus-Asia transport corridor (TRACECA) and oil and gas transportation from the Caspian region to European countries.
21 Georgian – Turkish Economic Relations Economic relations between Georgia and Turkey should be intensified. A Turkish State Minister, Tunja Toksai, spoke about this at his
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May 21s meeting with the President of Georgia. President Eduard Shevardnadze mentioned that an agreement "On Stimulating Investments" signed between the two countries promoted the strengthening of bilateral economic relations. Now Turkey is one of the lead investors in Georgia but still, stressed the President, Georgia should intensify economic and trade co- operation.
21 Georgian – Dutch Business Relations A meeting of Dutch and Georgian businessmen was held in Tbilisi. Since 1998, the government of Holland has been implementing several projects in Georgia.
22 EBRD The Georgian delegation participated in the annual session of the European Bank for Reconstruction and Development in Bucharest. The delegation members were Temur Basilia, presidential adviser on economic reform issues (head of delegation), Irakli Managadze, president of National Bank, Jemal Inanishvili, head of Poti port, Vladimir Pateishvili, Chairman of Supervisory Board of Bank of Georgia. The Georgian delegation members discussed, in particular, EBRD’s activities strategy in Georgia in 2002-2003, approved by the Bank Board of Directors on March 26, 2002.
22 WTO Ministerial Conference in Tbilisi Mike Moore, director general of the World Trade Organisation, spoke at the WTO Ministerial Conference of Central Asian and Caucasian trade Ministers in Tbilisi. According to Mr. Moore, the introduction of these countries into the world trade system "will promote both economic and political stability of the region". He stressed the readiness of the WTO to assist this process. Mr. Moore pointed to fact that the WTO at present attaches special attention to technical assistance for developing states with a transitional economy. In his opinion, support of donor-countries and WTO members enabled the doubling of resources of a special fund formed within the organisation. This lays a basis for increasing assistance to developing countries and providing for their full value participation in world trade.
24 Assistance/Japan Government of Japan continues financing the supply of agricultural machinery to Georgia. A memorandum was signed in Tbilisi on continuing the 2KR programme, started in 1996 financing the delivery of a variety of agricultural equipment to Georgia by the government of Japan. Over these years 1,046 units of agricultural machinery worth over GEL 24 million were brought to Georgia. This year the programme should finance 600 agricultural units, for which the Japanese government will have allotted a USD 3 million grant.
25 Regional Seminar for Farmers Tbilisi hosted a seminar for farmers from Georgia, Armenia and Azerbaijan, organised by the Israeli Centre Mashav and co-financed by the Eurasia Foundation.
27 Privatisation A regular tender for the privatisation of the state airline company Georgia Airlines was launched. 100 per cent of shares are being put to international commercial tender. The deadline for applications to be presented to the Ministry of State Property Management is June 27th. The initial sale price of the shares is USD 931,000.
30 Banks First quarter results for TBC-Bank show it to be the biggest commercial bank in Georgia by assets, liabilities, credit portfolio and major rates. The Bank is also the biggest financial organisation in the country. By April 2002, TBC-Bank assets were GEL 151.7 million,
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with liabilities of GEL 129 million, and the loan portfolio exceeded GEL 85 million. According to deposits, the market share of the bank was 21.2 per cent. Fourth quarter results from last year put Bank of Georgia as the biggest commercial bank in the country. Its assets were GEL 137 million. TBC-Bank was then in the second place with assets of GEL 118.7 million.
JUNE
7 Budget Memorandum on mutual understanding signed, according to which EU grant resources will support budget expenditures in agriculture, education, health care, etc. The first EUR 2 million will be transferred to Georgia in the near future, and by the end of the year two more tranches of EUR 5 million each should be received.
10- BSEC Tbilisi hosted the 19th session of Black Sea economic co-operation parliamentary 16 assembly. The session participants approved a special declaration dedicated to the 10th anniversary of BSEC, in which it is mentioned that BSEC has occupied an important place among the international and regional organizations having formed Black Sea Trade and Development Bank (BSTDB) which finances a number of projects in BSEC member- countries.
13 Transport Louis Michelle, the Foreign Minister of the Kingdom of Belgium and Irakli Menagharishvili, the Foreign Minister of Georgia, signed an agreement between the government of Georgia, Kingdom of Belgium and Grand Duchy of Luxembourg on co- operation in the sphere of sea freight and passenger transportation.
19 Investment Agency The Parliament unanimously adopted a draft law “On National Investment Agency of Georgia”. A major objective of this draft law is the introduction of the institute of state promotion to Georgia’s industrial potential growth. The draft law was elaborated by the Ministry of Economy, Industry and Trade. The basic purpose of the Agency is to introduce an institution of state promotion to increase the industrial potential of Georgia. The law foresees the formation of new structures, which will considerably promote the development of industry from the viewpoint of both financial and state support. A major source of financing for the Agency will be the presidential investment fund for industry development, and different grants.
25 BSEC Heads of BSEC member-countries delegations discussed issues of regional co- operation in the sphere of energy, transport, communications and adopted BSEC Istanbul Summit Declaration “10 years of Co-operation and Development: Gaze into the Future”. In the declaration they have evaluated the BSEC activities and outlined major directions of its development.
JULY
1 Tea export President Shevardnadze signed a decree "On Support of the State Programme of Maintenance of Exports of Georgian tea". According to the decree, in the near future the tender for distribution of financial resources will be announced. The tender commission, led by the Minister of Finance Mirian Gogiashvili, will develop the
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competitive conditions. The purpose of this programme is to keep and expand a segment of the Georgian tea in the external market. The State budget of this year provides for GEL 3 million of support for the export of the Georgian tea.
4 Consumer protection At an extraordinary parliamentary session on 4th July ammendments to the law "On Protection of Consumer Rights", submitted by an Antitrust Service, were accepted at a first reading. The presence of the Georgian inscriptions on imported food, cosmetic and household goods will be necessary from 1st November 2002, and on pharmaceuticals - from 1st January 2003.
19 GUUAM The summit of the member states of GUUAM was held in Yalta. Within the framework of the summit a declaration was signed establishing a multilateral Free Trade Agreement between Ukraine, Moldova, Georgia and Azerbaijan.
25 Exports Georgian Parliament has not renewed a temporary ban on timber exports that expired at the end of 2001, and also the ban on export of non-ferrous scrap metals that expired in the summer was abolished.
AUGUST
1 The pipeline Documents establishing the pipeline company Baku-Tbilisi-Ceyhan (BTC Co.) were signed in London. The ceremony of signing of the documents was held with participation of the representatives of the governments of three countries - owners of transit territory - Azerbaijan, Turkey and Georgia.
Oil transit GIOC (Georgian International Oil Corporation) and the Ukrainian state joint stock company Ukrtransnafta signed a protocol of intentions. According to it, the sides will jointly conduct activities for expanding the oil transportation corridor on the territory of Georgia.
Federal government of Germany allotted EUR 2.5 million for the rehabilitation of earthquake-affected buildings in Tbilisi. The sums will be mostly used for schools rehabilitation. In addition, it is planned to restore asylums for refugees from Abkhazia and Tskhinvali region and houses for the old-aged.
SEPTEMBER
10 Government On 10th September the President of Georgia approved the project elaborated by the State Anticorruption Council. The project offers liquidation of the Ministry of State Property Management and formation of a holding which will manage the state shares in the enterprises and also transferring to the Ministry of Finance management over the property of state enterprises.
11 Communications The minister of Transport and Communications Merab Adeishvili declared at the Governmental session that Sakartvelos Electrokavshiri should transfer the right of management to a Norwegian company TELENOR. He required prompt
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acceptance of the political decision concerning this issue.
11 Cooperation The President of Siemens, Dr. Heinrich von Pirer, and the State Minister of Georgia, Avtandil Jorbenadze put forward an initiative to form at the Government of Georgia a special group, which will work out a long-term (5-7 year) programme of cooperation between Georgia and Siemens in the following sector: energy, transport, communication, health care and also the project Baku-Tbilisi-Ceyhan and Baku-Tbilisi- Erzrum. The working group will elaborate business-plans for the project and will mobilize financial resources for their implementation.
16 Communications On 16th September, at the meeting with authorities of TV and radio companies, the National Communications Commission declared that broadcasting unlicensed production is prohibited by law. Corresponding changes were introduced into the law “On communication and post of Georgia” in May 2002, and TV and radio companies were given an adaptation period till 1st September 2002. As Vakhtang Abashidze, Chairman of the Commission mentioned, the issue of restriction of broadcasting unlicensed production was put on the agenda after Georgia signed certain international agreements on protecting the copyright.
18 Pipeline On September 18 at the oil terminal of Sangachali, located in 40 km from Baku, a ceremony of Baku-Tbilisi-Ceyhan Chief Export Pipeline (CEP) construction commencement was held. It was attended by President of Georgia Eduard Shevardnadze, President of Azerbaijan Heidar Aliev, President of Turkey Necet Sezer, US Secretary of Energy Spencer Abraham, and other officials. CEP Baku-Tbilisi-Ceyhan will enable to deliver annualy 50 million tons of the Caspian oil to the Turkish port Ceyhan on the Mediterranean.
18- Pension reform International conference “A State Pension System in Transition”, 20 organised by the Georgian Government and the United State Social Security Fund was held in Tbilisi, with the participation of the International Social Security Association and the Association of Pension and Social Funds top officials. The processes going on in the pension and social security systems in different countries were discussed. The pension reform taking place in Georgia and the draft laws regulating the transfer of the social security and the pension systems to insurance principles were presented to the participants of the conference
19 IFC According to an agreement, signed on 19th September, the International Financial Corporation (IFC) allocates a credit to JSC Mina (Glass) for expending and renovation of its production facilities. The credit sum, allocated for the period of 6 years (LIBOR+4%), makes up USD 6.3 million. The credit will be used for assembling a new furnace with the capacity of 20 thousand tons of glass packaging per year and reconstruction of the existing one. According to the experts’ calculations, after these works are finilised, the annual production of the enterprise will increase up to 40 thousand tons of high-quality glass bottles of wide assortment.
20 State Budget 2003 On 20th September at the Governmental session the next year state budget parameters were discussed. The government determined the budget priorities for the next year, that are: reinforcing the systems of defense, security, education, social security and health care. It was mentioned that the draft budget would foresee far more
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resources for these directions compared with the previous budgets. According to the law, the government should submit a draft budget for the next year to the parliament till 2nd October. The final version of the draft state budget should be agreed with IMF mission.
25 FDIs According to the information of the United Nations Conference for Trade and Development (UNCTAD), Georgia occupies the 36th place in rating of mobilizing FDIs. Azerbaijan occupies the 8th place, Armenia – the 15th. The rating of 140 UN member countries takes into account correlation between the share of the country in the global flow of direct foreign investments and its share in global GDP in the period of 1998 through 2000.
27 Electricity From 1st October tariff on electrcity increases by GEL 0.013 from GEL 0.124 to GEL 0.137 per 1 kWt/h in Tbilisi and by GEL 0.005 from GEL 0.08 to GEL 0.085 in the regions.
29 Marriott Tbilisi Hotel President Eduard Shevardnadze took part in the official opening ceremony of the first 5-star hotel in Tbilisi - Marriott Tbilisi
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APPENDIX I: A STATE PENSION SYSTEM IN TRANSITION
Address by Johan Verstraeten, President of the International Social Security Association to the International Conference “A State Pension System in Transition” organised by the Georgian Government and the United State Social Security Fund of Georgia
Tbilisi, September 18-20, 2002
GREETINGS
Ladies and Gentlemen,
• As the Good Lord completed the creation of the Universe and the World, he decided to apportion Earth between the different nations. So he summoned their representatives to allot to each of them their part of the land.
When the Georgians, who were just feasting, finally arrived, it was too late: there was no territory left to grant to them.
Instead of despairing, they started charming the Good Lord with songs and dances and so God spoke to them and said: «You dance and sing so beautifully and enjoy so much life that I can’t send you back with empty hands. Go, and take the land I have chosen for myself and use it well».
So far the legend that, despite the actual great difficulties of your land, I am keen to evoke because of its optimistic and hope giving content, and the emphasis on some of the Georgian people’s basic qualities.
• As President of the International Social Security Association, it is my great pleasure to be here with you today and to convey the greetings of ISSA to you. At the moment, ISSA is regrouping 378 organisations in 148 countries around the world, who are administering social security mandatory arrangements which provide protection against lifetime contingencies.
ISSA’s constitutional goal and ultimate objective is, as I truly believe, a wonderful one: promoting and developing social security throughout the world in order to advance mankind on the basis of social justice. Thus, ISSA is very much concerned about the well functioning of social security schemes.
I want to congratulate and to thank the Georgian Government and the United State Social Security Fund of Georgia for organising this International Conference about one of the new major challenges of social security: security in old age.
CONTEXT A dozen years have elapsed since the world witnessed the euphoria greeting the fall of the Berlin wall. Thus did the march from plan to market capture the world’s imagination. In those heady days,
76 GEORGIAN ECONOMIC TRENDS – 2002 No.2 A STATE PENSION SYSTEM IN TRANSITION famously dubbed at time of «extraordinary politics» by a leading reformer from the region, everything seemed possible.
Unfortunately, in many countries of the former centrally planned economies, the dominant fact of the 1990s has been a decline of a magnitude that has not been experienced since the Great Depression.
The transition process has given rise to major economic and social challenges as employment and income have fallen, income inequalities have widened, the incidence of poverty has increased, and the loss of fiscal control accompanying the transition coupled with the need to reduce the fiscal deficit to stabilise inflation have reduced government social expenditures everywhere.
Furthermore, the onset of transition was accompanied by severe external shocks. The collapse of the institutional and technological links of the Soviet centrally planned systems which disrupted the supply of inputs for production and the delivery of outputs, the loss of budget transfers from the centre and the elimination of subsidised energy imports were severe blows, particularly to some of the newly independent states of the Commonwealth of Independent States (CIS) where economic and social decline has been traumatic. The broader external economic environment was also less favourable in the 1990s, and the various financial crises also contributed to delaying or interrupting the recovery of output. In addition, war and civil strife in some countries took a major toll on lives, infrastructure, and the state, undermining the political consensus on reforms needed for successful transition.
As far as social security is concerned, transition economies had well-developed social sectors before the onset of transition: their social safety nets covered the same risks as social security schemes in developed countries. The social safety net - which provided «cradle-to-grave» protection to the entire population - was both comprehensive and universal. But this comprehensive safety net left people with little experience in dealing with economic uncertainty. This is specially so in many countries of the CIS where a lack of reform of enterprise-provided social services and benefits tied workers to chronically loss-making firms. In addition, the real value of social transfers was reduced by inflation so that insurance schemes and welfare programs failed to protect the vulnerable from poverty.
The transition process increased the demand for social benefits and undermined at the same time the availability of financing. The drop in economic activity reduced the revenue base of many countries, triggering, in combination with rising expenditure obligations, a vicious circle. Partly because nascent tax administrations were still weak and authorities often lacked the political will to enforce the rule of law, tax compliance decreased, and the shadow economy grew.
