The European Union, GEPLAC and Georgian Economic Trends
The relations of the European Union (EU) with the countries of Eastern Europe and Central Asia were underpinned in 1991 through a programme of technical assistance called Tacis. Since then these relations have deepened through political dialogue into a partnership resulting in greater cooperation towards common goals. In the case of Georgia, such cooperation is the subject of a Partnership and Cooperation Agreement with the EU which entered into force in July 1999.
The Georgian – European Policy and Legal Advice Centre (GEPLAC) was first established in 1998 as a project under the Tacis programme. The current phase of the project is being implemented by Deutsche Gesellschaft fur Technische Zusammenarbeit (GTZ) GmbH. In addition to Georgian Economic Trends (GET) and the Georgian Law Review, GEPLAC is involved in the provision of economic policy and legal advice to the government of Georgia on both a programmed and ad hoc basis.
While GET is produced with the financial assistance of the EU, the content is the sole responsibility of the authors and can in no way be taken to reflect the views of the EU.
Georgian Economic Trends Quarterly Review
2002 No. 3
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.3
GEORGIAN ECONOMIC TRENDS
Contents
Foreword 2 Part I. Economic Trends 1. Summary 5 2. National Accounts and Main Trends 8 3. Government Finance 14 4. Money and Finance 23 5. International Trade and Foreign Economic Relations 36 6. Privatisation 46 7. Employment, Incomes and the Social Safety Net 52 8. The EU-Georgian Relations 67 Calendar of Events 71 Part II. Appendix: Feature Articles I: Future Prospects of Caucasian Energy and Transportation Corridor 85 The Role of Caucasian Energy Corridor in European Energy Security Remarks to America-Georgia Business Council Conference by Howard Chase, Director, European Government Affairs, BP, Brussels II: Achievements and Failures of CEFTA: The Lesson for GUUAM 88 By Dr. Henryk Czubek and Dr. Edward Molendowski, Krakow University of Economics Part III. Statistical Appendix Statistical Appendix 106 Abbreviations 119 TRACECA Map 123
GEORGIAN ECONOMIC TRENDS – 2002 No.3 1
FOREWORD
Dear Reader
First of all, may we extend best wishes for 2003 from everyone at GEPLAC.
This is inevitably a season for taking stock of things, and maybe also for some forecasting. We don’t propose doing so quantitatively in this edition of GET, as we published some projections in our last one, though it does seem a good time to consider the position of Georgia and its economy in the world, and in a qualitative sense. This is for two important reasons.
Firstly, there was an extremely significant event in our region towards the end of last year, namely the official inauguration of construction work in Azerbaijan on the Baku-Tbilisi-Ceyhan (BTC) oil pipeline. This is described in some detail in one of our Chapters, and work will shortly begin in earnest, now that the first pipe shipments have been received.
Secondly, the Copenhagen Summit of the European Union, held in December 2002 formally invited 10 countries (another 75 million people) in Central/Eastern Europe and the Mediterranean to become members in May 2004. As a result, the EU will then have 25 members with 450 million people, and the number of official languages will increase from 11 to 21. The number of members of the European Parliament will rise from 626 to 752.
In regard to BTC, and apart from the likely financial benefits to Georgia, it is worthwhile also thinking about the wider significance of the new pipeline in relation to energy supplies to Europe; this is discussed in an article by one of our external contributors, Howard Chase of BP, based on an address to the America-Georgia Business Council Conference in Tbilisi in October 2002. At the same time, the construction activity in the Caucasus/Caspian region represents part of a general move towards establishing a much more substantial infrastructure of pipeline links between the former Soviet Union (both Russia and independent states) and other industrialised and industrialising regions. For example, there are important existing (and possible future) gas pipelines through Northern Europe and the Baltic region, and Russia is also in discussions regarding oil and gas transit with China and Japan, to which there are currently no pipeline links. Eastward pipelines might ultimately permit shipments to the west coast of the United States, which recently began purchasing small cargoes of Russian oil.
However, these are all factors that come into play only in the medium term. Meanwhile, short-term fluctuations in oil prices exercise a fundamental influence on economic activity and confidence in most economies, while also determining the prosperity of producers. As of early January 2003, oil prices are around USD 30 per barrel, their highest level for 2 years, and up from USD 20 since the start of 2002. The latest surge reflects developments in the Middle East, but also the disruption of production through strikes in Venezuela. While OPEC has sought to ensure there are no short-term supply problems by increasing quotas of other members, we are fairly confident in predicting at least continuing uncertainty this year in regard to oil prices, and therefore also in the prospects for improved performance in Western economies.
Turning to EU expansion, the agreement at Copenhagen marks the end of one major phase of negotiations between the EU and the candidate countries, and the commencement of another of final arrangements for accession. On a political level, nearly all candidate countries (the exception is Cyprus, and certain others still have to confirm dates) will hold referenda this year to ratify the actions
2 GEORGIAN ECONOMIC TRENDS – 2002 No.3 SUMMARY of their respective governments. There appears to be majority support for enlargement in every current EU Member State.
A number of aspects of the enlargement process are of interest to us in Georgia, in particular: • Administrative and political relationships with the EU • Economic and legislative convergence.
The former are the subject of the EU-Georgia Partnership and Cooperation Agreement (PCA) and there is an ongoing dialogue between the EU and the Government of Georgia at various official levels.
The PCA also refers to the latter and forms the basis for GEPLAC’s current work on the National Programme for Harmonisation of law as it relates to economic activity. Part of the Centre’s methodology in elaborating this is to analyse experience generally in the transition economies of Central/Eastern Europe and the former Soviet Union. Such analysis is to be formalised further in the publication later this year of a “benchmarking” study of a selected group of countries whose experience and performance is to be compared with that of Georgia and which may also offer pointers for Georgian policymakers.
