The Final Report on the Implemented by CASE in the Period
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FOUN~AT~ON Council of the Foundation Chairman Warsaw 28" May 2002 Marek D&BROWSKl Vice Chairman Stanislawa GOLINOWSKA Tadeusz BACZKO Ewa BALCEROWICZ Leszek BALCEROWICZ Barbara BtASZCZYK Wladyslaw BRZESKi Krzysztof CHMlELEWSKl Jacelc CUWiOWSKl Andrzej CYLWIK The Final Report on the Anna FORNALCZYK Wojciech G~RALCZYKjr Piotr KOZARZEWSKI Jacek ROSTOWSKI Richard WOODWARD 99 Project on Macroeconomic & Structural Advisory Council Reforms Advice to Georgia" Chairman Anders ASLUND Tamas BAUER Vitlorio CORBO Anatolij CZUBAJS implemented by CASE in the period since Slanley FISCHER Jegor GAJDAR September 2000 to February 2003. Stanislaw GOMUtKA lrena GROSFELD Simon JOHNSON Cezary J6ZEFIAK Richard LAYARD Wojciech MACIEJEWSKI Jan MUJZEL Lucian ORLOWSKI Jeffrey SACHS Nicholas STERN Project Number: No. 114-G-00-00-0016 1-00 Jan SVEJNAR Stanislaw WELLiSZ Waclaw WILCZYI(ISKI Charles WYPLOSZ Board of the Foundation President Barbara WSZCZYK Vice President Ewa BALCEROWICZ Director Graiyna WOJCIECHOWICZ Sienkiewicza 12, iV pietro, 00-944 Warsaw, Poland tel. (48-22) 62266-27,8284133 fax (4822) 8286069, mil:case&care.mn.pl, httpJh~.case.m.pl account: Bank Handlowy w Warszawie S.A. VI Oddzial w Warszawie nr 10301061 - 00989MX) 1 GENERAL ISSUES .............................................................................................2 2 ISSUES COVERED DURING THE FIRST PART OF THE PROJECT ONLY .IN TIIE PERIOD SEPTEMBER 2000 -DECEMBER 2001..................... 2.1. Strategic plan of economic development - PREGP............................................................... 5 2.2. Structural reforms ...............................................................................................................11 2.2.1. Pxivatization and restructuring of the state sector ....................................................11 2.2.2. Agriculture ...............................................................................................................14 2.2.3. Small business development and support ..................................................................15 2.2.4. Reform of the pension system ......................................................................................17 3 ANTI-SMUGGLING POLICY .ISSUE COVERED IN TFJE SECOND PART OF TEIE PROJECT ONLY .JANUARY 2002 -FEBRUARY 2003........... 3.1. Introductory information .Starting point of the second phase of the project .................. 18 3.2. Co-operation with Ministry of Tax Revenues of Georgia.................................................. 20 3.3. Co-operation with the Ministry of Finance - detailed recommendations for anti- smuggling structures of Georgian authorities ....................................................................................22 3.3.1. Bas~c. mformation. .........................................................................................................22 33.2. General issues................................................................................................................ 23 3.3.2.1. Legal changes ................................................................................................................23 3.3.2.2. Co-operation among insh'tuliom responsible for anfi-smuggling operahns ............. 25 3.3.2.3. Declarations of wealth of state officials ....................................................................26 3.3.2.4. Money launderingprevenlion ...................................................................................26 3.33. The work and reform plans of a Special Legion (and its successor)........................ 27 3.3.4. Customs Department.................................................................................................... 28 3.3.5. Customs Department - internal control structure. .............................................. 29 3.3.6. Border Guards ............................................................................................................30 4 BUDGETARY POLICY AND TAX SYSTEM .ISSUES COVERED lN BOTB[ PARTS OF THE PROJECT .SEPTEMBER 2000 -FEBRUARY 2003... 4.1. Tax system reform. .............................................................................................................30 4.1.1. VAT ...............................................................................................................................31 4.1.2. Excise ........................................................................................................................ 32 4.1.3. Personal Income Tax (PIT)and Profit Tax............................................................... 33 4.1.4. Introduction of fised and turnover taxes ............................................................... 35 4.1.5. Social Taxes............................................................................................................. 37 4.1.6. Other Tases ...............................................................................................................37 4.2. Budgetary policy .................................................................................................................. 38 4.2.1. Review and proposals of improvements of analytical tools at the Financial Planing Department of the Ministry of Finance ..............................................................................................38 4.2.2. Law on the budget system............................................................................................ 42 4.2.3. Deficit financing............................................................................................................ 43 ATTACHMENTS ......................................................................................44 1 General Issues The general aim of the project was the strategic advise to the president of Georgia Mr. Eduard Shevardnadze on the macroeconomic and structural reforms which according to the introductory analysis of the Georgian situation in the half of 2000, requests &om the Georgian side and Polish experience where indispensable for Georgia in the short or long run. These were: 9 formulation of a long run strategic and comprehensive program for economic development; 9 fiscal reform with the special attention given to the introduction of the new law on the budget system and improvement of the budget spendings' control, tax system reform, tax and and customs administration reform leading to tax collection increase and improvemt of budget planning; 9 structural reforms with a special attention to privatization and public enterprises' management, reform of agriculture and small and medium enterprises' development and pension reform. The project has been originally planned to last for one year between September 2000 and September 2001. However resulting &om the numerous requests from the Georgian side the project has been initially non-costly extended till February 2002 and then hlly extended for the next year ie. till February 2003. During the first phase of the project realized within the period Septemba 2000 - January 2002 the CASE team analyzed the wide range of issues the list of which resulted from the initial project proposal the main elements of which have been mentioned above. CASE experts were working on fiscal policy problems including the tax code reform and tax administrating, structural policy issues with a special attention given to the pension reform, privatization, agriculture, small business development and regulatory &mework. We were also actively assisting the government officials working on the Poverty Reduction and Economic Growth Program. The more detailed description of the results of the work of the project's experts is presented further in the report. Professor Leszek Balcerowicz paid three visits to Georgia during the first phase of the project implementation. After each visit the report to the President of Georgia outlining the most important results of the project's activities and presenting the directions of the most vital reforms to be implemented has been prepared and delivered directly to the addressee. All of letters to the president are attached to this report, (see attachment 1). Additionally during the entire year 2001 and in the first half of 2002 Mr. Jerzy Miller the deputy coordinator of the project was having conversations on the monthly basis with President Eduard Shevardnadze. One short visit of the former Polish negotiator with the Paris and London clubs Mr. Krowacki was the special event of the project, organized as a response to a direct request kom USAID, (M?. Earl Gast). Mr. Krowacki consulted Minister of Finance Mr. Zurab Noghaideli in March 2001, when he was preparing himself for negotiations of Georgian debts in Paris Club. Eventually, it became clear that there were two main and interrelated problems that must have been solved in Georgia to make any economic policy really effective. These two were smuggling and bad quality of fiscal policy and they became the only priorities in the next project's phase planned for the period since February 2002 to February 2003. Struggle against smuggling was the top priority from the point of view of budget incomes. According to CASE estimations the annual budget loss only due to illegal import of two main excise goods, i.e. fuel and cigarettes was not less then 100 mln lari. The second result of the large smuggling was its devastating impact on the competitiveness of the locally produced goods on the domestic market. This factor could be even more harmful fiom the point of view of economic development. It destroyed all the legal