• Ten years experience of transition highlighted that this historically unprecedented process is by no means finished in many countries. Poverty and income inequality in some countries have increased to levels not foreseen earlier. In many countries, reform efforts that started in the early 1990s have been interrupted and in some cases even stalled. Many transition economies are still stuck in a no man’s land between plan and market.
At the beginning of the new millennium, a profound divide lies between Central and South-eastern Europe and the Baltics (CSB) and the CIS. In the CSB, officially measured gross domestic product bounced back from a transition recession, recovered its 1990 level by 1998 and exceeded that level by 6 per cent in 2000. However, in the CIS, GDP in 2000 stood at only 62.7 per cent of its 1990 level.
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THE PENSION SYSTEMS In the transition countries, large PAYG pension systems inherited from the former Soviet Union, with their attendant large unfunded liabilities, burden public finances and savings in the long term.
In the most dramatic cases, the crisis situation led to very difficult short run policy choices. Some low- income countries where resources were constrained and tax compliance especially poor needed to move to a flat benefit structure to protect the poorest elderly until fiscal conditions permit a move to a different structure.
Georgia, however, faces the challenges with courage and determination and tries to build the enabling environment for long term reforms: reform of the banking system and financial sector in general, deepening of the capital markets and a strong supervisory apparatus that will ensure transparency.
As far as social development is concerned, I quote the recent (May, 7, 2000) - and most encouraging - Order 179 of the President of Georgia «On urgent arrangements for implementation of conceptual fundamentals of social development of Georgia»:
«In the first phase, in the conditions of very reduced resources of economic capacity, it is necessary to undertake compound arrangements for stabilisation of living standards of population, to start effective activity for the reduction of poverty scales, to reduce differences of living standards between the various categories of population, to prevent massive unemployment, to defend labour and social rights of population. The second phase (2002-2005), will allow for real material and financial capacities to increase expenses on social programs. In the third phase, by reaching stable economic growth, ground for social development will become rather sound, open society of wide social integration will be generated, where each individual will be able to realise own potential and capacity.»
This is undoubtedly the right way.
Indeed, social development is not an optional extra to economic development: it is an essential component of balanced economic development. Social development cannot be funded in a society where wealth is not being created and there can be no redistribution where there is nothing to distribute.
Several attributes brighten Georgia’s long term prospects:
1) the richness of the country’s resources: the generous human capital endowment with respect to both health standards and level of education; the country’s warm climate and position on the eastern shore of the Black Sea which make the country suitable for tourism and agricultural development (tea, citrus fruits, grapes, vegetables and grains); the abundance of mineral and fuel deposits (manganese, iron, gold, coal and petroleum), the many fast-flowing rivers, important source of hydroelectricity and forest that provide pulp and timber.
2) the clear consciousness that the amount of growth required to improve the social development of a country depends on its level of inequality - the more unequal is the distribution of income, the fewer are the benefits of growth to poor people.
Praise and admiration are well deserved for the endurance, patience and courage of the people and authorities of Georgia. Despite the critical situation, years of much too often wrecked efforts, fatalism
78 GEORGIAN ECONOMIC TRENDS – 2002 No.2 A STATE PENSION SYSTEM IN TRANSITION never came the fore. The strong government and institutions commitment is now likely to lead to significant progress.
CONCLUSION The ultimate goal of social security is guaranteeing not just a minimum income but also integration. If citizens cannot participate in the labour market, they cannot participate in society.
Social protection and social justice are being recognised as the mainstay of a stable world order and designing a sustainable pension scheme contributes substantially to this objective.
Each country has to work out its own solutions by integrating its specificities and particular needs and considering all the changes noticed in social and economical environment and in acquirements.
It is, to a large extent, a matter of political choice.
Ladies and Gentlemen,
Here, in mythical Colchis, Jason and his Argonauts, finding and conquering the Golden Fleece, achieved the purpose of their journey.
I’m sure that, during this important Conference, the light that Prometheus took from the gods may help Georgian social security actors making some significant steps on the way to achievement.
Your confidence, tenacity, pride and love of life, your pugnacity and deep sense of friendship and hospitality, so aptly symbolised by Kartlis Deda, Mother Georgia, holding in one hand the cup of wine for the friends and in the other the sword against adversity, will certainly contribute to master actual problems.
Thanks to its great human qualities and the richness of its soil, Georgia can be confident in tomorrow and believe in come back of better times.
Most convinced that ISSA can be instrumental in providing with best practices, benchmarking and documentation of any kind, I wish you all success!
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AN UNPRECEDENTED CHALLENGE Transition countries had well-developed social security schemes before the onset of transition to a market economy. They devoted considerable resources to their social safety nets, which covered the same risks as social security schemes in developed countries.
The traumatic economic and social decline in most transition countries has challenged them in an unprecedented way. While the transition process increased the demand for social benefits, it also undermined the capacity of financing. The drop in economic activity reduced the revenue base, triggering, in combination with rising expenditure obligations, a vicious circle.
As a consequence, transition countries are challenged to reform their social security schemes to promote the welfare of their citizens and spur economic growth. The reforms of the pension schemes are a central element of this strategy with a view to creating an active welfare state as well as for ensuring a high level of social cohesion.
Transition countries, like all other countries, are expected to build pension schemes that are sustainable. This sustainability refers to the ability to meet social objectives on an ongoing basis while maintaining other important policy goals, such as sound public finances and intergenerational equity. Its objective is to ensure an adequate level of income for the future and current pensioners without creating undue burdens for future generations or destabilising public finance.
The Belgian Minister of Social Affairs and Pensions, Frank Vandenbroucke, stated clearly that the sustainability of pensions should not only be understood in terms of budgetary or financial sustainability but also in the wider sense of social sustainability, meaning the capacity of a pension system to fulfil the social purposes for which it was designed. He stressed that the question of pensions is a social question with an important economic dimension and not an economic problem with an important social element.
Countries may indeed not separate social and economic welfare. Without economic prosperity, no country can provide for all the social needs of its citizens. But nor can any country be called truly prosperous so long as many of its citizens are left to fend for themselves against ignorance, hardship and disease.
Indeed, the ultimate goal of social security is social integration and not only guaranteeing a minimum income to citizens. Social integration is a prerequisite for creating harmonious, stable, peaceful and inclusive societies, while excessive income inequality is a threat to democracy, social development and economic growth. Social security is in fact a preventative strategy aimed at minimising costly social problems in the future and a productive input for our societies.
BASIC PRINCIPLES OF SOCIAL SECURITY SCHEMES Every country should build a social security scheme that is realistically based on its actual economic, social and political conditions. There is no single design of a social security scheme, but all schemes should comply with the following basic principles:
Compulsory affiliation Social security schemes put in place by public authorities are mostly based upon the principle of compulsory affiliation. This principle allows to mutualise risks and to cover risks, which the private sector is unable or not willing to cover, except at prohibitive prices.
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Compulsory affiliation is important for two main reasons. First, where the financing of minimum anti- poverty pensions relies on the revenue collected by the general pension scheme, there must be no possibility for individuals to opt out simply to avoid their share of supporting those on low incomes. Second, and perhaps more important, is the fear that a large part of the population are myopic. Many individuals will be too short-sighted to save enough for their retirement and will become a burden on the State when, given a push, they could have contributed sufficiently for their retirement.
The correct functioning of compulsory schemes supposes a broad social consensus based upon the conviction of their fairness. Furthermore, workers and employees will only accept to contribute if they are involved, through their representatives, in the design and the management of the scheme and in decisions concerning the use of their contributions.
Social solidarity Social security schemes should aim at social solidarity and a redistribution of resources. All people subject to the same risk should pay a compensation or contribution to meet collectively the financial consequences of a misfortune or event in human life affecting a certain number of them.
Minimum standards Universal coverage, adequacy of benefits and democratic scheme management are the minimum standards for the introduction of a social security scheme.
Universal coverage remains the ideal, but is not always possible. In many countries, a large proportion of the active population does not possess a regular job whose earnings can be monitored and on which contributions can be levied.
Benefits should be adequate, predictable and guaranteed. Otherwise, the objective of providing a retirement income will not be kept.
Democratic management or the participation of workers’ and employers’ representatives in the management of social security scheme is the direct consequence of financing through contributions.
PENSION SCHEMES WORLDWIDE Governments have the task to design a sustainable and equitable pension system with an adequate level of pensions, which implies creating a balance between contributions and entitlements, between rights and obligations and between the active and the retired populations.
They can choose between several design features that determine the economic and social impact of pension schemes, while reflecting the underlying social contract. Pension schemes can be publicly or privately managed, membership may be mandatory or voluntary, and there are defined benefit and defined contribution plans. Coverage can be linked to citizenship, to the place of residence or to dependent employment.
Most governments haven chosen between a public PAYG (pay-as-you-go) scheme or a private PAYE (pay-as-you-earn) scheme.
PAYG financing implies that current outlays on pension benefits are paid out of current revenues from pension contributions, thus calling for intergenerational solidarity as a necessary precondition. The individual’s pension is defined and normally based on the number of years of service and the final salary. Under these defined benefit pension schemes, risks are borne by the contributors.
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This system, adopted by most of the OECD countries, has reached its limitations. General ageing of the population, either real (demographic) or generated fictively (pre-pension), has created an almost exponential growth of expenditures (pensions, illness) and consequently increased the burden on employers and the active population.
Contrary to the defined benefit schemes, in defined contribution or PAYE schemes with individual accounts for workers, contributions are accumulated and invested over the entire working life, and retirement benefits are closely linked to the resulting individual balance. Under these schemes, risks are borne by pensioners. Contribution rates are fixed and the amount of capital which will be accumulated by the time of retirement is determined by interest rates. Clearly PAYE schemes are not able to provide a guaranteed retirement income, nor the degree of solidarity necessary to provide anti- poverty minimum pensions.
REFORM OF PENSION SCHEMES Reforms can be one of the two following types: parametric and systemic. Parametric reforms concentrate on changing key parameters that control the size and scope of the pension system. These involve extending coverage and adjusting contribution rates. By contrast, systemic reforms concentrate on changing the basic structure of the pension system.
In recent years, the most common reforms are systemic and involve moving to a system that is advance funded, privately managed and has individual DC (defined contribution) accounts.
DC approach Countries prefer a defined contributions scheme because of its important advantages: • Facilitating portability; • Facilitating competition among fund managers; • Facilitating a free choice about investment strategies for workers; • Reinforcing political insulation.
Nevertheless, the DC approach has some important disadvantages.
First, this approach requires workers to assume a greater risk, because the level of the benefit is much less predictable. Individuals bear the risk that the amounts they have saved will be insufficient to produce an adequate pension. Their benefits can be inadequate due to a capital risk, reinvestment risk or inflation risk.
Second, there can appear difficulties in providing annuities. DC accounts must be converted into life annuities in order to provide assurance that the retirement incomes will last the lifetime of the recipients. Such conversions raise two major policy questions. Should annuity amounts vary by gender? Should annuity providers be required to adjust them to reflect price or wage changes after retirement?
Third, government still has the liability to guarantee a minimum pension level.
Advance funding Advance funding means accumulating assets against future pension payments. This concept allows pension providers to match revenues and costs more accurately and provides assurance that pension promises will be met even if the firm that made them is no longer in existence when the worker retires.
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Advance funding has several advantages.
First, it spreads the cost of financing pensions more broadly. Advance funding shifts a portion of the financing responsibilities to capital, broadening thereby the base of support for retirement incomes.
Second, it allows a given pension benefit package to be financed with a lower contribution rate. This is only possible if the rate of return earned on pension assets, net of administrative expenses, exceeds the rate of growth of earnings covered by the pension system. Important is minimising the risk of poor investment performance and avoiding excessive administrative charges.
Third, it increases savings. To the extent that an advance funded plan forces participating workers to save more than they would otherwise want to, it will raise savings.
Fourth, it can help improve the efficiency of capital markets. Where capital markets exist but are not fully developed, funded pensions can help to improve their efficiency and the economy to grow more rapidly.
Fifth, it gives workers an increased claim on future benefits.
Pension accumulations are not the only way to prefund. Future retirees can protect themselves against shifting demographics in ways that do not involve pension funds: • They can invest in countries with a younger population; • Governments can cut future public spending to offset expected increases in pension spending; • Governments can set aside resources to meet increased future demands.
Advance funding reduces the burden on governments, but is no miracle solution. It is not likely to increase the rate of return that workers realise as a result of the operation of the retirement income system. More importantly, advance funding will not reduce the costs of an ageing population. If the retired are to be allowed to share proportionately in the general increase in living standards, the share going to their support will not change. Reducing the cost of supporting an ageing population requires parametric reforms – e.g., changes in the retirement age. Systemic reforms - changes in the structure and financing strategy of the pension scheme - are unlikely to have a significant cost effect unless they are accompanied by parametric changes.
The shift to advance funding needs thorough reflection, because of its two major drawbacks.
Advance funded pension schemes have a slow phase-in: they take long to mature. Significant change in the economic status of the retired population will only occur three or four decades after the inauguration of a system of individual, funded accounts. The transition from a PAYG system to advance funding inevitably creates in the short term financial strains and budgetary pressures within a country. These transition costs can be regarded as a double burden on the working generation, since they are supposed to pay for the pensions of those already retired while shouldering the new burden of saving for their own, future pension.
The transition costs make advance funding very costly for a generation of workers: without them, pensioners in the lengthy transition period could have enjoyed significantly higher benefits; revenues could have been used for other social purposes; and less debt would have been placed on the shoulders of the current and future workforce that will have to generate wealth to cover interest payments. No working generation would be able or willing to carry such a real double burden.
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As a consequence, governments have to finance pensions for the transition generation through other ways. The substantial transition costs - estimated in Chile to be 5.7 percent of the GDP - must be raised through additional taxes, cutbacks in spending on other government programs or borrowing from the capital markets.
PRIVATISATION OF PENSION SCHEMES Pension privatisation means that the delivery of pensions will be organised more privately in the future than it has been before. In principle this can be achieved by transferring state responsibility to non- state actors and by more closely involving the private sector in areas for which the State is still responsible.
Countries privatise pension delivery because they believe that public management of pension funds can be disadvantageous. The non-pension objectives of the government often lead to socially and economically targeted investments and forced loans to the government to finance its deficits. These investments yield returns that are often below bank deposit rates and almost always below the growth of incomes. The low rates of return have negative consequences for the finances of the pension scheme as well as for the output of the overall economy.
The advantages of private management are seen as: • Providing a more effective insulation from political involvement in pension investment decision- making: privately managed pension funds generally earn a higher rate of return than do publicly managed funds; • Improving the quality of service offered to workers and pensioners: a shift to private management is an attractive alternative to dealing with an unresponsive, monopoly bureaucracy; • Greater operating efficiency: private firms will have more incentive to cut costs and are better positioned to implement technological improvements and streamline work practices; • Free choice of provider: privatising enhances individual choice and responsibility through the freedom to select a fund manager, ensuring good service and performance through competition between fund managers and so deliver reasonable pension benefits and limiting risks through competition and investment restrictions. Workers have a choice among competing fund managers but not necessarily among investment strategies.
A private provision of pensions can be questioned in different ways and is not always better than a state provision of pensions. It has some important drawbacks.