The negotiation process between the EU and candidate countries has of course focussed strongly on legislative convergence. While the formal process has been completed, the EU will nevertheless continue to monitor implementation, especially in areas of customs, food standards and measures to tackle illegal immigration. There has also been intensive discussion in certain cases regarding such issues as regional aid, property rights and work permits. These legislative developments naturally impact upon the microeconomic environment, though at the same time there is work still to be done in some countries to meet macroeconomic criteria, especially in regard to fiscal deficits. It should be borne in mind that, unlike existing Member States, new countries will be obliged by the accession treaty to adopt the Euro at some point, which is a further spur to reform in this area.
In the case of Georgia’s Black Sea neighbours, Romania and Bulgaria, it is understood that 2007 should be the target date for their entry into the EU. Turkey, a bordering country, and one of Georgia’s most important existing, and potential, trading partners has also expressed a strong desire to join. A number of issues complicate Turkey’s candidature, however it was agreed at Copenhagen that the EU would discuss in December 2004 a start date for talks on Turkish accession.
For Georgia, cooperation with other countries of the region should remain a priority and this will in large part reflect its links within Europe; thus, TRACECA, also described in one of our Chapters, is a major EU technical assistance project. Another regional organisation of which Georgia is a member is GUUAM, a political-, economic- and security-oriented grouping of Georgia, Ukraine, Uzbekistan, Azerbaijan and Moldova. We publish an article by Drs Czubek and Molendowski of Krakow University, Poland, a presentation to a recent GUUAM meeting in Kiev, which draws on experience from CEFTA, a free trade grouping in Central Europe, in regard to the GUUAM free trade agreement.
A given country may identify with more than region, and regional cooperation can take many forms, including both formal treaties and large commercial projects. The BTC pipeline is an obvious example, while telecommunications, in many ways exhibiting similar features, present another possibility. In regard to the latter, there is already increasing contact between countries of the Caucasus/Caspian/Central Asian region which met at a telecoms summit in Istanbul in May 2002, and it should be borne in mind that Georgia is, by regional standards, already well advanced in the area of wireless communications.
GEORGIAN ECONOMIC TRENDS – 2002 No.3 3 SUMMARY
All in all, economic and political developments around the world continue to raise interesting immediate and practical issues for Georgia; and not just at New Year, they also provide the opportunity for further consideration of the direction that future policy might take. For its part, GEPLAC will remain active in presenting to policymakers analysis and recommendations which emphasise relevant experience in other places and also the possibilities for Georgia’s evolving participation in both a regional and wider international capacity.
4 GEORGIAN ECONOMIC TRENDS – 2002 No.3
CHAPTER ONE: SUMMARY
NATIONAL ACCOUNTS AND MAIN TRENDS GDP growth rate in Q1-Q3 2002 was 4.1 per cent. Domestic demand is the driving force of growth. Among the major components of domestic demand private consumption grew substantially. Public consumption has also supported economic growth. The share of gross capital formation in GDP has fallen to only 17.8 per cent compared with 18.5 per cent in the corresponding period of last year.
Among the major sectors of economy, the lowest growth rate was recorded in agriculture (only 1.5 per cent). Animal breeding is growing, while the production of grain, wheat, sunflower, grapes, fruits have considerably declined. Transport, telecommunications and financial intermediation have shown a stable growing trend in this year. Registered output of industrial enterprises has increased by 3.1 per cent compared with the corresponding period of last year.
The significant event of Q3 was the start of construction of the main export pipeline “Baku-Tbilisi- Ceyhan”. The total length of pipeline is 1750 km; of which the Georgian section is 248 km. The pipeline will start working at the beggining of 2005. The design capacity of the pipeline is 50 million tons per year, which corresponds to approximately 1 million barrels per day. The total cost of this project is USD 2.9 billion. Construction of Georgian section will cost USD 514.7 million.
BALANCE OF PAYMENTS The current account deficit increased in H1 2002 to 7.8 percent of GDP. Both exports and imports have reduced compared with the corresponding period of 2001. The foreign trade deficit has also fallen. The deterioration in goods export in H1 was offset by an improvement in service-related trade links, primarily, to a buoyant transportation sector. As for the capital account, in H1 2002 there was a drastic reduction of trade credits and also loans to general government. One good piece of news for Georgia in H1 is the increasing share of foreign direct investments in total capital inflows.
FOREIGN DEBT As of September 30 2002, Georgia’s outstanding foreign debt, including state guaranteed debt amounted to USD 1,705 million, that is USD 115 million more than at the end of 2001. In the first nine months, foreign debt servicing was USD 57.7 million, while credit disbursements of USD 73 million were received. Not only new loans, but also the depreciation of USD and GEL against the SDR, EUR, JPY, SFR and KWD, in which Georgia’s foreign debt is nominated induced the significant rise of total debt in terms of USD and GEL.
GOVERNMENT FINANCE According to the 2002 State Budget, total revenues at the end of Q3 of the year were expected to reach GEL 697.1 million. Actual state budget revenues were GEL 615.3 million, GEL 81 million less than planned. Not all the anticipated external payments were received and this explains GEL 39 million of the shortfall. Another source of shortfall was lower than expected tax revenues. However, overall tax collection has improved by 11.2 per cent over the year. A sharp rise of profit tax receipts and taxes on imports is accompanied by marginal changes in all other tax revenues.
The expenditure target for central budget was set at GEL 692.9 million. Actual expenditures were GEL 595.9 million, that is 86 per cent of target. Expenditures of special state funds were GEL 190 million. The main spending priorities were social security, general government and servicing
GEORGIAN ECONOMIC TRENDS – 2002 No.3 5 SUMMARY of state debt.