The competition to acquire clients has produced substantial - sometimes excessive - marketing costs, which lead to high administrative charges, offset the social gain from greater operating efficiencies among private sector firms and reduce the rate of return for workers. Privatising is very costly for governments, as shows the case of Argentina. Social security privatisation in Argentina deprived the government of a large amount of tax revenue. Payroll taxes that had gone to the government to support the old PAYG social security scheme were instead diverted to private accounts. Argentina had to borrow to finance the very high costs of the social security privatisation.
The privatisation of pension delivery can lead to new governance problems. They include problems of institutional clarity, conflicts of interest between stakeholders, lack of professional competence in management, investment and administration and weak accountability and transparency mechanisms. Ultimately the effectiveness of the pension fund itself and citizens’ trust in the scheme and in the government can be undermined.
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These problems make clear that a privatisation of pension schemes does not bring an end to the responsibility and liability of the public sector for income maintenance in old age. Even where the administration and funding of pension schemes is partly transferred to the private sector, public institutions cannot escape playing a major role in private sector pension provision.
States have imposed multiple technical, legal, social, tax and accounting constraints on private pension schemes to safeguard public interest and to protect consumers in areas too complex to protect themselves. These regulatory and supervision frameworks are a necessary protection for individual workers and the society as a whole. Without such frameworks, the private sector can generate far- reaching imbalances.
Privatisation should therefore not be considered as the end of government participation, but rather as a new beginning. It should be seen as the process of rebalancing the role of the State. The level of government intervention is at least as great in the case of private pension schemes as in the case of public schemes. It is all about “Probably less State, certainly another State”.
THE SEARCH FOR BALANCE Many countries throughout the world have recently adopted a multi-pillar pension system, including Argentina, Bolivia, Columbia, Hungary, Chile.
Such a multi-pillar pension system is composed of three different pillars: • Pillar 1: A large, mandatory public or quasi-public system with inter- and intragenerational redistribution, which can be fully funded (e.g., Denmark and the Netherlands), partially funded (f. ex. Morocco, the United States and India) or unfunded (e.g., Germany and Brazil) and in which a defined benefit (DB) formula determines benefits; • Pillar 2: Fully funded, defined contribution systems in which benefits depend on the assets accumulated in the individual’s account at the age of retirement. These systems may be mandatory or voluntary. Participants may take benefits as a lump-sum, use them to purchase an annuity, or withdraw them in phases; • Pillar 3: Regulated, voluntary and privately managed pension systems that supplement the first and second pillars.
These three pillars enable people to remain financially autonomous in old age and, within reasonable limits, to maintain the living standards achieved during their working life.
Several countries have also adopted a social safety net next to the multi-pillar pension system. Countries have introduced minimum pensions as a safety net and thereby chosen between universal flat benefits and targeted benefits. The first approach to providing minimum pensions is to provide a flat benefit to all citizens, or at least all pension system participants. The other approach is a minimum that fills the gap between the benefit otherwise available and the minimum income level. This minimum is purely a supplement, and is offered only to those whose benefits would otherwise be too low.
The targeted approach has two major advantages over the universal flat benefit. It is a cheaper mechanism for guaranteeing a minimum income because it is only paid to those who would otherwise not have a sufficient income. And it leaves room for a much larger earnings-related program.
The targeted approach has several major drawbacks too: it creates an uncertain future liability for the government and is more difficult to administer than a universal benefit.
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Countries may offer citizens only pillar 1, only pillar 2 or a blend. But most countries regard the multi- pillar system plus social safety net as the best approach of reducing risk through risk diversification. Essential is that pensions are provided from different sources having different risk characteristics in order to diversify risk.
GOOD GOVERNANCE OF PENSION SCHEMES States have to install qualitative pension schemes - whether public or private - because individuals require protection against the risk of being left without sufficient means in their old age. The issue of governance lies therefore at the heart of the debate on how to provide more effective pensions.
Governance is the set of constitutional, legal and administrative arrangements by which governments exercise their power. It refers to the process of managing - through the involvement of broad-based stakeholders - the economic, political and social affairs of a country and to the use of its natural, financial and human resources in the interests of all people. Governance encompasses both the relationships and ensuing patterns of behaviour between the different agents (behavioural side) and the set of rules that frame these relationships (normative side).
The governance of pension schemes has to meet two general objectives: the one of legitimacy (public confidence in the operations of the organisation) and the one of performance (efficiency and effectiveness).
Applying elements of governance in the social security sector is called social governance. Social governance embraces the institutional processes of consultation and decision making which determine the structure of the scheme, the institutional arrangements responsible for its administration, and the managerial and administrative functions which relate to the implementation and supervision of schemes. It goes from the conception of the social security scheme to the installation of fitting institutional mechanisms and the management of particular institutions.
Good social governance ensures that the political, social and economic priorities are based on a broad consensus in society, that the voices of the poorest and the most vulnerable are heard in decision- making and that the views of minorities are taken into account. It generates higher, more secure benefits for members and provides positive externalities to the economy.
Ten objectives of good social governance can be distinguished. These objectives relate to strategic issues, institutional arrangements and administrative obligations at the operational level.
The strategic objectives relate to the process of consultation and decision-making which determines the structure of the overall social security scheme, to the respective roles of public and private provision and to the types of schemes to be introduced. They comprise of: • the implementation of a policy system considering maximally social needs in regard of available national resources; • the settlement in national policy of a fair balance between public and private social security schemes; • the creation of a mechanism for the enactment of legislation to give effect to political decisions.
The institutional objectives describe the institutional arrangements responsible for the administration of the social security scheme and encompass: • the adoption of institutional provisions allowing an effective application of social security programs;
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• the organisation of procedures enabling contributors and beneficiaries to influence decision-making and to supervise the administration of the social security schemes; • the creation of audit mechanisms to survey the allocation and management of resources.
The operational objectives describe the institutional and administrative functions relating to the implementation of the social security scheme and include: • the collection of contributions and the quick and effective payment of benefits; • the minimisation of management costs without the diminution of the quality of service delivery; • the information of contributors and beneficiaries about their rights and obligations; • the creation of a mechanism for monitoring and reviewing administrative performance.
The realisation of these objectives is of an extreme importance in the context of pension delivery, because research has shown that pension schemes are likely to perform badly in countries with low governance ratings. In general, publicly-managed schemes perform worse than privately-managed schemes. But countries with bad governance ratings would even not produce reasonable returns with private management.
The ten objectives illustrate that good social governance is all about fairness, transparency, accountability and participation. These particularities are the hallmark of good governance and are critical to building citizen confidence. They also make clear that good social governance is an ideal which is difficult to achieve in its totality. In fact, they represent the ideal, and no society has them all.
ASPECTS OF GOOD SOCIAL GOVERNANCE OF PENSION SCHEMES Governments have to respect several principles to introduce good social governance in the context of pension delivery:
Overall responsibility of the State The State retains the overall responsibility in the design and implementation of pension schemes, even in the case of a private pension delivery, and in the provision of minimum pensions.
The primary roles of the State are in relation to the development and finalisation of policy, the drafting and enactment of legislation, the creation of a sound financial and monetary framework, the supervision of public and private institutions and the establishment of transparent and accountable organisational structures and consultative bodies.
The state also has to provide some form of pension coverage - a minimum pension - to those who are not able to set aside a sufficient capital to fund their retirement. The State remains, even in a privatised system, the last resort guarantor of pensioners’ income. If privatised pension funds are unable to pay pension benefits at the level promised, for example because of underperformance of investments, it is difficult to imagine that governments will not be expected to pay the bill.
Solidarity and equality of treatment Pension schemes are only sustainable when all the population groups show solidarity with each other and when they know it from each other. Solidarity has to be maintained between the generations, within each generation group and between men and women.
As many citizens as possible should be brought within the scope of pension schemes to achieve a sufficient level of solidarity. Social security ought to be an effective right for everyone. Each person
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No one should be excluded from pension schemes because of his low income or unfavourable risk profile. Pension schemes should have a redistributive element in favour of people with poor labour market opportunities or who had to provide care to children, disabled or frail elderly people.
In terms of fairness, all citizens bear responsibility for problems associated with demographic ageing. States have to follow the principle of fair burden sharing or fair distribution of costs. The traditional defined benefit model lacks sufficient solidarity, because it tends to impose all the costs of population ageing on the working age population.
Consultation and participation Good governance structures have to ensure that the interests of the members of pensions schemes are properly represented in the managing boards of the institutions that administer the pensions and that these interests are taken into account when decisions concerning investments, benefit and contribution levels and indexation are made.
The participation of contributors and beneficiaries in the design, implementation, administration and supervision of the pension schemes can be justified on several grounds: in recognition of their financial contribution to the scheme, to support the financial and administrative autonomy of the scheme and by virtue of the legitimacy of employers’ and workers’ organisations.
This partnership between governments and employers’ and workers’ organisations must be broadened to include all citizens in the management of the pension schemes. By involving even the most marginalized and least advantaged in the management of the schemes, the government is broadening the support in society for those schemes.
When the poor and vulnerable are consulted and when their priorities are identified, the outcomes of the social security programmes are usually better for the recipients. At the same time, when efforts are made to make social security systems more responsive to the poor, these systems become more user-friendly and more attuned to their needs.
Indeed, strengthening relations with all citizens contributes to building trust in government, improving government transparency and accountability, raising the quality of democracy, strengthening civic capacity and achieving better public policies - in other words enhancing the legitimacy of government. Quality of management The management of pension schemes should be regarded as a public trust of the highest order and must therefore be undertaken with utmost integrity, competence, and professionalism at all levels. It is indeed the quality of management which is essential for any pension arrangement.
The protection of members can be significantly improved and risks minimised if the qualifications and reputation of managers are examined at the outset and when contributors, workers and beneficiaries carry out their responsibilities.
Transparency Transparency in a narrow sense relates to the use of public resources and to the means through which stakeholders can see that resources are used as authorised. In a broader sense, transparency means
88 GEORGIAN ECONOMIC TRENDS – 2002 No.2 A STATE PENSION SYSTEM IN TRANSITION that all stakeholders in public administration can see how decisions are made and which criteria and procedures are used, and can verify that laws and approved policies are being followed.
Transparency means the right of access for citizens to administrative documents and information and to the rule-making process. In private pension schemes, individuals should be able to make informed choices among competing providers, offering different plans, with different retirement ages, benefits levels, and so on.
Social security schemes often fail to explain adequately their broad concepts and objectives and to advise the insured persons how their records are progressing or what is happening to the contributions that they have paid. This failure is partly due to the complex legislation which is difficult to explain to the insured persons and employers.
Transparency of pension schemes could be improved by better public relations activities aimed at making social security obligations and rights simple to understand and by emphasising the linkage between benefit entitlement and contributions.
Evasion and compliance with legislation Contribution evasion - not complying with the regulations pertaining to the amount and frequency of contributions - is one of the biggest problems experienced by social security schemes. It is only possible if the social security administration tolerates it or if it does not have the authority or resources to enforce compliance with the statutory contributory provisions.
Each pension administration should actively promote compliance with the legislation because evasion has an immense effect on the solvency and trustworthiness of the scheme: it influences the adequacy of benefit payments to participants as well as both the financial status and the political legitimacy of the entire programme. And it creates inequities between employers who meet their contribution obligations and those who do not, and similarly between workers who contribute and those who do not.
Social security administrations should therefore have several possibilities to maintain compliance with legislation. The enforcement activities - activities which force employers and employees to comply with the statutory obligations - should relate to the different causes of non-compliance and comprise of a prompt verification that contributions are paid on time, meaningful penalties, legal recovery procedures, a priority for social debts and a critical inspectorate with inspectors having the right to examine employers’ records at any time.
The problem of evasion is often compounded by administrative weaknesses: many social security schemes experience great difficulty in processing the registration of insured persons, in allocating a social security number and in ensuring that this number is applied to that individual regardless to changes in employment.
Collection of contributions Both social security and tax administrations need to collect contributions or taxes and have therefore lots of functions in common: • Registration of all businesses and individuals; • Maximum collection of all amounts legally required to pay; • Effective enforcement to increase overall voluntary compliance; • Record maintenance.
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These common functions can easily be integrated. A unified collection system for both taxes and social contributions is always more cost-effective and it simplifies collection arrangements. But its introduction would imply the need to harmonise taxable and insurable earnings and definitions as to the status of workers and taxpayers.
The tax administration can solely be an operator for the social security administrations. Separate accounts for both administrations are needed and the collected social contributions should be transferred immediately to the social security scheme.
This unification approach is the reverse of the specialisation approach. Many countries have developed a system with different specialist agencies administering different schemes sometimes in respect of different occupational groups. Such an approach reduces the range of risk pooling since those insured are more homogeneous, but it could be argued to be inconsistent with social insurance principles and, in the governance context, to lead to a duplication of functions and to higher aggregate administrative costs.
Financial security of the benefit level The financial security of benefit levels should be regarded as a critical element in the development of effective regulations for private systems. When planning their income maintenance in old age, individuals face three areas of risks: • labour market risks; • investment risks; • the risk of inflation.
Labour market risks encompass all the contingencies which may limit the career of an individual. For example, adequate provision for old age is difficult to attain in the case of precarious employment, interrupted work histories or outright unemployment. Similarly, disability, health problems or caring for children and frail elderly may constrain an individual’s capacity to accumulate adequate entitlements.
Investment risks include partial or full loss of savings or investments, either as a function of the ups and downs of the market, or as a consequence of the bankruptcy of a pension plan or its sponsor.
While many public pension schemes provide benefits that are indexed to prices or wages, the risk of inflation in many private pensions schemes is borne fully by the individual, if annuities are not indexed to inflation.
If the investment risk and the risk of inflation are borne by individuals alone, the most probable result is a high level of inequality between cohorts of pensioners and a considerable degree of insecurity with regard to economic well-being in old age.
Governments have to deal with this financial security of benefit levels in their regulatory frameworks.
Accountability The persons entrusted with the task of taking decisions in government, the private sector and civil society organisations have to be accountable for their actions to all citizens and institutional stakeholders. Accountability may be limited to financial results or it can cover both financial and operating results.
The UN Manual on Government Accounting specifies three types of accountability objectives:
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• Fiscal accountability ensures that applicable laws and regulations are followed, that financial records and reports are accurate and represent a fair result of government operations, that the accounts and reports are issued in time, and that expenditure is within legislative appropriations; • Managerial accountability which stresses the need to provide essential information for the use of managers ensuring efficiency and economy of operations and avoidance of waste; • Programme results accountability which demands the evaluation of programmes in terms of effectiveness, to find out whether a programme or activity is achieving the intended goals.
Even where arrangements for accountability exist, they do not function well in many countries and do not promote the interests of most people. They do in most cases an even poorer job of protecting the interests of minorities, women and poor people.
Reduction of costs The pension level depends partly on the cost of administering the pension scheme. These administrative charges consume a non-negligible proportion of the benefits and, what is more, bite particularly hard the weakest on the labour market. They consume a higher proportion of savings for low income individuals because the administration of individual accounts involves a component of fixed expenditures.
In general, privately administered schemes incur significantly higher expenses than efficiently administered public schemes do and the expected higher investment returns cannot always offset the higher expenses. For the future of all the scheme members, it is necessary to reduce acquisition expenses (principally commissions) and other expenses which are deducted from contributions and which have a direct and major impact on the amounts individuals accumulate in their individual accounts and on the resulting pensions.