Central budget deficit financing was GEL 135 million. Of this amount, GEL 89.2 million was borrowed from international financial organisations, while GEL 45.9 million came from domestic sources.
MONEY AND FINANCE In Q3 the Ministry of Finance issued GEL 66 million of T-Bills making a total during Q1-Q3 of GEL 195 million.
According to the State Department for Statistics, the accumulated inflation of nine months (since December 2001) reached 2.1 per cent. In July 2002, monthly deflation was –1.1 per cent. In August, monthly deflation was -0.5 per cent. Seasonal decreases of agriculture product prices caused that. In September prices increased by 0.4 per cent.
The average monthly nominal exchange rate of the lari appreciated slightly against the US dollar in Q3 2002. The Lari depreciated against the Euro, especially in July (GEL/EUR 2.1883), reflecting the trends of strengthening the Euro against the US dollar.
INTERNATIONAL TRADE AND FOREIGN ECONOMIC RELATIONS The external trade deficit increased slightly during January- September of 2002. During this recorded period registered external trade turnover was USD 764 million, of which exports were USD 240 million and imports USD 524 million. CIS countries remained the main partner, with 40 per cent of the total imports and 48 per cent of exports, just before the EU and Turkey. These figures underline the importance of proximity and traditional links as key-determinants of foreign trade. However Georgia’s trade links needs more diversification.
The composition of exports reveals that Georgia’s main competitive products (with exception of military aircrafts) on international markets are scrap black metals, ferro-alloys and gold, followed by wine and chemical fertilizers. That structure could be improved in case of using measures and instruments aimed at the promotion of labor-intensive products such as textile and clothing and agro-processing.
PRIVATISATION There was some progress in privatisation of medium and large enterprises (MLE) in the third quarter of 2002. The Ministry of State Property Management (MSPM) has sold the majority shareholdings of two joint stock companies; Elmavalmshenebeli; and Elektrovagonshemketebeli Plant. Two large enterprises were offered and sold at zero reserve price auctions 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 January. There is still no progress in privatisation of energy sector and telecommunications. The MSPM is going to offer state owned shares of eighteen enterprises through the Georgian Stock Exchange trading system in December.
6 GEORGIAN ECONOMIC TRENDS – 2002 No.3 SUMMARY
EMPLOYMENT, INCOMES AND THE SOCIAL SAFETY NET LABOUR MARKET The situation on the labour market remains largely unfavourable. For several years unemployment rate figures have remained quite high. Generally compatible with other transition economies, it is very likely, that they conceal overwhelming underemployment, hidden and disguised unemployment, and the dominant role in the labour market of subsistence agricultural self-employment, without which the unemployment rate would have been much higher. Average salaries across the economy are persistently below half the miminum subsistence level for an average family. The labour force is gradually shrinking due to both long-term unemployment and migration caused by the complicated economic situation. Unemployment and underemployment contribute to household budget problems, and, therefore, to growing poverty. The majority of the working age population is without a stable job or a job whatsoever - underemployed or non-employed (including the unemployed and those outside the labour force). Hired employment accounts for about 20 per cent of the working age population, while 40 per cent of hired emploees work at budgetary organisations and are paid extremely low salaries. The share of the employed and self-employed in the informal economy in total employment is growing together with the growing informal sector. The majority of jobs are unstable and paying low salaries.
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. Reform of the pension system, provided for by the Poverty Reduction and Economic Growth Programme (PREGP), is underway and is aimed at introducing a sustainable multi-pillar pension system, based on insurance principles. Currently, social policy is among the top priorities of the PREGP, as social reforms are acknowledged by the Government to be a long-term strategic objective.
EU-GEORGIAN RELATIONS In first nine months of 2002, Georgia’s trade with the Member States of the European Union amounted to USD 179,715 thousand. This represents 23.5 percent Georgia’s total turnover (Georgia’s total turnover amounted to USD 763,995 thousand). During the reporting period the EU-Georgian trade reduced slightly, by 2.7 per cent, compared to the same period of the previous year.
The Transport Corridor Europe Caucasus Asia (TRACECA) programme was launched at a conference in Brussels in May 1993. The main objectives of the Brussels conference were to stimulate and develop trade and transport co-operation among the participating countries, to identify problems in these sectors and promote the Central Asian Trans-Caucasian Europe corridor.
In Georgia during the last ten years the European Union through TRACECA programme implemented 38 technical assistance projects and 11 investment projects.
GEORGIAN ECONOMIC TRENDS – 2002 No.3 7
CHAPTER TWO: NATIONAL ACCOUNTS AND MAIN TRENDS
GDP AND MAIN TRENDS According to preliminary estimates of the SDS, in January-September 2002, GDP was GEL 5,284.1 million (USD 2,397.1 million). GDP growth was 4.1 per cent, but it has fluctuated in this year. In Q3 it was 4.8 per cent, after 6.9 per cent in Q1 and 1.1 per cent in Q2. Looking at the causes of growth, domestic demand is the driving force. Among the major components of domestic demand, private consumption grew substantially. Public consumption has also supported economic growth. The share of gross capital formation in GDP has reduced and was only 17.8 per cent of GDP compared with 18.5 per cent in the corresponding period of last year. Domestic investment in Georgia lags significantly behind the average level of 13 EU candidate countries1. In Georgia the capital stock is largely obsolete, undervalued and underdeveloped, and this is one of the major obstacles for sustained high growth. Among the major sectors of economy, the lowest growth rate was recorded in agriculture (only 1.5 per cent). However, agriculture maintains the leading position in Georgian GDP and total employment. A sharp revival in the construction sector is related to a rise in building of private apartments and motorways. Transport, telecommunications and financial intermediation have shown a stable growing trend in this year. Compared with the corresponding period of 2001 the number of mobile telephone consumers has increased by 58 per cent. There are 371 thousand subscribers of mobile telephones2, i.e., about 8 per cent of the population. The growing output of the service sector is supported by increasing private consumption, which falls mostly on services sectors and through investment growth in the underdeveloped non-tradable sectors.
Table 2.1: Dynamics and structure of GDP, Q1-Q3 2002 Q1-Q3 2002 versus Q1-Q3 2001 Share in GDP Q1-Q3 2002 (Q1-Q3 2001=100) (percent) Agriculture, forestry and fishing 101.5 19.5 Industry and construction 106.5 20.3 Industry without food industry and construction 105.1 12.6 Domestic processing of agricultural products 102.4 4 Construction 115.8 3.7 Services 104.9 54.7 Trade 103.4 12.8 Hotel and restaurant 105.3 3 Transport 109.9 11.2 Telecommunication 104.8 3.5 Financial intermediation 122.3 1.7 Operation with real estate, commercial activities 101.7 6.4 State management, Defence 99.5 3.9 Education 99.7 4.5 Health care and social service 106.1 4.7 Other services 102.3 3
Amendments 138.1 -1.3 Net taxes 101.5 6.8 GDP 104.1 100 Source: State Department for Statistics
1 Average gross fixed capital formation in the EU membership candidate 13 countries made up 22.6 per cent of GDP in 2001, while in Georgia it was 16.6 per cent (January-September 2002). 2 Source: Georgian State Department for Statistics Monthly Report, January-September 2002.
8 GEOGIAN ECONOMIC TRENDS – 2002 No. 3 NATIONAL ACCOUNTS AND MAIN TRENDS
SECTORS OF ECONOMY
Agriculture Animal breeding has been characterised by a growing trend this year. The national herd and also the production of meat, milk and eggs have increased. In plant-growing the situation is more pessimistic. The production of grain, wheat, sunflower, grapes, and fruits have declined this year, while the production of maize and vegetables have increased. There are a lot of fundamental impediments to the development of the agrarian sector in Georgia: small farm size, drastic lack of financial resources and also of phosphorus and potassium fertilizers, poor material-technical base, widespread manual work, and weak financing from budget. All these have contributed to significantly less productive labour in agriculture than in the rest of the economy.
Industry The registered output of industrial enterprises in Q1-Q3 2002 increased by 3.1 per cent compared with Q1-Q3 2001. A positive trend recorded this year is the growth of export sales of Georgian industry (the share of export in registered output was 30.6 per cent compared with 26.6 per cent in January- September last year), also there has been an increase in the share of small and medium size enterprises in industrial output, up to 18.9 per cent compared with 16.6 per cent in the corresponding period of last year. Meanwhile, 75.7 per cent of registered output was accounted for by 49 of the 2,773 enterprises. It indicates that the situation in the industrial sector is still very much dependent on the performance of certain large industries, the success or failure of which could have an enormous impact on the whole sector.
A significant step for supporting the development of national industry was the adoption of a law “On national investment agency of Georgia” on June 2002. The main objective of this law is the establishment of an effective mechanism for management of resources allocated for financing industrial investment projects. For this purpose, the National Investment Agency was created in September this year. According to the law, the financing of agency is provided for from the following sources: the state budget, foreign grants, and private resources under state guarantee. Priority is given to projects oriented to the development of local industry, also to export-oriented and import– substitute sectors, modern technologies, new job creation, and the development of high mountain regions. The agency will provide three types of support for selected projects: subsidized bank interest rates, guarantor for enterprise loans from banks, and grants. In 2002, the agency has started with the programme of subsidizing bank interest rates. According to the subsidy programme, the volume of subsidy should not be over 70 per cent of bank interest rate and also its maximum rate is 15 per cent of interest per annum.
Transport In contrast to other sectors, the development of the transport sector is relatively stable. It reflects the favourable geopolitical situation of Georgia, which allows the country to serve as a transport corridor for the region. In January-September 2002, the turnover of cargo by railway has increased by 12.5 per cent compared with the corresponding period of last year. More than three quarters of all cargoes transported by railway are in transit. Batumi and Poti sea ports processed 10.1 million tonnes of cargo (13.6 per cent more than in the corresponding period of last year). Supsa exported 4.6 million tonnes of Caspian oil (4.2 million tonnes in January-September 2002), that is related to the growth of output of the Baku-Supsa oil pipeline. Another positive trend of 2002 is the growth of activity of Georgian air companies. This year they transported 24 per cent more passengers than in the corresponding period of last year.
GEORGIAN ECONOMIC TRENDS – 2002 No.3 9 NATIONAL ACCOUNTS AND MAIN TRENDS
A significant event of Q3 was the start of construction of the main export pipeline “Baku-Tbilisi- Ceyhan”. The route of the pipeline starts at Sangachali terminal near Baku in Azerbaijan, crossing the territory of Azerbaijan, Georgia, Turkey and ending on the Turkish Mediterranean coast at a marine terminal near the town of Ceyhan. The total length of the pipeline is 1,750 km; of which the Georgian section is 248 km. The pipeline will be put into operation in the beginning of 2005. The design capacity of pipeline is 50 million tons per year, which corresponds to approximately 1 million barrels per day. The total costs of this project is USD 2.9 billion. For the construction of Georgian section USD 514.7 million will be allocated: of which USD 126 million is for pipeline construction; USD 120 million for compensation to land owners and for lost harvest; USD 95.2 million for construction of pumping stations; USD 88.3 million for purchasing of pipes; and USD 85.3 million for other activities. In this summer the Baku-Tbilisi-Ceyhan pipeline company (BTC co.), was established. This will undertake the construction and exploitation of the Georgian and Azerbaijani sections. The shareholders of Baku-Tbilisi-Ceyhan pipeline are BP (32.6 per cent share in BTC co.), SOCAR (25 per cent), Unocal (8.9 per cent), Statoil (8.7 per cent), TPAO (6.5 per cent), Itochu (3.4 per cent), INPEX (2.5 per cent), TotalFinaElf (5 per cent), Delta Hess (2.4 per cent), ENI (5 per cent). Georgia’s budget will benefit in total by USD 2.5 billion over 40 years. Tariffs for transportation of oil through the territory of Georgia will continuously increase from USD 0.89 per tonne for the first four years to USD 1.86 per tonne at the end of project. Contracts for pipeline construction and facilities engineering, procurement and construction in Georgia have been awarded to a French-American joint-venture of Spie Capag/Petrofac. The vast majority of employment on the Georgian section will be for Georgian citizens.