Regulatory frameworks and supervision Where the State does not operate the schemes itself, it must establish a wide range of prudential regulations, coupled with a rigorous supervision framework, which safeguard individual contributions over a long time, and ensure that the benefits are efficiently delivered.
Regulatory frameworks Regulatory frameworks include the full range of legal instruments by which governing institutions impose obligations or constraints on behaviour in society. The basic objectives behind the regulations in the social security sector are to protect the people covered by such schemes - particularly their right to fair and adequate benefits - and to ensure that the schemes are solvent. Regulations of pension schemes have indeed to make sure that citizens, at the age of retirement, are entitled to an adequate level of pensions after having paid a lot of contributions during their working life.
The regulatory frameworks in the social security sector should answer three fundamental questions. They should ensure or enhance equity between all citizens, ensure or enhance the adequacy of the promised social security benefits and guarantee the financial security of these benefits and the invested assets.
The financial security of benefits should be regarded as a critical element in the development of effective regulations for private systems, while private systems entail a series of financial risks requiring appropriate prevention and supervision. The primary objective here is to protect beneficiaries from the effects of the sponsor’s insolvency, insufficient funding of the plan because of improper
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The way in which the public and private sectors are regulated not only affects all citizens but also the economic competitiveness of the country. Regulatory quality is crucial for economic performance and government effectiveness.
The principles of good governance of a pension scheme - overall responsibility of the State, solidarity, satisfactory income, consultation and participation, financial security, reduction of costs, transparency, compliance with legislation and quality of management - should be at the core of the regulatory framework.
Supervision Having an adequate regulatory framework is not enough for the effective delivery of pensions. Pension funds should be supervised too: governments need to ensure that the enlarged private sector, in following its private interests, is also meeting the requirements of society as a whole.
The supervision of pension funds should be conducted by a special authority and should incorporate the following three basic aspects, namely the ex-ante licensing activities, the ongoing monitoring and inspections and the remedial and punitive problem resolution.
The licensing of funds has to deal with the range of methods for the approval of funds to operate. Prior to the granting of licences, funds are required to provide extensive documentation regarding their compliance with minimum capital levels, reserves or other financial criteria. The legal form of organisation of the fund management, business and marketing plans, investment policies and the qualifications of the relevant staff are scrutinised, to assess a priori the adherence to the requirements prescribed by the law and regulations.
The core of most supervisory programs is the monitoring of the activities of funds. These comprise two main forms of activity: the review of reports on the financial status of pension funds (off-site surveillance) and the conduct of on-site reviews. These on-site inspections are often the most visible element of a supervisory program. Virtually all legal systems provide supervisors with the authority to access all the records and examine other relevant materials on site.
The application of sanctions for remedial and punitive purposes is usually the most difficult part of any supervisory program. Sanctions available to supervisors include removal of persons from positions of authority in funds, their permanent exclusion from involvement in the pension fund business, and the unwinding of transactions deemed inappropriate. Restitution of losses, fines and criminal penalties for more egregious problems are also typically available to supervisors, although the authority for the application of these may be separated from the supervisory agency.
The supervision agency should have the proper regulatory and enforcement powers, preferably including the duty to act promptly according to well specified triggers, and should also have adequate protection against lawsuits. It requires clear powers and an objective legal framework to mitigate risks of litigation, overreaction, inaction and interference.
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CONCLUSION Designing a sustainable pension scheme contributes substantially to the objective of social justice and social integration. Like Kofi Annan stated, “good governance is perhaps the single most important factor in eradicating poverty and promoting development”.
Good governance of pension schemes contributes to the sustainability, feasibility and credibility of these schemes. The effectiveness of pension schemes is in fact a question of good governance and not a question of being public or private. Pension schemes are indeed only as effective as their administration.
But good governance of pension schemes is not so easy to realise. It necessitates transparency of operations, a regulatory framework and an efficient supervisory authority both adapted to the country’s unique features and the involvement of civil society in the achievement of a productive society.
The weaknesses in the governance of pension delivery would not necessarily be solved by privatisation: they may only appear in another form or may be replaced by different problems.
The choice of government for a public or private pension scheme is in other words less important. It is good governance which is the decisive factor in the context of pension delivery.
The biggest challenge for your country, Georgia, is providing good governance in order to ensure the sustainability of pension schemes in the context of the social, economic and demographic transitions that your country is going through at the moment.
Most convinced that ISSA can be instrumental in providing with best practices, benchmarking and documentation of any kind, I wish you all success!
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APPENDIX II: LEGISLATION OF SOCIAL INSURANCE AND PUBLIC PENSIONS
Presentation by Irakli Koplatadze, General Director of the United State Social Security Fund of Georgia at the International Conference “A State Pension System in Transition” organised by the Georgian Government and the State United Social Security Fund of Georgia
Tbilisi, September 18-20, 2002
One of the problems facing the social insurance and public pension system in Georgia is an inadequate legal and regulatory framework that is the mix of old soviet heritage and current financial hardships.
Between 1998 and 2000 several laws related to the public pension system were drafted. In 1998, the Law on State Social Insurance, the Law on State Pensions and the Law on Medical Examination were developed by the Pension Department, which was located within the Ministry of Labour and Social Protection. In 1999, a working group lead by a deputy state minister of Georgia prepared a Proposal for the Reform of the Social and Medical Insurance Sector in Georgia. Unfortunately, all these documents were rather unrealistic in assessment of the possibilities of Georgian economy.
In the beginning of 2002, the Ministry of Health, Labour and Social Protection and the United State Social Security Fund of Georgia, in close cooperation with the World Bank social protection team drafted a new package of laws regulating mandatory social insurance and public pensions. These are the following laws: "On Mandatory Social Insurance", "On Mandatory Insurance Pensions", and "On Introduction of Individual (Personalized) Accounting and Individual Accounts in the System of Mandatory Social Insurance ".
DRAFT LAW ON MANDATORY SOCIAL INSURANCE The purpose of this draft law is transformation of the social sphere of the country into one with insurance principles, formation and development of a new legislative basis aimed at realisation of guaranteed rights on social protection of thepopulation under the constitution of Georgia that will provide for real guarantees of social protection of the population. The draft law determines legal, economic and organisational basics for mandatory social insurance of the population.
The draft law has been prepared based on the decree of the President of Georgia No. 156, of April 7, 2002, “On First Priority Measures Aimed at Realisation of the Social Development Concept”, and carrying in mind the new economic situation in Georgia and the international experience.
This document will be a framework law regulating only basics of mandatory social insurance against loss of income due to the following cases: a) old-age, disability and death of breadwinner; b) temporary disability; c) pregnancy and childbirth; d) pre-18 months child care; e) unemployment insurance; f) allowance for death of insured person; g) health rehabilitation; h) mandatory medical insurance.
The social insurance system envisages a universal coverage of all economically active individuals, including self-employed and agricultural workers, based on the obligatory payment of an integrated social insurance contribution (currently 33 per cent). The contribution of employees' is linked to their
94 GEORGIAN ECONOMIC TRENDS – 2002 No.2 LEGISLATION OF SOCIAL INSURANCE AND PUBLIC PENSIONS individual salaries, while self-employed and farmers are paying a reduced amount (18 per cent) that is tied to the average salary in the economy.
While the draft includes general clauses on unemployment insurance as a part of the mandatory social insurance system, its introduction will be postponed for the time being due to the nature of the unemployment in Georgia that is systemic and not cyclical. In such a situation, the unemployment insurance has neither economic, nor social risk management justification. In the medium term Georgia will focus on providing flat unemployment assistance for a relatively short period of time to those who have lost their jobs.
Besides the current insurance cases, the draft law considers the introducing of rehabilitation insurance, death allowance and pre-18 months child care benefits. According to our projections, cost of these additional programs will be 3 per cent of the Fund's total insurance income, which will be financed from expected expansion of the contribution base after the power of mandatory contributions administration is delegated to the USSSF. Thus, widening of the insurance menu does not require any increase in transfers or expenses of the State Budget.
Currently, any amount of wages is subject to payment of social insurance contribution. The draft law introduces a social insurance contribution base, with the minimum and maximum amounts, expressed as a percentage of the average salary in the country (for instance, 65 per cent as a minimum and 1,000 per cent as a maximum). It is believed that this will reduce the widespread evasion of the contribution payment.
The draft law considers separating the obligations between the State and the Fund, so that all social benefits not subject to insurance cases are financed from the state budget. Such benefits annually amount on average to GEL 86 million, whereas the Fund receives only GEL 47.3 million as a targeted transfer from the state budget. After enactment of this draft law, the State Budget will have to fully finance non-insurance benefits. As a result, the Fund will be able to gradually cover pension arrears accumulated in 1998-2000.
DRAFT LAW ON MANDATORY INSURANCE PENSION The draft law regulates mandatory insurance pensions and, accordingly, defines all non-insurance benefits (such as social pension, military pension, etc.) that will be regulated, administered and funded separately.
The draft law will regulate the first pillar of the pension system. The economic, institutional, financial, and fiscal situation in Georgia is assessed as not favourable for successful introduction of the second pillar (mandatory, fully funded, privately managed) in the medium term. In order to ensure sustainability and affordability of mandatory pension insurance, the draft law does not provide either for early retirement or privileged benefits (top-ups for special categories of pensioners).
The pension system will be based on notionally defined contributions (NDC) with a flat minimum benefit (basic pension) guaranteed to all participants meeting the minimum requirements for retirement. This will allow Georgia to strengthen the link between benefits and contributions, while providing a minimum guarantee based on solidarity.
The main parameters of the system, based on actuarial analysis conducted by the USSSF of Georgia, are as follows: retirement age – 65 for both men and women (the retirement age for women that is currently 60, will gradually increase to 65 at a pace of a half a year per calendar year); minimum
GEORGIAN ECONOMIC TRENDS – 2002 No.2 95 LEGISLATION OF SOCIAL INSURANCE AND PUBLIC PENSIONS contribution history – 15 years; basic pension – 13 per cent of the average wage in the economy in the previous year. The NDC part of the pension will be calculated using life expectancy at the age of retirement, equal for both men and women. The notional capital will be valorised yearly according to the price index, capped with the average wage increase. The same mechanism will be used for the indexation of already assigned benefits, but at the first stage they will be indexed on a discretionary basis, within the available resources of the USSSF. The new system is expected to generate average replacement rate (average pension relative to the average wage) of 33 per cent.
The pension insurance contributions (currently 28 per cent) will be split into two parts: one that would cover the basic pension (solidarity) part and the other that would be recorded on individual accounts. The initial split envisaged by the draft law is 20+8 (20 percentage points to cover the solidarity part and 8 percentage points to be recorded on individual accounts). It is expected that the NDC portion will be gradually increasing.
The pension rights acquired by the workers before the enactment of the draft law will be converted into initial notional capital using the following parameters: average wage in the year prior to introducing of the new system, length of employment history and the contribution rate coefficient, which is equal to the percentage points used in the new system for the transferring contributions to the NDC part (0.08).
The individual employment history for the employed will be determined based on the records in the labour books, while for farmers and self-employed documents verifying the payment of contributions will be required additionally. After the introduction of the new system, the insurance histories will be determined according to the records on individual accounts.
Disability pensions will be awarded for the first (severe) and second (substantial) disability categories. The minimum length of employment history equals to 15 years.
In contrast to the current system that awards 100 per cent pension to each surviving member, the new system will cap the amount to be received by the survivors based on their number. At the same time, the guaranteed minimum is provided for each member too.
DRAFT LAW ON INTRODUCTION OF INDIVIDUAL (PERSONILISED) ACCOUNTS Moving towards the insurance principles in the social security system of Georgia requires putting in order accounting and personalized accounting of employees (the insured) and employers (the insurants), and introduction of individual accounts being the most well-checked and developed system. Creation of personalised accounting is the central point of social insurance.
The draft law will clearly spell out the responsibilities of the USSSF of Georgia in controlling, monitoring, und supervising collection, recording and valorisation of social insurance contributions.
The personalised accounting will be based on introduction of notional-savings accounts and provision of correct and full information on labour history, income and insurance contributions, which represent background for determining the amount of insurance benefits (pension, allowance, etc.). The accounting database will give the informational support for projecting of insurance benefit expenses, adjusting of insurance contribution rates and analyzing data on insurance benefits.
The draft law describes organisational system of individual (personalised) accounting and sets out rules of processing the individual account of insured person, defines the rules for submitting and keeping the information on an insured persons by employee, employer and self-employed to the
96 GEORGIAN ECONOMIC TRENDS – 2002 No.2 LEGISLATION OF SOCIAL INSURANCE AND PUBLIC PENSIONS insurer, considers obligations and responsibilities of the insured person, the insurant and the insurer for breach of law, and sets out the rule of dispute settlement between the parties.
The draft law makes a clear reference to the applicable Georgian legal acts regulating data privacy protection. Financial support for the implementation of this draft law is provided by the World Bank programme in the amount of USD 1.5 million and does not require additional funding from the state budget.
PUBLIC AWARENESS In addition, strategies to educate the public on the current approaches to structural changes in the system are necessary in order to outline the rationale for the social reforms. As such, successful models of public education campaigns implemented in other countries would provide insightful suggestions on how Georgia can reach out to the public at large. Public education programmes that include the goal of developing a basic understanding and need for the reforms would help to foster political will of population if incorporated into the overall strategy at the early stages of the reform.
GEORGIAN ECONOMIC TRENDS – 2002 No.2 97
APPENDIX III: GEORGIA: A DECADE OF TRANSITION
By Lekso Liparteliani, Galt & Taggart Securities LLC
Georgia is a post soviet country with an economy in transition. Following the collapse of the USSR, the country experienced a significant economic recession, and stable growth is the only way to build a western-oriented, democratic community. Here we have presented brief analyses of the country’s performance during recent years. We note that current economic tendencies are far from desirable, which is obvious by looking at Georgia’s financial market development. However, it is noteworthy that such highly important sectors as banking and telecommunications maintain extremely high growth rates, and this enables us to remain optimistic about the country’s medium term growth prospects.
GROSS DOMESTIC PRODUCT Political developments in the early 1990s affected both the level and the structure of the Georgian economy. During 1990-94 the country’s GDP took a heavy hit due to the break-up of the Soviet Union and a civil war in the country. During this period the country’s GDP dropped by more than 70 per cent, which is an unbelievably big figure even if compared with other FSU countries. However, GDP showed a consistent growth since 1995 after the political and economic situation in Georgia stabilized. The economic growth achieved high single digit and double-digit levels in 1996 and 1997, respectively. However, it slowed down after the impact of Russian financial crisis in 1998. Nevertheless, predictable monetary policy and reduction of interest rates may mark the start of the investment process in the Georgian economy, translating into an acceleration of the country’s economic recovery.