Box. 2.1 EU candidate countries growth forecast in 2002-2004
The European Commission published its Autumn Economic forecasts 2002-2004 for the candidate countries, that are based on the data available at 4th November, 2002. The whole picture for the candidate countries remains relatively favourable.
Candidate countries have on average sustained solid growth despite the worsened international economic climate. Due to strong domestic demand, most candidate countries showed resilience and the extent of the slowdown remained limited. In 2002, growth is forecast at 2.1 per cent for ten acceding countries and 2.9 per cent for all candidate countries. However, this figure does not show the divergence among the candidates with Polish growth at 0.8 per cent and Latvia and Lithuania with 5 per cent GDP growth. An expected return to normal external and domestic developments should allow them to reach an average growth of close to and beyond 4 per cent in 2003 and 2004. The prospects of accession and the effects from actual accession of a large number of candidate countries in 2004 is expected to continue to be positive on economic performance. Necessary structural reforms, the adoption of the acquis and raising administrative capacity strengthen the efficiency of the economies and raise the potential output growth. The enhanced political and economic stability increase domestic and foreign investors’ confidence and raise domestic and foreign investment. These effects have started to build up gradually and are expected to continue doing so.
10 GEORGIAN ECONOMIC TRENDS – 2002 No.3 NATIONAL ACCOUNTS AND MAIN TRENDS
Lower international commodity prices and weaker growth have contributed to a further fall in inflation in 2002. In 2003 a limited rebound in inflation is expected: Inflation for the average of the ten acceding countries is forecast to reach 3.3 per cent in 2003, after 2.9 per cent on average in 2002. Country-specific differences remain, driven by several factors, including the monetary policy framework, the cyclical position and the development of administered and regulated prices. In many countries, the underlying trend of disinflation is partly offset by hikes in administered prices and customs tariffs, driven by the need to align the regimes to the acquis and to reduce state aids in important areas.
Over the forecasting period, the employment losses due to continued enterprise restructuring should be progressively compensated by higher employment creation and should lead to a slightly improved labour market situation up to 2004.
The lower economic growth in the world and in main trade partners affects the growth of export markets for candidate countries. However, the candidate countries are expected to show a better export performance than export markets would suggest. It is due to structural changes in the candidate countries’ exports and their access to development markets, also by the less pro-cyclical structure of export of these countries. In addition, a sizable part of the enterprise sector in the candidate countries is owned by foreign, often EU based companies. A significant part of output of these enterprises is exported. That also supports candidates’ exports. In 2002, the terms of trade in export and imports for candidate countries will remain neutral.
General government deficits remain relatively high as the combined result of lower growth and counter–cyclical fiscal policies in some countries and high transition related expenditures over the whole forecasting period.
Domestic demand remains the main growth engine in most candidate countries. This trend is mainly due to reaccelerating investments. Private consumption, the largest category of aggregate demand in all candidate countries (ranging from a little more than 50 per cent of GDP in Slovenia to 80 per cent in Bulgaria), is expected to show fairly stable and robust growth.
Trade and current account balances will remain negative for all acceding countries and for Bulgaria and Romania over 2002-2004, according to Commission forecasts. On average they are expected to fall only very slightly, as high investment needs drive imports of capital goods. Deficits in current account balances are expected to be particularly high in Estonia and Latvia, where domestic demand is particularly strong, and in the Slovak Republic. On the other hand, Slovenia will have on average no current account deficit at all. International capital flows to candidate countries have not been affected by the global weakness in equity markets. Current account deficits have continued to be financed without any strains by international capital. Most candidate countries should continue to remain relatively sheltered from financial markets’ sentiments on emerging markets by the substantial reforms they are undertaking in view of their progressive integration in the Single Market and the prospects of nearing EU membership, particularly in the case of acceding countries.
Source: Based on Economic Forecasts for the candidate countries, Autumn 2002, European Economy, European Commission, Directorate-General for Economic and Financial Affairs, Enlargement Papers.
FOREIGN DEBT As of end September 2002, Georgia’s outstanding foreign debt, including state guaranteed debt, amounted to USD 1,705 million (GEL 3,696 million), that is USD 115 million (GEL 418 million) more than at the end of 2001. Debt servicing in the first nine months was USD 57.7 million (including USD 21 million to the IMF, USD 2.1 million to the World Bank, USD 22.7 million for servicing the
GEORGIAN ECONOMIC TRENDS – 2002 No.3 11 NATIONAL ACCOUNTS AND MAIN TRENDS rescheduled credits, USD 3.5 million to EU, and USD 8.3 million for state guaranteed credits). In the first nine months, credit disbursements were USD 73 million; of which USD 61.5 million are loans from the IMF and the World Bank. In addition to new loans, the depreciation of USD and GEL against SDR, EUR, JPY, CHF and KWD, in which more than half of Georgia’s foreign debt is nominated, induced a significant rise in total debt in USD and GEL terms this year. Georgia has already received debt relief from creditors for 2001-2002, but due to high debt obligations and limited budgetary revenues Georgia is going to apply to creditor countries of the Paris Club for further relief from the debt burden. Prolongation of the grace-period for 2003 would allow Georgia to postpone payments on principal of USD 50 million.