Figure 1: Real GDP Growth during 1990-2003
120% 100% 100% 79% 80%
60% 43% 38%40%42% 34%35% 36%37% 40% 31% 28%28% 31%
20%
0%
Source: State Department for Statistics, Galt & Taggart forecast
Since the early 1990s, the GDP structure changed in favour of agriculture as the industrial sector showed faster decline due to firstly, losing key contacts with suppliers and customers in other FSU countries and secondly, shortages of energy supply during most of 1990s resulted in disruptions in production processes. In the mid 1990s, agriculture accounted for about one-third of the country’s GDP. In 2000 and 2001, the share of industrial sector declined to about 20 per cent and 19 per cent, respectively, thus giving Georgia the status of an agricultural country. The non-corporate sector – small households – produces about 90 per cent of agricultural products, a significant part of which is intended for personal consumption.
98 GEORGIAN ECONOMIC TRENDS – 2002 No.2 GEORGIA: A DECADE OF TRANSITION
Three other industries, which together with agriculture account for approximately two-thirds of the country’s GDP are 1) manufacturing (including electricity, gas and water supply), 2) trade, and 3) transport.
Manufacturing, the second largest industry, accounts for 17 per cent of GDP. About a quarter of the industry is based on processing of agricultural goods and is not incorporated, i.e., it is produced by households. Trade represents more than 12 per cent of GDP. Its share has been stable during the last five years as higher trade with Turkey compensated the decline in trading activity with Russia. Transport is one of the highest growth segments of the Georgian economy. Its share in GDP increased from 2 per cent in 1996 to 11 per cent in 2001.
The share of services in 2001 amounted to 60 per cent of GDP, compared to only 44 per cent in 1996. The main reason of this change was the fast growth of transport, telecommunication and financial services sectors. The latter approximately tripled since 1996.
Unlike in 2000, when Georgia experienced a severe drought, which resulted in a 13 per cent drop in agricultural production, 2001 showed a moderate, 5.6 per cent, growth of agriculture. While the manufacturing declined by 2.7 per cent year-on-year, in 2001 the continuing growth in transport (3.1 per cent) and communication (15 per cent) sectors as well in construction (8 per cent) resulted in a 2.5 percentage point rise in real GDP growth from 2.0 per cent in 2000 to 4.5 per cent in 2001.
In H1 2002 GDP grew by 4.2 per cent year-on-year. This was a result of maintained growth in agriculture (3.5 per cent), an unexpected 4.5 per cent growth in manufacturing, a 6.7 per cent increase in transport, a 6 per cent growth in telecommunications and a 24 per cent boost of financial services. We estimate full year real GDP growth at 4 per cent. This, in our opinion, will partially be a result of easing growth in agriculture and industry, as well as in financial sector and communications. In 2003, our forecast of 4.9 per cent rise implies slightly accelerated industry growth, but continuing decline of growth rates in communication and financial services.
In the long term, the county’s sustainable economic growth, in our opinion, depends on three factors:
1. Level of investments and investment growth The first factor depends on overall macroeconomic stability, protection of property rights, rule of law and liberalization of the major industries. Reduction of real interest rates may result in investment growth.
The State Department of Statistics does not report figures for total investments in the Georgian economy. Therefore, the only guide for investment trends is foreign investment statistics reported as a part of the balance of payments. We intuitively believe that foreign investments could account for about a half of the total investments in the economy. Consequently, the future economic growth heavily depends on the level of foreign investments in the coming years.
GEORGIAN ECONOMIC TRENDS - 2002 No.2 99 GEORGIA: A DECADE OF TRANSITION
Figure 2: Net Foreign Investment (USD million)
450 400 350 300 250 200 150 10 0 50 0 1996 1997 1998 1999 2000 2001 2002F 2003F
Source: State Department for Statistics, Galt &Taggart forecast
Investment trends have been disappointing for the last five years. Not only its level was only 9 per cent of GDP in 2001, but also it had unstable up-down trend. The graph shows the foreign capital inflows into the Georgian economy. The reduction in 1998 was due to the devaluation of lari resulting from the Russian financial crisis, whereas the decline in 2000 resulted from low privatisation revenues and the delay of the IMF programme since 1999, which was restored in 2001 and immediately translated into the increase of total foreign investments in 2001.
2. Incorporation of agricultural and its related industries The development of a corporate sector in agriculture and in the non-corporate part of the manufacturing industry, related to processing of agricultural products, is crucial for the economy taking into account its large share in the country’s GDP. Lack of profit seeking enterprises stalls the long- term sustainable growth in these sectors and limits the investments.
As we noted before, about 90 per cent of agricultural production takes place in the non-corporate sector. We saw no significant changes in this figure over the last six years. We, however, observe a small decline in non-corporate manufacturing, the share of which slightly dropped from 29 per cent in 1996 to 27 per cent in 2001.
Table 1: Distribution of Manufacturing and Mining Industry Production (per cent) 1996 1997 1998 1999 2000 2001 2002 F 2003 F Corporate 71.5 72.9 72.4 74.2 78.7 72.6 70.2 70.1 Non-corporate 28.5 27.1 27.6 25.8 21.3 27.4 29.8 29.9 Total 100 100 100 100 100 100 100 100 Source: State Department for Statistics, Galt & Taggart forecast Note: F - forecast
We believe that development of the corporate part is a very slow process and requires demographic, economic and legislative changes, including allowing free sales of agricultural land. This is the result of our pessimism in the hope that breakthrough can be achieved in this issue in the next 5-7 years.
3. Overcoming the energy crisis The shortage of primary energy resources resulted in the energy crisis from the interruption of electricity and gas supply to major industrial enterprises. This has been a significant factor limiting the economic growth of the country, particularly in the industrial sector. Continued dependence on
100 GEORGIAN ECONOMIC TRENDS – 2002 No.2 GEORGIA: A DECADE OF TRANSITION
Russian energy sources and complications in the political relationship with Russia have negatively influenced solution of the energy problem. Declining oil prices will somewhat ease the problem in the short-term. However, more radical steps from the Government are required both on the domestic and international fronts for the long-term solution of the issue. We imply complete liberalization of the energy industries and allowing for the cut-off of non-paying consumers, as well as negotiations with Russia and taking full advantage of oil and gas exporting projects involving transportation through Georgia.
INFLATION With the exception of 1998 and 1999, Georgia has achieved low single digit inflation since 1997. Inflation measured by the CPI over the period amounted to only 3.4 per cent in 2001. An extremely low level for such an emerging market economy as Georgia is a result of very strict monetary policy implemented by the National Bank of Georgia (NBG) with the support of the IMF and the World Bank. The 11 per cent inflation level in 1998 and 1999 was caused by Lari devaluation in the end of 1998 and beginning of 1999, translating into higher prices on imported goods.
One characteristic of inflation in the country is its seasonality within a year. This is due to the relatively large portion of agricultural goods included in the consumer basket. The change in CPI decelerates during the summer due to seasonal decreases in prices of agricultural products (See figure 3 below).
We forecast 5.9 per cent and 6.7 per cent inflation levels in 2002 and 2003, respectively. The increase in 2002 accounts for growth in electricity prices on the one hand and stable prices on agricultural products on the other hand.
In our opinion, the government will attempt to maintain around 5 per cent inflation in the long term. However, the need for easing its monetary policy in order to fuel economic growth may result in higher inflation levels. Taking into account low capacity utilization in the country, we believe that the Georgian economy can achieve a significant growth levels at high single-digit inflation levels.
Figure 3: CPI (month-on-month change) (per cent)
14 % 12 % 10 % 8% 6% 4% 2% 0% -2% -4%
Source: State Department for Statistics
BALANCE OF PAYMENTS Georgia has run sizeable trade deficits for the last four years. This was a result of the strict monetary policy implemented by the Government. Total imports in 2001 comprised USD 1.3 billlion compared to exports of USD 810 million. Nevertheless, the deficit of USD 549 milllion reported in 2001 declined from a high of USD 760 million in 1998. The drop was a result of 38 per cent Georgian lari devaluation
GEORGIAN ECONOMIC TRENDS - 2002 No.2 101 GEORGIA: A DECADE OF TRANSITION in 1998, that followed the fall of Russian rouble, Georgia’s neighbour and one of its largest trading partners. The net result of the 1998 devaluation and the Russian crisis was a fall both in exports and imports, but imports fell more as products from countries other than Russia became less competitive in Georgia.
Figure 4: Trade and Current Account Balances (USD millions)
-800 -600 -400 -200 0
-675 -499 1997 -760 -416 1998 -534 -195 1999 -562 -288 2000 -549 -211 2001 -602 -230 2002F -635 -211 2003F
Trad e B alance Current A ccount B alance
Source: State Department for Statistics, National Bank, Galt & Taggart
We expect that the increase in export in 2001 will continue in the next two years, with exports reaching USD 987 million by 2003. However, as we do not anticipate the significant acceleration of GDP growth in the coming two years, we also do not expect an improvement of trade balance at the same time, as imports are expected to grow too.
About half of Georgia’s USD 549 million trade deficit is covered by positive flows of income and unilateral transfers. This includes assistance from foreign governments and transfers made by the Georgian diaspora to their families in Georgia. The latter is an important element of the current account balance, although only estimated by the State Department of Statistics at more than USD 150 million annually. This alone explains much of the mystery of the currency stability despite the substantial trade deficit during the last four years.
The capital account balance was positive and totaled about USD 285 million in 2001. A significant part of the account was foreign direct investments, which accounted for 38 per cent of the surplus. Another important part of the capital account includes government and banking sector loans. Unlike in 2000, FDI declined from USD 132 million in 2000 to USD 109 million in 2001, despite the increase of total foreign capital inflows. The possibility of raising foreign investments in 2002 will largely depend on the success of the government privatisation plans in communication, transport and energy sectors, about which we are somewhat pessimistic. Although continuing the IMF programme that resumed in January 2001 means that Georgia will receive additional funding from the IMF and the World Bank as well. We expect also the expansion of foreign credit lines by major Georgian banks. Altogether, we forecast 7 per cent increase of capital account surplus in 2002.
EXCHANGE RATE AND MONETARY POLICY The Lari, the Georgian national currency, was introduced at the end of 1995 at an exchange rate of 1 GEL/USD. However, a 30 per cent devaluation occurred immediately after the introduction. After the stable 1996 and 1997 years, Lari experienced another 38 per cent devaluation in October 1998. This was due to the sharp fall in the Russian ruble and the lack of resources in NBG to finance an increasing current account deficit. NBG more or less managed to smooth out the external shock and
102 GEORGIAN ECONOMIC TRENDS – 2002 No.2 GEORGIA: A DECADE OF TRANSITION was able to stabilize the rate at 1.8 GEL/USD until the end of 1998. Starting from 1999 NBG limited its interventions in the currency market, stopped the reduction of money base and introduced a floating exchange rate policy.
At the end of 2001 the exchange rate was 2.06 GEL/USD implying a 4.3 per cent devaluation in 2001, compared to 2 per cent appreciation in 2000 and 7.8 per cent devaluation in 1999. Unlike in 1998-1999, in 2000-2001 NBG was a net buyer of foreign exchange. This indicates the establishment of a natural balance of the exchange rate as a declining current account deficit is financed by foreign capital inflow.
NBG continued a similar approach in H1 2002 as payments for foreign debt require the accumulation of foreign exchange reserves. We note that the NBG’s foreign exchange reserves amounted to USD 159 million at the end of 2001, a 46 per cent increase compared to the end of 2000. IMF financing and purchases of USD 35 million on the domestic market were the main source of this increase. The total reserves (including SDRs and gold) correspond to an import cover of only 47 days, which is lower than the respective figure for the most of the CIS countries. As of June 30, 2002 foreign exchange reserves totaled USD 146 million, showing a slight decline. Despite the fact that the figure shows the vulnerability of the exchange rate, we believe that the NBG will be able to maintain relative stability of the currency in the next two years. The resumption of the IMF programme should help to maintain the current import cover despite an increase in imports. We expect a 9 per cent and an 8 per cent Lari devaluation in 2002 and 2003, translating into end of year exchange rates of 2.2 GEL/USD and 2.4 GEL/USD, respectively.
Figure 5: Exchange Rates GEL/USD
0.5
1. 0
1. 5
2.0
2.5
Source: National Bank of Georgia
In 2001 the money base increased by 14 per cent and the growth of M2 and M3 money aggregates amounted to 6 per cent and 18 per cent, respectively. The M3 money multiplier showed a healthy growth from 1.68 in 2000 to 1.75 in 2001 due to a 26 per cent increase in bank deposits. As a result, the growth of M3 was 1.34 times more than money base growth in 2001.
The Georgian economy, which was generally dollarized until 1997, is increasingly using GEL as a means of payment. This will have a positive impact on the monetary indicators. On the other hand, the main saving instrument is still the US dollar and changes in this trend remain slow. Foreign currency deposits represented 86 per cent of total deposits in 2001. This means more growth for the M3 multiplier than the M2 multiplier.
A significant part of the Georgian economy is not monetarised, resulting in usage of non-cash payment systems. This is indicated by money velocity (by M3), which is very high and amounted to
GEORGIAN ECONOMIC TRENDS - 2002 No.2 103 GEORGIA: A DECADE OF TRANSITION
9x in 2001. However, decreasing nature of this indicator (velocity totaled 13x and 10x in 1999 and 2000 respectively) shows that the economy is becoming more monetarised. We believe that this trend will continue in 2002 and 2003.
In the environment of an expected 3.9 per cent real GDP growth and 5.9 per cent inflation, we expect a 12 per cent increase in the money base in 2002. We believe that the NBG’s monetary policy remains strict and limits the economic growth potential of the country. In our opinion, the economy needs a boost in terms of a more liberal monetary policy as a higher Lari devaluation to sustain an above 5 per cent growth rate.
FISCAL POLICY State budget revenues amounted to GEL 749 million in 2001, representing only 11.5 per cent of GDP. The figure is disappointing taking into account that it includes current transfers of foreign grants to the government. As a percent of GDP, budget revenues increased by 0.6 per cent in 2001 compared to preceding year. Unable to boost a particularly low tax collection level represents the main frustration regarding the government’s fiscal policy. We believe that a significant part of the Georgian economy, so called grey economy, remains untaxed and this substantially reduces the government’s financial resources.
Budget expenditures totaled GEL 931 million, or 14.3 per cent of GDP. Expenditures as a per cent of GDP remained practically unchanged, increasing by just 0.2 per cent, thus reducing the budget deficit to GEL 181 million, or 2.8 per cent of GDP (compared to 3.4 per cent in 2000). In our opinion, the main reason for the budget deficit is the low revenue and not inflated expenses.
On a consolidated budget level, government’s total revenues amounted to GEL 1,073 million and expenditures of GEL 1,260 million, translating into a deficit of GEL 187 million, or 2.9 per cent of GDP. The deficit shows a decline from 3.6 per cent of GDP in 2000.
Figure 6: State Budget Expenditures vs. Deficit (GEL million)
1, 4 0 0 1, 155 1, 2 0 0 1, 0 2 0 931 1, 0 0 0 860 844 777 810 800 600
400 236 231 204 19 7 18 1 158 14 6 200 0 1997 1998 1999 2000 2001 2002F 2003F
deficit exp endit ure
Source: State Department for Statistics, Ministry of Finance, Galt & Taggart forecast
We expect the budget picture to remain close to 2001 levels within the next two years. The government needs to restructure its tax department to make a leap in budget execution mostly on the revenue side. In our opinion, there is little room for cutting expenses in order to achieve a balanced budget.