BALANCE OF PAYMENTS The current account deficit increased in H1 2002 and reached 7.8 percent of GDP. Both exports and imports have reduced compared with the corresponding period of 2001. The foreign trade deficit has also fallen. The deterioration in goods exports in H1 was offset by an improvement in service-related trade links, primarily to a buoyant transportation sector. A notable feature of H1 is the sharp growth of revenues of non-residents from direct investments in Georgia (USD 46.9 million). In addition, current transfers to the state sector have also substantially reduced. All these contributed to the rise in the current account deficit.
On the capital account, H1 2002 saw a drastic reduction in trade credits and also of loans to general government. Within declining net capital inflows, one piece of good news for Georgia is the increasing share of foreign direct investments in total capital inflows. However, the total inflow of FDI in Georgia is too small and was only 4.2 per cent of GDP. With a small domestic population, the low purchasing power of population and a limited resource base, Georgia is not a very attractive location for foreign investors. Therefore, improving the environment for investment (relative to that of its competitors) will be a critical factor for the government in its efforts to increase the level of sustainable FDI3.
In the first nine months of this year, Georgia received 228 thousand visitors, that is 3.8 per cent less than in the corresponding period of last year. As international experience shows, the inflow of tourists substantially depends on the economic situation in the country. High economic growth and total consumption may increase tourism. In January-September 2002, the tourism industry generated incomes of GEL 530 million (10 per cent of GDP), though its potential is insufficiently utilized. In Georgia, there are 102 resorts, 2,400 kinds of mineral waters, 12 thousand historical and architectural monuments, and some national parks, all of which create a good prospect for attracting tourists to the country. However, the continuing perception of security problems in Georgia, political instability in the Caucasian region, and continuing difficulties with Russia deter foreigners from coming to the country.
3 Study of administrative barriers to investment. Foreign Investments Advisory Service. A Joint service of the International Finance Corporation and World Bank, 2001.
12 GEORGIAN ECONOMIC TRENDS – 2002 No.3 NATIONAL ACCOUNTS AND MAIN TRENDS
Table 2.2: Balance of Payments, 2000-2002 H1 (USD million) H1 2000 H1 2001 H1 2002 Current account Balance -136.5 -114 -120.8 Goods -245.5 -295.3 -243.6 Credit 225.9 255 247.2 Debit -471.5 -550.3 -490.9 Services 9.2 42.8 44.2 Credit 99 157.7 166.7 Debit -100.3 -114.9 -122.5 Incomes 50.8 18.3 -16.8 Credit 78.7 51.5 52.3 Debit -27.8 -33.2 -68.9 Current transfers 59.4 120.2 95.3 Credit 71.3 130.6 106.9 Debit -12 -10.4 -11.6 Capital and Financial account Balance 48.1 118.8 110.4 Capital account -2.3 -2.7 32.9 Financial account 50.4 121.5 77.5 FDIs 63.2 50.8 66 Portfolio investments 2.7 0 0 Other investments -38 77 -1.5 Reserves 22.4 -14.9 13 Net errors and omissions 88.4 -4.7 10.4 Source: State Department for Statistics Note: The above data includes the estimation of non-recorded trade
GEORGIAN ECONOMIC TRENDS – 2002 No.3 13
CHAPTER THREE: GOVERNMENT FINANCE
According to the 2002 State Budget, total revenues at the end of Q3 of the year were expected to reach GEL 697.1 million. Actual state budget revenues were GEL 615.3 million, GEL 81 million less than planned. Not all the anticipated external payments were received and this explains GEL 39 million of the shortfall. Another source of shortfall was lower than expected tax revenues. However, overall tax collection has improved by 11.2 per cent over the year. A sharp rise of profit tax receipts and taxes on imports is accompanied by marginal changes of all other tax revenues.
The expenditure target for the central budget was set at GEL 692.9 million. Actual expenditures were GEL 595.9 million, that is 86 per cent of target. Expenditures of special state funds were GEL 190 million. The main spending priorities were social security, general government and servicing of state debt.
Central budget deficit financing was GEL 135 million. Of this amount, GEL 89.2 million was borrowed from international financial organisations, while GEL 45.9 million came from domestic sources.
STATE BUDGET REVENUES Initial revenue projections for the state budget 2002 envisaged collections of GEL 697.1 million, by the end of Q3 2002. State budget receipts were actually GEL 615.3 million according to treasury data, that is 88.3 per cent of planned amount. The shortfall of GEL 81.7 million is mainly explained by lower than expected external grants and the fact that some tax revenues payable to the state budget were retained by Achara. Non-tax revenues were also short of target. Nevertheless the amounts collected were 12.8 per cent higher than the corresponding figures of the previous year.
The tax revenue target of the state budget was set at GEL 573.2 million. Actual tax revenue receipts of GEL 541.4 million are closer to the projected figure compared to the overall budget and indicates a 94.5 per cent collection performance. However if taxes collected and retained in Achara are included, tax revenue collection looks much better, 100.5 per cent of the projected amount.
The GEL 55.1 million of non tax revenues were short of target by 16.5 per cent. External grants were GEL 18,3 million while the government had expected to get GEL 57.4 million from this source.
A comparison of 2002 State Revenues with planned and previous year figures is provided in Table 3.1.