104 GEORGIAN ECONOMIC TRENDS – 2002 No.2 GEORGIA: A DECADE OF TRANSITION
We expect state budget revenues of GEL 862 million in 2002 or a 15 per cent growth compared to 2000. This is significantly more conservative than the official budget figure of GEL 1,040 million, which implies a 39 per cent growth year-on-year. H1 2002 results suggest that our forecasts are more realistic than the projected target, as in this period collection was GEL 392 million or just 38 per cent of the annual target and even an increase in the monthly average collection level up to GEL 85 million in H2 2002 will imply a GEL140 million shortfall at year end. Therefore, we do not rule out another sequester in 2002 as in 2001 and estimate the state budget deficit at 2.3 per cent of GDP in 2002.
Unlike in the preceding year, when 61 per cent of the state budget deficit was funded from NBG, in 2001 the major source of the state budget deficit financing was external sources. 88 per cent of deficit financing came from abroad, compared to just 18 per cent in 2000. The H1 2002 trends showed a similar movement as the internal sources funded 30 per cent of deficit versus the 70 per cent financing from abroad.
FOREIGN DEBT The Georgian government’s foreign debt amounted to USD 1.6 billion at the end of 2001, which represented 51 per cent of GDP. The short-term nature of the major part of the debt and the government’s limited capacity to service the principal part of the debt resulted in the accumulation of the debt arrears with Turkmenistan and Russia in 2000. The main part of the foreign debt was accumulated up to 1997 and is denominated in USD. Since 1998, foreign debt accumulation has stopped. Still the country saw a sharp increase in the debt/GDP ratio in 1999 due to the exchange rate adjustment in 1998.
Table 2: Foreign Debt of the Government (end of period) 1996 1997 1998 1999 2000 2001 Government foreign debt (USD millions ) 1,348 1,509 1,627 1,631 1,543 1,601 Per cent of GDP 44 42 45 57 51 51 Source: National Bank of Georgia
STOCK MARKET
Infrastructure Georgian securities law defines the main framework for the securities market. It states licensing conditions for stock exchange, central depositary, brokerage companies and registrars.
National Commission for Securities (NCS). According to the securities law, this is the main regularity body supervising all market participants. It is responsible for licensing the stock exchange, central depositary, brokerage companies, registrars, and their professional staff. It also oversees periodic (annual and semi-annual) and transactional disclosure of public joint-stock companies (JSC). In addition, NCS can issue rulings, which are mandatory for public JSCs as well as other members of the market. Mainly NCS is responsible for adopting disclosure standards of reporting JSC, prospectuses for issuing new securities and trade rules for the stock exchange.
A JSC is considered public if its stock is publicly offered, which means that any of the three factors apply: 1) JSC has more than 100 shareholders; 2) share issuing documents did not define the number of shareholders; 3) the stock is admitted to the stock exchange.
GEORGIAN ECONOMIC TRENDS - 2002 No.2 105 GEORGIA: A DECADE OF TRANSITION
All public JSCs are required to have a licensed securities registrar for maintaining its shareholders register. Currently, there are 7 licensed registrars in Georgia and all of them are independent. Shares in Georgia do not exist in a paper form. Interestingly, this is the requirement of the securities law. In this environment the role of the registrars and their independence become quite important.
Any transaction in a public JSC shares may take place only through a licensed broker and should be registered on the Georgian Stock Exchange. Today there are 17 brokerage companies, which are permitted to trade on the exchange.
Georgian Stock Exchange (GSE) is a non-profit JSC established by brokerage companies. Currently it has 38 members. GSE is the only trading platform for Georgian stocks. Trading on the exchange started in April 2000. Like in Russia and Ukraine, the electronic trading system of GSE was developed with the support of USAID and has a similar interface to the Russian and Ukrainian trading systems.
Central Depositary was created in order to arrange settlements among brokers. The adopted trading rules and procedures guarantee the payments and exclude the possibility of withdrawal from the transaction after the trading session. Central Depositary uses any of the four qualified clearing banks for settlement of all transactions on GSE.
GSE rules distinguish securities, which are listed and those, which are admitted to trade on GSE. There are only two requirements for admission to trading on GSE: 1) register should be maintained by an independent registrar; and 2) an issuer should report its financial statements in accordance with the Georgian Accounting Principles. Requirements for listing are much stronger. Listed securities, in addition to the conditions set for admitted stocks, should satisfy the following provisions:
• Ownership capital - not less than USD 100,000 equivalent in GEL; • Operating history of JSC - not less than 3 years; • Profitability - at least 2 out of the last 3 years; • Number of shares issued - at least 50,000. • Financial reporting according to the International Accounting Standards.
There are no investing and trading differences between listed and admitted stocks. Nevertheless, listing would indicate not only larger size and relative financial stability of the company, but also management’s readiness to create a truly public company. Still, we view that listing requirements, particularly the item on profitability, are too strict even by Western standards. Currently, only the Bank of Georgia, the largest commercial bank in the country, has applied for a listing on the GSE.
Market performance While 2001 was a reasonably good year for the Georgian stock market as the aggregate trading volume on the GSE reached GEL 13,077,250, a 54.9 per cent increase from 2000 (the year when trading was launched) the stock market turnover remains far from desired. This figure amounted to just 0.2 per cent of GDP in 2001 and more disappointing are the results of H1 2002 showing a 35 per cent year-on-year decline. Therefore, significant growth of volumes is not expected if the basic improvements are not made.
Some progress, but not sufficient, was made in market activity as 1,591 trades were conducted in 2001, a 165 per cent increase from 2000 which resulted in a respectable average trade size of GEL 8,220. However, the average volume per trading session remained low at GEL 128,208 in
106 GEORGIAN ECONOMIC TRENDS – 2002 No.2 GEORGIA: A DECADE OF TRANSITION
2001 compared to GEL 73,654 in 2000. Similar to trading volumes, there was a slight regress in H1 2002 with a decline of average volume per session to GEL 113,632.
Figure 7: GSE Trading Volume and GTBC index (last 12 month) (GEL million)
14 0 2.5
12 0 2.0
10 0 1. 5
80 1. 0
60 0.5
40 0.0 Jul-01 Sep-01 Nov-01 Jan-02 Apr-02 Jun-02 GSE (rhs) GTBCI (lhs)
Source: Georgian Stock Exchange, Galt & Taggart
We attribute the low trading volumes on the GSE to an insufficient market capitalization. At the end of H1 2002 this indicator was GEL 167 million or just 2.4 per cent of the 2002F GDP. This ratio is disappointingly low, and, given the potential of the domestic market, we believe that it should be no less than 20 per cent. International comparisons show that the Georgian market has room for further growth and development. We note that most of the domestic leading companies are not admitted on the GSE trading system, and if they were to be listed on the GSE, the market capitalization would be easily increasing to GEL 1 billion. It is obvious that the Georgian stock market suffers from insufficient breadth as such important sectors as Services, Transport, Construction and Telecommunications (accounting for 31.0, 13.1, 4.5 and 3.2 per cent of 2001 GDP, respectively) are not represented in the GTBC index - currently the only stock market index in the country.
Figure 8: Market Capitalization (last 12 month) (GEL million)
240
18 0
12 0
60
0 Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun
GTBCI GSE
Source: Georgian Stock Exchange, Galt & Taggart
In 2001, the Georgian Investment Bank Galt and Taggart Securities introduced the Galt & Taggart Blue Chip Index (GTBCI), which comprises ten stocks and provides the definitive market performance benchmark. While the index is characterized by high volatility, which easily may be explained by the high emergence and low liquidity of market, the GTBCI has proved a useful proxy and tracking tool for the Georgian stock market. In 2001, the Blue Chips comprising the GTBCI accounted for 85.6 per cent of the aggregate GSE trading volume. As of June 31, 2002, the Blue Chips accounted for 84.5 per cent of the aggregate capitalization of the GSE.
GEORGIAN ECONOMIC TRENDS - 2002 No.2 107 GEORGIA: A DECADE OF TRANSITION
Table 3: GTBC Index Composition COMPANY TICKER TRADING PERFORMANC MARKET FREE GTBCI SYMBOL VOLUME E 2001 CAP (GEL) FLOAT WEIGHT 2001(GEL) (PER CENT) JAN/1/2002 (PER (PER CENT) CENT) AES Telasi AEST 1,640 -23.1 81,147,886 0.09 0.23 Bank of Georgia GEB 4,871,737 113.3 32,000,000 47.60 48.82 United Georgian Bank UGB 222,783 -30.0 14,700,000 38.62 18.20 Charkhmshenebeli CHAR 119,702 2667.6 10,661,812 62.27 21.28 Bagrationi-1882 BAGR 1,100 0.0 7,413,585 5.20 1.24 Rustavcementi RUCE 35,743 300.0 6,323,836 10.34 2.10 Kazbegi KAZB 10,599 25.0 2,702,938 42.70 3.70 Department Store Tbilisi UTB 5,500,010 -49.5 1,966,030 35.48 2.24 Saqqalaqmshenproeqti SQMP 21,838 -10.0 1,116,761 58.64 2.10 Tbilisi Tobacco Factory TTFQ 90 28.2 1,038,900 3.16 0.11 Qartli Total 159,071,747 100 Source: Galt & Taggart
The lack of the high quality stocks on the GSE implied the low liquidity of market as only one stock - Bank of Georgia (GEB) - trades regularly, which together with the Department Store Tbilisi (UTB) accounted for 79.4 per cent of the aggregate trading volume on the GSE in 2001. In 2001, 94 stocks were traded on the GSE compared to 40 in 2000 despite the fact that 269 and 282 stocks were admitted to the trading system at the end of the corresponding period. More surprisingly, there were only five stocks (GEB, UTB, Saqqalaqmshenproject, United Georgian Bank, and Saqtransproject) in which more than 20 trades took place in 2001. We believe that, for as long as the most successful Georgian companies remain out of the GSE trading system, the market liquidity will continue to disappoint. The admission of financial derivatives like ADR1 of CIS and other more developed countries may raise the market liquidity.
1 ADR (or ADRs) – American Depositary Receipts – Certificates traded in United States markets which represent an interest in shares of a foreign company. ADRs were created to make it possible for foreign issuers to meet United States securtity registration requirements and to facilitate dividend collection by dollar-based investors. (GET)
108 GEORGIAN ECONOMIC TRENDS – 2002 No.2
STATISTICAL APPENDIX
CONTENTS *
Table A3.1: State Budget Revenues, H1 2002
Table A3.2: State Budget Expenditures by Economic and Functional Breakdown, H1 2002
Table A4.1: Accounts of the National Bank of Georgia
Table A4.2: Summary Accounts of Commercial Banks
Table A4.3: Monetary Survey
Table A5.1.1: Registered Foreign Trade Balance, H1 2002
Table A5.1.2: Registered Foreign Trade Balance, H1 2002
Table A5.2.1: Georgia’s Registered Exports and Imports by Harmonized Tariff Schedule (HTS) Chapters, H1 2002
Table A5.2.2: Georgia’s Registered Exports and Imports by Harmonized Tariff Schedule (HTS) Chapters, H1 2002
Table A6.1: Establishment of JSCs by Region, as of 1st July, 2002
Table A6.2: Small Privatisation by Region, as of 1st July, 2002
Table A7.1: Economic Status, Q1 1998 – Q4 2001
* Note: First digit in the number of an appendix table indicates the number of the chapter to which it belongs.
GEORGIAN ECONOMIC TRENDS – 2002 No.2 109 Table A3.1: State Budget Revenues, H1 2002 (GEL million) Actual as per Year Actual H1 The Actual as per cent Actual compared H1 target cent of Year target revenues difference of H1 target to previous year target Total ravenues and grants 928.6 448.543 381.95 -66.593 85.2 41.1 109 Tax revenues 771.3 357.246 331.366 -25.88 92.8 43.0 106 Central budget tax revenues 573.7 264.104 244.729 -19.375 92.7 42.7 income tax 19.9 9.281 8.247 -1.034 88.9 41.4 98 Profit tax 9.6 4.531 3.924 -0.607 86.6 40.9 124 VAT 374.8 172.255 166.606 -5.649 96.7 44.5 108 On domestic products 203.5 94.412 92.815 -1.597 98.3 45.6 99 On imports 171.3 77.843 73.791 -4.052 94.8 43.1 121 Excise duty 104.7 48.043 40.338 -7.705 84.0 38.5 103 On domestic products 27.1 12.637 10.059 -2.578 79.6 37.1 94 On imports 77.6 35.406 30.279 -5.127 85.5 39.0 106 Customs duty 59.2 27.426 21.163 -6.263 77.2 35.7 102 Other taxes 5.5 2.568 4.451 1.883 173.3 80.9 1% social tax 5.5 2.568 2.923 0.355 113.8 53.1 Fixed tax 1.582 Non-tax revenues 79.1 53.676 48.706 -4.97 90.7 61.6 158 Revenues of Special State Funds 198.3 93.462 86.911 -6.551 93.0 43.8 101 Social security Fund 156 73.613 70.693 -2.92 96.0 45.3 103 Roads Fund 42.3 19.849 16.218 -3.631 81.7 38.3 97 Grants 77.5 37.301 1.604 -35.697 4.3 2.1 23 Source: Ministry of Finance Table A3.2: State Budget Expenditures by Ecomomic and Functional Breakdown, H1 2002 (GEL million) Subsidies Other Business Social Interest and Capital Target Net Total Salaries goods and trips Contributions payments current expenditures programs lending services transfers General Government 91.9 9.2 2.1 3.2 14.3 0.7 0.0 2.3 60.1 Defence 17.0 4.4 0.3 0.2 8.2 3.8 0.0 Law and Order 37.9 14.9 0.4 1.4 9.1 12.1 0.1 Education 15.2 6.7 0.0 2.9 3.4 0.9 1.2 Health care 16.7 0.7 0.0 0.2 0.6 9.1 6.2 Social Security 116.3 0.0 0.0 67.3 47.5 0.1 1.4 Housing 1.9 0.0 0.0 1.1 0.8 Culture, sports and religion 10.1 0.7 0.0 0.2 0.3 7.1 0.1 1.8 Energy 12.6 0.1 0.0 0.0 12.4 Agriculture 3.0 1.7 0.0 0.8 0.2 0.2 Construction and mining 0.2 0.2 0.0 0.1 0.0 0.0 Transport and communications 19.6 0.1 0.0 0.0 1.0 18.5 0.0 Other economic activities 1.1 0.6 0.0 0.3 0.1 0.0 0.2 Other expenses 113.0 0.0 0.0 0.6 64.0 32.2 0.0 16.1 Total 456.5 39.1 2.9 9.3 106.2 64.0 126.7 18.7 13.3 76.2 Source: Ministry of Finance Table 4.1: Accounts of the National Bank of Georgia (GEL thousand) 2001 2002 ANNUAL Jan-02 Feb-02 Mar-02 Apr-02 May-02 Jun-02
NET INTERNATIONAL RESERVES -335,729 -363,822 -365,946 -368,539 -386,075 -388,686 -407,404 Gold 1,058 1,058 1,058 1,240 1,240 1,240 1,295 Foreign Exchange 331,803 334,294 334,674 328,613 320,195 321,691 320,243 Use of IMF resourses -587,559 -618,555 -620,661 -613,335 -622,454 -626,561 -632,222 Other Foreign Liabilities -81,031 -80,618 -81,016 -85,056 -85,056 -85,056 -96,721
NET DOMESTIC ASSETS 765,585 795,219 801,285 801,330 820,709 825,742 844,962 Net Claims on General Government 739,129 750,264 757,859 730,654 742,995 747,865 746,563 Net Claims on Republican Government 749,415 758,754 765,676 742,910 751,255 754,929 757,004 O/w Loans to Republican Government 767,625 776,925 786,625 767,625 770,625 773,625 782,322 Net Claims on Unified Social Security Fund -925 -983 -791 -732 -834 -527 -293 Other Extrabudgetary Funds (net) -9,361 -7,507 -7,026 -11,524 -7,426 -6,537 -10,149 Claims on the Rest of Economy 78,335 81,760 82,122 82,092 82,061 82,012 93,032 Net Claims on Banks 677 507 501 519 -441 419 12 Other Assets (net) -52,555 -37,313 -39,198 -11,936 -3,906 -4,555 5,355
RESERVE MONEY (M1) 429,857 431,397 435,339 432,791 434,634 437,055 437,557 Currency in Circulation 365,669 361,839 369,189 361,629 366,022 365,492 363,913 Banks' Deposits 64,188 69,557 66,150 71,162 68,612 71,563 73,645 Required Reserves 53,300 55,815 57,844 57,613 59,571 58,803 61,046 Balances on Correspondent Accounts 10,888 13,742 8,306 13,549 9,041 12,761 12,599 Source:National Bank of Georgia (1) Annualised by the NBG since 1998 Table 4.2: Summary Accounts of Commercial Banks (GEL thousand) 2001 2002 ANNUAL Jan-02 Feb-02 Mar-02 Apr-02 May-02 Jun-02
NET FOREIGN ASSETS 3,708 -9,102 -32,892 -16,365 -7,531 -14,973 -11,275 NFA (CONVERTIBLE) 3,708 -9,102 -32,892 -16,365 -7,531 Gold 4 4 4 4 4 4 4 Foreign Exchange 151,118 177,262 169,400 157,085 158,219 140,469 189,902 Foreign Liabilities -147,414 -186,368 -202,296 -173,454 -165,753 -155,446 -201,181
NET DOMESTIC ASSETS 379,887 399,787 426,777 427,432 417,693 417,107 432,874 Domestic Credit 479,469 494,024 523,137 525,725 541,136 540,121 533,129 Net Claims on General Government -14,513 -21,106 -15,677 -10,181 -3,620 -11,739 -23,259 Net Claims on Republican Government -2,415 -5,282 -3,125 1,371 7,997 1,609 -5,075 Claims on the Rest of Economy 493,982 515,130 538,814 535,905 544,755 551,860 556,387 Other Assets (net) -99,582 -94,237 -96,360 -98,293 -123,442 -123,014 -100,254
DEPOSIT LIABILITIES 383,595 390,685 393,884 411,066 410,162 402,134 421,599 Domestic Currency Deposits 54,989 56,358 55,063 59,794 61,930 65,412 59,596 Foreign Currency Deposits 328,606 334,327 338,821 351,272 348,232 336,722 362,003 Source:National Bank of Georgia (1) Annualised by the NBG since 1998 Table 4.3: Monetary Survey (GEL thousand) 2001 2002 ANNUAL Jan-02 Feb-02 Mar-02 Apr-02 May-02 Jun-02
NET FOREIGN ASSETS -332,021 -372,924 -398,838 -384,904 -393,606 -403,660 -418,679 Gold 1,061 1,061 1,061 1,243 1,243 1,243 1,299 Foreign Exchange 482,921 511,556 504,074 485,698 478,414 462,161 510,145 Foreign Liabilities -816,003 -885,542 -903,973 -871,845 -873,263 -867,064 -930,123
NET DOMESTIC ASSETS 1,064,466 1,108,247 1,144,757 1,142,256 1,151,284 1,152,529 1,185,429 Domestic Credit 1,296,932 1,326,049 1,363,118 1,338,471 1,366,192 1,369,999 1,372,723 Net Claims on General Government 724,616 729,159 742,182 720,474 739,375 736,126 723,304 Net Claims on Republican Government 747,000 753,473 762,551 744,281 759,253 756,538 751,929 Treasury Obligations 15,925 14,555 14,785 16,411 21,384 20,259 22,670 Net Claims on Local Government -4,333 -3,221 -3,282 -3,676 -2,596 -4428.59 -7205.37 Net Claims on Pension Fund -925 -983 -791 -732 -834 -527.13 -292.95 Other Extrabudgetary Funds -17,126 -20,110 -16,296 -19,399 -16,447 -15455.50 -21126.60 Claims on the Rest of Economy 572,316 596,890 620,936 617,997 626,816 633872.17 649418.79 Other Items (net) -232,466 -217,801 -218,362 -196,215 -214,908 -217469.52 -187294.23
BROAD MONEY (M3) 732,445 735,323 745,918 757,352 757,678 748,869 766,749 Broad Money, excluding foreign currency deposits (M2) 403,839 400,996 407,097 406,081 409,446 412,148 404,746 Currency Outside Banks (M0) 348,850 344,638 352,034 346,286 347,516 346,736 345,150 Currency in Circulation 365,669 361,839 369,189 361,629 366,022 365,492 363,913 Currency in Commercial Banks -16,819 -17,201 -17,155 -15,343 -18,506 -18,756 -18,763 Deposit Liabilities (GEL) 54,989 56,358 55,063 59,794 61,930 65,412 59,596 Foreign Currency Deposits 328,606 334,327 338,821 351,272 348,232 336,722 362,003 Source:National Bank of Georgia (1) Annualised by the NBG since 1998 Table A5.1.1: Registered Foreign Trade Balance, H1 2002 (USD thousands) Countries H1 2002 H1 2001 Import Export Import Export Total foreign trade CIS 138,345 68,413 136,449 75,540 Armenia 5,158 10,036 7,310 6,237 Azerbaijan 32,402 15,335 38,658 5,298 Belarus 429 436 1,109 546 Kazakhstan 2,727 941 2,631 2,812 Kyrgizstan 64 58 135 - Moldova 75 48 87 64 Russia 66,349 24,081 49,887 40,696 Tajikistan - 282 122 50 Turkmenistan 7,938 11,446 7,398 14,419 Ukraine 22,981 4,415 28,021 5,085 Uzbekistan 222 1,335 1,091 333
EU 90,348 29,319 97,040 29,663 Austria 6,035 92 6,081 495 Belgium 3,232 1,002 3,875 6,575 Denmark 3,706 300 2,459 335 Finland 1,115 - 8,365 - France 6,111 1,171 10,334 196 Germany 27,730 2,474 34,806 4,004 Greece 4,387 2,199 1,772 1,582 Ireland 244 72 646 - Italy 17,517 3,598 8,917 5,455 Luxembourg 83 - 112 - Netherlands 5,581 2,134 4,555 2,504 Portugal 333 21 568 76 Spain 981 371 847 879 Sweden 2,805 12 993 710 UK 10,488 15,873 12,710 6,852 Source: State Department for Statistics Table A5.1.2: Registred Foreign Trade Balance, H1 2002 (USD thousands) Countries H1 2002 H1 2001 Import Export Import Export Other countries Afganistan 0 0 2 0 Algeria - - - 241 Angola 0 0 - - Argentina - - 10 0 Australia 246 51 251 16 Bahama Islands 3,062 0 266 227 Bangladesh 0 9 - - Butane 1 11 10 0 Bosnia and Hercegovina 0 25 0 3 Brazil 6,719 0 1,352 3 Belize 0 20 - - Virgin Islands (GB) 1809 0 206 20 Bulgaria 7,171 107 5,572 143 Canada 128 12 206 13 Sri-lanka 49 15 51 0 China 2355 510 1711 482 Taiwan (China) 261 1 174 0 Comubmia 30.48 3 18.028 0 Croatia 2,359 0 128 0 Cuba 0.328 0 - - Cyprus 589 33 1,128 63 Czech Rep. 1764 239 1244 201 Dominica 25 0 - - Dominican Rep. 96 0 - - Ecuador 425 0 373 0 Ecuadorian Guinea - - 40 0 Estonia 98 19 27 0 Gambia 2 2446 - - Gana 0 73 - - Giblartar 846 2713 248 464 Guinea 0 15 0 46 Honduras - - 147 0 Hong-Kong (China) 93 0 255 1 Hungary 2272 10 2853 253 Island 0 0 27 0 India 2020 354 854 3086 Indonesia 100 0 2,234 15 Iran 3844 1732 2239 1914 Israel 590 198 260 341 Jamaica - - 3 0 Japan 3430 651 1306 691 Jordan 0 41 0 116 Kenya - - 3.171 0 Corea PDR 258 0 8 0 Corea Rep. 197 617 387 25 Lebanon 186 0 1,270 11 Latvia 421 151 600 220 Libya 2 0 - - Liechtenstein 16 0 116 67 Lithuania 555 1,178 3,893 1,659 Malawi 94 0 138 0 Malaysia 0 0 52 3 Malta 0 28 - - Mauritania 144 0 28 0 Mexico - - 2 0 Monaco 1 0 - - Mongolia 0 162 0 80 Maroco - - 18 0 Mozambique - - 0 5 New Zealand 170 0 455 0 Newer 1154 0 1146 15 Norway 143 3 95 0 Pakistan 0 5 - - Panama 0 182 - - Peru 46 6 - - Philippines 49 0 0 20 Poland 1520 141 1886 479 Romania 2,221 0 4,684 385 San-Marino 0 1 3 0 Saudi Arabia 25 0 2 22 Singapore 343 29 103 21 Slovakia 320 0 338 1 Vietnam 22 3 22 0 Slovenia 1305 9 4763 3 South Africa 44 3 12 58 Zimbabwe 250 0 583 0 Switzerland 6,190 7,710 6,220 9,117 Syria 171 431 228 252 Thailand 308 2 4 0 Tonga - - 11 0 United Arab Emirates 2,783 1,766 3,780 121 Tunisia 0 7.68 - - Turkey 44,997 25,355 53,147 34,715 Macedonia 28 5 34 25 Egypt 35 4 23 3 Tanzania - - 4 0 USA 16224 2669 18442 3066 Yugoslavia 214 5 237 5 Zambia 0 15 - - Source: State Department for Statistics Table A5.2.1: Georgia's Registred Exports and Imports by Harmonized Tariff Schedule (HTS) Chapters, H1 2002 (USD thousands) HTS Category Import Export 01 - Live Animals 229 2 02 - Meat and edible meat offal 6,479 733 03 - Fish and crustaceans, molluscs and other aquatic invertebrates 889 63 04 - Dairy produce; birds eggs; natural honey; edible products of animal origin, not elsewhere specified or included 2,116 153 05 -Products of animal origin, not elsewhere specified or included 12 0 06 -Live trees and other plants; bulbs, roots and the like; cut flowers and ornamental foliage 118 8 07 -Edible vegetables and certain roots and tubers 1,205 415 08 -Edible fruit and nuts; peel of citrus fruit or melons 1,499 2,899 09 -Coffee, tea, maté and spices 841 2,503 10 -Cereals 8,720 3,018 11 -Products of the milling industry; malt; starches; inulin; wheat gluten 4,643 - 12 -Oil seeds and oleaginous fruits; miscellaneous grains, seeds and fruits; industrial or medicinal plants; straw and fodder 164 434 13 -Lac; gums, resins and other vegetable saps and extracts 126 11 14 -Vegetable plaiting materials; vegetable products not elsewhere specified or included 21 5
15 -Animal or vegetable fats and oils and their cleavage products prepared edible fats; animal or vegetable waxes 3,731 32 16 -Preparations of meat, of fish or of crustaceans, molluscs or other aquatic invertebrates 1,385 13 17 -Sugars and sugar confectionery 13,589 314 18 -Cocoa and cocoa preparations 2,238 153 19 -Preparations of cereals, flour, starch or milk; bakers' wares 2,017 62 20 -Preparations of vegetables, fruit, nuts or other parts of plants 979 599 21 -Miscellaneous edible preparations 3,009 220 22 -Beverages, spirits and vinegar 1,183 22,701 23 -Residues and waste from the food industries; prepared animal feed 455 - 24 -Tobacco and manufactured tobacco substitutes 12,384 564 25 -Salt; sulfur; earths and stone; plastering materials, lime and cement 2,494 277 26 -Ores, slag and ash 27 8,556 27 -Mineral fuels, mineral oils and products of their distillation; bituminous substances; mineral waxes 81,220 6,488 28 -Inorganic chemicals; organic or inorganic compounds of precious metals, of rare earth metals, of radioactive elements or of isotopes 2,059 2,848 29 -Organic chemicals 739 13 30 -Pharmaceutical products 24,399 1,517 31 -Fertilizers 146 7,385
32 -Tanning or dyeing extracts; tannins and their derivatives; dyes, pigments and other coloring matter; paints and varnishes; putty and other mastics; inks 1,221 142
33 -Essential oils and resinoids; perfumery, cosmetic or toilet preparations 3,646 515 34 -Soap, organic surface-active agents, washing preparations, lubricating preparations, artificial waxes, prepared waxes, polishing or scouring preparations, candles and similar articles, modeling pastes, "dental waxes" and dental preparations with a bas 2,291 44 35 -Albuminoidal substances; modified starches; glues; enzymes 320 6