14 GEORGIAN ECONOMIC TRENDS – 2002 No.3 GOVERNMENT FINANCE
Table 3.1: State Budget Revenues, 9 Months 2002 (GEL million)
Revenues (treasury) (treasury) Growth over the year (NBG including Achara) including Achara) (NBG Target for 9 months 2002 Actual (NBG) as per cent of target Actual revenues for 9 months 2002 Actual revenues for 9 months 2002 Actual revenues for 9 months 2001 Actual (treasury) as per cent of target
Total Revenues and grants 697.1 615.3 88.3 545.6 12.8 649.7 93.2
Total Revenues 639.7 597.0 93.3 526.4 13.4 631.4 98.7
State budget tax revenues 573.2 541.4 94.5 486.9 11.2 575.9 100.5
Central budget tax revenues 415.7 386.5 93.0 346.3 11.6 417.5 100.4
Non-tax revenue 66.0 55.1 83.5 39.7 39.5 55.1 83.5
Revenues of special state funds 158.0 155.4 98.4 140.6 10.5 158.8 100.5
Grants 57.4 18.3 31.8 19.2 -5.1 18.3 31.8 Source: Ministry of Finance, Parliamentary Budget Office, GEPLAC calculations
Nominal growth of overall budget revenues over the year was 12.8 per cent. Comparison with the inflation rate between the two periods of 5.7 per cent indicates a real growth of public revenues. Nominal growth of the most important item of tax revenues of 11 per cent was also higher than inflation. The increase of 39.7 per cent in non-tax revenues over the year is a result of the 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 performance or administrative improvement. Based on 5.7 per cent inflation and 4.1 per cent economic growth between the periods, 10 per cent growth of tax revenues was expected at the same level of administration. Thus nominal growth figures show slightly improved administration of tax collection. The same comparision at the end of the previous quarter indicated a worsened administration factor (see GET No 2 2002).
A detailed breakdown of central budget tax revenues is provided in Table 3.2.
GEORGIAN ECONOMIC TRENDS – 2002 No.3 15 GOVERNMENT FINANCE
Table 3.2: Central Budget Tax Revenues, H1 2002 (GEL million)
Revenues (treasury) (treasury) including Achara) including Achara) Growth over the year Target for 9 months 2002 Actual (NBG) as per cent of target Actual revenues for 9 months 2002 Actual revenues for 9 months 2001 Actual (treasury) as per cent of target Actual revenues for 9 months 2002 (NBG
Central budget tax revenues 415.7 386.5 93.0 346.3 11.6 417.5 100.43
Income tax 14.5 12.8 88.3 13.4 -4.3 13.0 89.396
Profit tax 7.1 6.9 97.3 4.7 45.7 7.0 99.0
VAT 271.3 267.5 98.6 237.7 12.5 288.0 106.2
On domestic products 148.2 146.9 99.2 145.5 1.0 154.1 104.0
On imports 123.1 120.5 97.9 92.3 30.6 133.9 108.8
Excise 75.7 59.9 79.1 59.2 1.2 65.3 86.2
On domestic products 19.8 14.9 75.2 14.6 1.7 18.0 90.9
on imports 55.9 45.0 80.5 44.5 1.1 47.3 84.6
customs duty 43.1 32.3 75.1 29.8 8.6 36.7 85.2
1 per cent social tax 4.0 4.5 110.9 4.8 119.3
fixed tax on car imports 02.6 2.6 Source: Ministry of Finance, Parliament Budget Office, GEPLAC calculations 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.
Direct tax collections were below the target. According to Treasury data, revenues of GEL 12.8 million from personal income tax and GEL 6.9 million received under corporate income tax were short of target by 11.7 and 2.7 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 45.7 per cent.
Collection of VAT was better in terms of projected figures. Being critical to overall budget performance (as VAT receipts were 69.2 per cent of central budget tax revenues) VAT revenues of GEL 265.7 million were collected at 98.6 per cent of target. However, if VAT amounts collected in Achara but not transferred to Treasury accounts are included in calculations, VAT was collected in access of target by 6 per cent. Nominal growth over the year based on amounts actually received by the treasury was 12.5 per cent. However, growth of VAT revenues mainly was observed in the case of import taxation (30.6 per cent nominal growth on import taxation against 1 per cent growth on domestic products).
16 GEORGIAN ECONOMIC TRENDS – 2002 No.3 GOVERNMENT FINANCE
Excise duty collections were 79.1 per cent of target. GEL 59.9 million in revenues under this heading was 1.2 per cent higher compared to the previous year. Compliance with target was 75.2 per cent in case of taxation of domestic products while excise on imports was 80.5 per cent of target. However there is a big discrepancy between the different sources of excise revenues from imports in terms of target compliance as well as in growth terms (see table below). Customs duty collections were only 75.1 per cent of target with 8.6 per cent growth over the year.
Table 3.3: Excise Revenues of Central Budget from Imports, 9 Months 2002 (GEL million)
(treasury) (treasury) Growth over the year Target for 9 months 2002 Actual revenues for 9 months 2002 Actual revenues for 9 months 2001 Actual (treasury) as per cent of target
Total excise revenues on imports 55,9 45,0 80.5 44,5 1.1
Petroleum products 25,7 22,1 86.0 19,5 13.2
Tobacco products 12,9 14,4 111.2 11,0 30.6
Other oil products 10,5 6,4 61.2 8,3 -23.0
Other excise goods 6,9 2,2 31.6 5,7 -61.9 Source: Ministry of Finance, Parliament Budget Office, GEPLAC calculations
A sharp rise in revenues from petroleum products and tobacco is offset by declines of revenues from other oil products and other excise goods. It is worth noting that 30 per cent of excise revenues from petroleum products is directed to Roads Fund. In 9 months of 2002 the Roads Fund received GEL 9.5 million from this source. Thus overall excise revenues of the state from petroleum products were GEL 31.6 million.