36 -Explosives; pyrotechnic products; matches; pyrophoric alloys; certain combustible preparations 656 - 37 -Photographic or cinematographic goods 230 - 38 -Miscellaneous chemical products 2,294 346 39 -Plastics and articles thereof 5,782 663 40 -Rubber and articles thereof 1,611 2 41 -Raw hides and skins (other than furskins) and leather 73 588 42 -Articles of leather; saddlery and harness; travel goods, handbags and similar containers; articles of animal gut (other than silkworm gut) 125 1 Source: State Department for Statistics Table A5.2.2: Georgia's Registred Exports and Imports by Harmonized Tariff Schedule (HTS) Chapters, H1 2002 (USD thousands) HTS Category Import Export 44 -Wood and articles of wood; wood charcoal 1,223 1,849 45 -Cork and articles of cork 531 18 46 -Manufactures of straw, of esparto or of other plaiting materials; basketware and wickerwork 0 - 47 -Pulp of wood or of other fibrous cellulosic material; waste and scrap of paper or paperboard 3 9
48 -Paper and paperboard; articles of paper pulp, of paper or of paperboard 8,668 114 49 -Printed books, newspapers, pictures and other products of the printing industry; manuscripts, typescripts and plans 2,464 189 50 -Silk 19 - 51 -Wool, fine or coarse animal hair; horsehair yarn and woven fabric 239 - 52 -Cotton 116 -
53 -Other vegetable textile fibers; paper yarn and woven fabric of paper yarn 8 - 54 -Man-made filaments 640 0 55 -Man-made staple fibers 614 15
56 -Wadding, felt and nonwovens; special yarns, twine, cordage, ropes and cables and articles thereof 157 7 57 -Carpets and other textile floor coverings 279 3 58 -Special woven fabrics; tufted textile fabrics; lace, tapestries; trimmings; embroidery 34 2 59 -Impregnated, coated, covered or laminated textile fabrics; textile articles of a kind suitable for industrial use 102 0 60 -Knitted or crocheted fabrics 46 - 61 -Articles of apparel and clothing accessories, knitted or crocheted 402 25 62 -Articles of apparel and clothing accessories, not knitted or crocheted 461 340 63 -Other made up textile articles; sets; worn clothing and worn textile articles; rags 2,185 455 64 -Footwear, gaiters and the like; parts of such articles 1,470 25 65 -Headgear and parts thereof 8 0 66 -Umbrellas, sun umbrellas, walking sticks, seatsticks, whips, riding-crops and parts thereof 39 - 67 -Prepared feathers and down and articles made of feathers or of down; artificial flowers; articles of human hair 3 - 68 -Articles of stone, plaster, cement, asbestos, mica or similar materials 937 8 69 -Ceramic products 2,140 12 70 -Glass and glassware 3,654 124 71 -Natural or cultured pearls, precious or semi-precious stones,precious metals, metals clad with precious metal and articles thereof; imitation jewelry; coin 185 14,194 72 -Iron and steel 5,152 23,127 73 -Articles of iron or steel 5,254 990 74 -Copper and articles thereof 331 1,297 75 -Nickel and articles thereof 6 47 76 -Aluminum and articles thereof 1,227 4,446 78 -Lead and articles thereof 9 35 79 -Zinc and articles thereof 17 - 80 - Tin and articles thereof 14 - 81 -Other base metals; cermets; articles thereof 107 1 82 -Tools, implements, cutlery, spoons and forks, of base metal; parts thereof of base metal 331 84 83 -Miscellaneous articles of base metal 897 34
84 -Nuclear reactors, boilers, machinery and mechanical appliances; parts thereof 34,345 3,575 85 -Electrical machinery and equipment and parts thereof; sound recorders and reproducers, television image and sound recorders and reproducers, and parts and accessories of such articles 28,705 1,937 86 -Railway or tramway locomotives, rolling-stock and parts thereof; railway or tramway track fixtures and fittings and parts thereof; mechanical (including electro- mechanical) traffic signalling equipment 9,923 985 87 -Vehicles other than railway or tramway rolling stock, and parts and accessories thereof 17,192 507 88 -Aircraft, spacecraft, and parts thereof 11,824 26,230 89 -Ships, boats and floating structures 0 1 90 -Optical, photographic, cinematographic, measuring, checking, precision, medical or surgical instruments and apparatus; parts and accessories thereof 5,818 585 91 -Clocks and watches and parts thereof 84 16 92 -instruments; parts and accessories of such articles 10 6 93 -Arms and ammunition; parts and accessories thereof 319 1,385 stuffed furnishings; lamps and lighting fittings, not elsewhere specified or included; illuminated sign illuminated nameplates and the like; prefabricated buildings 3,186 100 95 -Toys, games and sports requisites; parts and accessories thereof 443 88 96 -Miscellaneous manufactured articles 310 318 97- Works of art, collectors' pieces and antiques 32 31
Source: State Department for Statistics Table A6.1: Establishment of JSCs by Region, as of 1st July, 2002 (Number of enterprises) Total number of Approved for Region established and privatisation registered JSCs Abkhazia 34 0 Achara 86 35 Tbilisi 432 418 Guria 56 61 Lanchkhuti 12 14 Ozurgeti 35 39 Chokhatauri 9 8 Racha-Lechkhumi and lower Svaneti 12 9 Ambrolauri 6 3 Lentekhi 2 3 Oni 1 1 Tsageri 3 2 Samegrelo and upper Svaneti 180 196 Abasha 10 9 Zugdidi 54 62 Martvili 12 12 Mestia 1 0 Senaki 27 30 Chkhorotsku 16 18 Tsalenjikha 23 24 Khobi 12 13 Poti 25 28 Imereti 234 245 Kutaisi 80 87 Tkibuli 16 12 Tskaltubo 18 17 Chiatura 17 16 Bagdati 12 12 Vani 11 10 Zestafoni 24 24 Terjola 16 14 Samtredia 17 27 Sachkhere 5 9 Kharagauli 7 6 Khoni 11 11 Kakheti 120 111 Akhmeta 13 13 Gurjaani 22 19 Dedoplistskaro 10 7 Telavi 27 28 Lagodekhi 10 10 Sagarejo 15 17 Signagi 14 12 Kvareli 9 5 Mtsketa-Tianeti 41 39 Akhalgori 1 0 Dusheti 12 8 Tianeti 2 0 Mtslheta 23 27 Kazbegi 3 4 Samtskhe-Javakheti 54 47 Adigeni 2 2 Aspindza 3 1 Akhalkalaki 8 8 Akhaltsikhe 16 15 Borjomi 24 20 Ninotsminda 1 1 Kvemo Kartli 99 118 Rustavi 33 38 Bolnisi 10 12 Gardabani 20 33 Dmanisi 6 4 Tetritskaro 11 9 Marneuli 17 20 Tsalka 2 2 Shida Kartli 78 83 Tskhinvali 0 0 Gori 36 38 Kaspi 15 16 Kareli 12 10 Khashuri 15 19 Java 0 0 Total 1,426 1,362
Source: Ministry of State Property Management Note: This table represents in the first column enterprises approved for privatisation, and in the second those that have actually been valued and established as joint-stock companies. It does not represent enterprises actually privatised. The numbers in the second column can exceed those in the first since some enterprises are split up when being corporatised. Table A6.2: Small Privatisation by Region, as of 1st July, 2002 (Number of enterprises) Merged with Approved for Privatised in medium or Region Total privatised Liquidated privatisation 2002 large enterprises Abkhazia 8 - - - - Achara 325 171 21 - Tbilisi 4,641 5,126 61 412 - Guria 314 468 6 3 71 Lanchkhuti 60 110 5 - 17 Ozurgeti 197 259 1 3 40 Chokhatauri 57 99 - - 14 Racha-Lechkhumi and lower Svaneti 168 276 3 2 50 Ambrolauri 58 94 - 1 18 Lentekhi 32 47 - - 23 Oni 47 73 3 1 9 Tsageri 31 62 - - Samegrelo and upper Svaneti 1,110 1,536 10 184 279 Abasha 86 98 - 3 14 Zugdidi 211 282 2 7 - Martvili 53 57 3 2 19 Mestia 12 24 1 3 3 Senaki 249 428 1 140 104 Chkhorotsku 39 63 - - 23 Tsalenjikha 52 65 - 15 15 Khobi 145 140 1 2 59 Poti 263 379 2 12 42 Imereti 2,738 3,097 73 187 582 Kutaisi 624 824 41 71 211 Tkibuli 223 200 5 - 49 Tskaltubo 274 300 4 10 29 Chiatura 265 304 7 68 44 Bagdati 71 108 - - 36 Vani 68 106 - 1 17 Zestafoni 412 408 6 12 52 Terjola 132 154 - - 20 Samtredia 446 456 5 19 59 Sachkhere 94 87 2 - 16 Kharagauli 65 75 3 5 14 Khoni 64 75 - 1 35 Kakheti 1,084 1,322 37 71 178 Akhmeta 178 182 1 18 28 Gurjaani 140 170 4 13 19 Dedoplistskaro 88 120 16 34 3 Telavi 217 272 1 3 36 Lagodekhi 71 65 5 - 15 Sagarejo 128 129 - 3 10 Signagi 138 229 6 - 34 Kvareli 124 155 4 - 33 Mtsketa-Tianeti 323 408 7 25 71 Akhalgori 18 18 - - 5 Dusheti 87 132 3 1 12 Tianeti 58 65 - 12 12 Mtslheta 131 158 1 12 42 Kazbegi 29 35 3 - - Samtskhe-Javakheti 592 925 17 9 109 Adigeni 82 113 8 - 5 Aspindza 30 49 - 1 - Akhalkalaki 56 100 4 1 10 Akhaltsikhe 245 369 4 7 56 Borjomi 152 250 1 - 34 Ninotsminda 27 44 - - 4 Kvemo Kartli 1,139 1,607 28 20 154 Rustavi 355 463 6 4 60 Bolnisi 62 138 1 6 - Gardabani 270 285 3 - 36 Dmanisi 20 73 - - 7 Tetritskaro 114 241 8 4 17 Marneuli 284 370 10 6 10 Tsalka 34 37 - - 24 Shida Kartli 887 1,024 18 47 161 Tskhinvali - 5 - 5 - Gori 315 376 7 19 52 Kaspi 201 191 5 - 15 Kareli 139 182 4 - 62 Khashuri 232 270 2 23 32 Java - - - - - MSPM 490 490 35 - -
Total 13,819 16,450 295 981 1,655 Source: Ministry of State Property Management Note: Number of enterprises actually privatised can exceed those approved for privatisation since some are split up during corporatisation. Table A7.1: Economic Status, Q 1 1998 - Q4 2001 (Thousand) Q I 1998 Q II 1998 Q III 1998 Q IV 1998 Q I 1999 Q II 1999 Q III 1999 Q IV 1999 Q I 2000 Q II 2000 Q III 2000 Q IV 2000 Q I 2001 Q II 2001 Q III 2001 Q IV 2001 Total population over 15 years old 3, 099 3, 136 3, 194 3, 008 3, 032 3, 049 3, 092 3, 018 3, 123 3, 151 3, 133 3, 199 3, 277 3, 269 3, 139 3, 083 Total economically active population (labour force) (1) 2 ,332 2, 462 2,146 1,990 2, 018 2, 052 2, 058 1, 917 1, 951 2, 102 2, 064 2, 095 2, 066 2, 197 2, 144 2, 048 Total economically active population (labour force) (2) 2 ,457 2 ,555 2,195 2,042 2, 058 2, 093 2, 106 1, 975 2, 087 2, 199 2, 181 2, 215 2, 195 2, 314 2, 246 2, 165 Employed 2, 101 2 ,283 1,887 1,741 1, 725 1, 784 1, 792 1, 633 1, 705 1, 890 1, 890 1, 878 1, 818 1, 944 1, 913 1, 838 Hired 714 737 786 741 737 743 741 710 679 695 675 691 681 672 636 630 Self-employed 1, 387 1 ,546 1,092 990 973 1, 023 1, 030 905 912 1, 087 1, 095 1, 080 1, 034 1, 189 1, 194 1, 127 Unemployed (1) 231 179 260 249 292 268 266 284 246 212 174 217 248 253.1 230.8 210.5 Unemployed (2) 356 272 309 301 333 308 314 342 382 309 292 337 377 369.9 332.8 327.3 Unemployment rate (per cent) (1) 9.9 7.3 12.1 12.5 14.5 13.0 12.9 14.8 12.6 10.1 8.4 10.4 12.0 11.5 10.8 10.3 Unemployment rate (per cent) (2) 14.5 10.6 14.1 14.7 16.2 14.7 14.9 17.3 18.3 14.0 13.4 15.2 17.2 16.0 14.8 15.1
Labour force participation rate 75.3 78.5 67.2 66.2 66.6 67.3 66.6 63.5 62.5 63.9 65.9 65.5 63.1 67.2 68.3 66.4 Self-employment share in total labour force 59.5 62.8 50.9 49.7 48.2 49.8 50.1 47.2 46.7 51.7 53.0 51.6 50.1 54.1 55.7 55.0 Self-employment share in total employment 66.0 67.7 57.8 56.9 56.4 57.3 57.5 55.4 53.5 57.5 57.9 57.5 56.9 61.2 62.4 61.3 Source: The State Department for Statistics, Labour Force Survey, Household Survey Note: (1) ILO Standard (or “strict” methodology) (2) ILO “Loose” Methodology
ABBREVIATIONS
ACDI Agricultural Co-operative Development International BSEC Black Sea Economic Co-operation CASE Centre for Social and Economic Research CIS Commonwealth of Independent States CPI Consumer Price Index DB Defined Benefit DC Defined Contribution DMB Deposit Money Bank (Commercial Bank) EBRD European Bank for Reconstruction and Development ECB European Central Bank ECU European Currency Unit EMI European Monetary Institute EMS European Monetary System EMU Economic and Monetary Union ERM Exchange Rate Mechanism ESAF IMF Enhanced Structural Adjustment Facility EU European Union EUR Euro FAO Food and Agricultural Organisation FDI Foreign Direct Investment FSU Former Soviet Union FXB Foreign Exchange Bureau (x) GATS General Agreement on Trade in Services GATT General Agreement on Tariffs and Trade GCT General Customs Tariff GDP Gross Domestic Product GEL Georgian Lari GEPA Georgian Export Promotion Agency GEPLAC Georgian-European Policy and Legal Advice Centre GET Georgian Economic Trends GNP Gross National Product GSP Generalised System of Preferences H Half year ha hectares HS Harmonised Commodity Description HTS Harmonised Tariff Schedule ICC International Chamber of Commerce IDP Internally Displaced Person IFAD International Fund for Agricultural Development ILO International Labour Organisation IMF International Monetary Fund INOGATE Interstate Oil and Gas Transport to Europe ISIC International Standard Industrial Classification JPY Japanese Yen JSC Joint Stock Company KWh Kilowatt hour LDC Least Developed Countries LFS Labour Force Survey LIBOR London Inter-bank Offered Rate
122 GEORGIAN ECONOMIC TRENDS – 2002 No.2 ABBREVIATIONS
MFA Multi-fiber Agreement MFN Most Favoured Nations status MoF Ministry of Finance MoHSS Ministry of Healthcare and Social Safety MoLSA Ministry of Labour and Social Affairs MSPM Ministry of State Property Management MWh Megawatt hour NBG National Bank of Georgia NDA Net Domestic Assets NDC Notional Defined Contribution NFA Net Foreign Assets NMP Net Material Product NTB Non-tariff Barriers NTR Normal Trade Relations OECD Organisation for Economic Co-operation and Development PAYE Pay-as-you-earn pension system PAYG Pay-as-you-go pension system PCA Partnership and Co-operation Agreement PPI Producer Price Index PREGP Poverty Reduction and Economic Growth Program PRGF Poverty Reduction and Growth Facility (IMF) PSI Pre-shipment inspection Q Quarter year RM Reserve Money RUR Russian Ruble SAC World Bank Structural Adjustment Credit SCD State Customs Department SDR Special Drawing Rights SDS State Department for Statistics SIS State Institute of Statistics of Turkey STI State Tax Inspectorate TBT Technical Barriers on Trade agreement TICEX Tbilisi Interbank Currency Exchange TRACECA Transport Corridor Europe-Caucasus-Asia TRI Trade Restrictiveness Index TRIMs Trade-Related Investment Measures TRIPS Trade-Related Intellectual Property Rights TRL Turkish Lira UNCTAC United Nations Conference on Trade and Development UNCITRAL United Nations Comission on International Trade Law UNDP United Nations Development Program USAID United States Agency for International Development USD United States Dollar USITC United States International Trade Commission USSSF United State Social Safety Fund USTR United States Trade Representative VAT Value Added Tax WTO World Trade Organisation
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