The overall picture of tax collection is similar to that of the end of previous quarter. A sharp rise in profit tax receipts and VAT on imports and excise on imports of some products was accompanied by modest increase of revenues from customs duty and marginal changes of all other tax revenues. At the same time, there is no evidence of such important changes in GDP and import value or structure which could induce the tax developments discussed above. One possible explanation might be administrative enforcement. First, administration at the border is much easier as it does not require complex accounting examinations. Second, 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.
Non-tax revenues were 12 per cent of total central budget revenues. These mainly consists of NBG profit transferred to the central budget. However, unlike previous years other sources of non-tax
GEORGIAN ECONOMIC TRENDS – 2002 No.3 17 GOVERNMENT FINANCE revenues became substantial in budget revenues. A detailed breakdown of central budget non-tax revenues is presented in table below.
Table 3.4: Central Budget Non-tax Revenues, 9 Months 2002 (GEL million)
Target for 9 months Actual revenues for 9 Actual as per cent of
2002 months 2002 (treasury) target
Non-tax revenue 65.9 55.1 83.5
Repayment of credits 6.4 4.2 65.7
Revenues from economic activities 1.4 0.4 30.1
Administrative fees and non-commercial sales 7.9 5.9 74.1
Administrative fines and penalties 1.4 0.7 51.7
Other non-tax revenues 48.7 43.8 89.9
Dividends from state owned enterprices 7.9 5.1 64.4
Privatization of land 2.2 0.2 11.1
NBG profit 32.0 35.0 109.4
Other revenues 6.6 3.4 52.4 Source: Ministry of Finance, Parliament Budget Office, GEPLAC calculations
GEL 18.3 million received in Grants were only 31 per cent of target. The shortfall of GEL 39 million accounts for about half of the overall State Budget revenue shortfall. Expected sums of GEL 16 million and GEL 15 million were not received under European Union’s Food Security and Special Financial Aid programmes respectively. A World Bank investment projects grant disbursements were GEL 2.8 million instead of a planned GEL 8.3 million. Other grants were received at 90 per cent of the expected level in total amount of GEL 15.5 million.
SPECIAL STATE FUNDS Total revenues of the United State Social Security Fund in 9 months 2002 were GEL 165.4 million including amounts collected in Achara. Of this amount, GEL 129 million came from social taxes and GEL 36.1 million was transferred from the central budget. State pensions financing was GEL 134.6 million (66 per cent of yearly target). GEL 2.7 million was spent for distribution of pensions and various benefits. Administrative expenses of the fund were GEL 2.9 million. Another GEL 12.4 million was spent by social security funds of Achara and Abkhazia.
By the end of Q3 2002, own revenues of the Roads Fund (which comes from excise on oil products and other taxes) were GEL 26.4 million (62 per cent of year target). GEL 1 million was transferred to the fund from the Presidential Fund for rehabilitation of bridges in mountainous regions damaged by heavy rains. Total spending of the fund amounted to GEL 26.6 million. The main spending of the fund was on roads maintenance – GEL 13.2 million; payments for works performed in previous periods – GEL 5.5 million; co-financing of projects financed by foreign credits – GEL 4.5 million; repayment and servicing of credits – GEL 1.1 million; and administration – GEL 1.2 million.
18 GEORGIAN ECONOMIC TRENDS – 2002 No.3 GOVERNMENT FINANCE
STATE BUDGET DEFICIT State budget deficit was expected to be GEL 183.8 million in the first 9 months of 2002. Actual financing of state budget deficit in the period was lower than target (GEL 135.5 million). However, there are some discrepancies between expected and actual sources of financing. GEL 27.1 million was expected under World Bank Structural Adjustment Credit (SAC) which was not received by the end of Q3 2002. World Bank investment credits were received in excess of an expected GEL 74.6 million. Actual amounts received were GEL 89.2 million, that is GEL 14 million higher than target. Investment credits are transferred directly to commercial bank accounts for financing respective investment projects. So these amounts are not used for financing Treasury expenditures. The shortfall resulting from the non-receipt of the SAC was partly compensated for by short-term borrowing from NBG of GEL 22 million. This amount should be repaid upon reception of SAC funds later in the year. GEL 16 million in long term credit from NBG envisaged in the 2002 budget law was not issued at all. GEL 17 million was financed by T-bills. The initial budget law envisaged financing of GEL 13.5 million from this source. Receipts from privatization of state property were GEL 6.9 million instead of planned GEL 6.5 million.
CENTRAL BUDGET EXPENDITURES Central budget expenditure for the first 9 months of 2002 was set at GEL 692.9 million. Actual expenditure was 86 per cent of this amount, only GEL 595.8 million were actually spent. The balance on government accounts at the end of the period was GEL 14.2 million. These were used in October to cover September’s social expenditure arrears. A breakdown of central budget expenditures by economic category is provided in table below.
Table 3.5: Central Budget Expenditures by Economic Category, 9 mMonths 2002 (GEL million)
Actual as per cent Per cent in Plan Actual of target Total
Total 692.9 595.8 86.0 100 Salaries 70.6 60.8 86.1 10.2 Business trips 5.6 4.0 71.8 0.7 Social Contributions 15.1 13.4 88.5 2.2 Other goods and services 91.5 69.2 75.6 11.6 Interest payments 166.1 126.0 75.9 21.2 Subsidies and current transfers 200.4 190.9 95.3 32.1 Capital expenditures 2.2 0.8 35.7 0.1 Target programs 47.4 25.5 53.8 4.3 Net lending 94 105.1 111.8 17.6 Source: Ministry of Finance, Parliament Budget Office, GEPLAC calculations
Salaries of state employees were financed at 86.1 per cent level. This is in line with overall budget execution. GEL 70 million was paid under this category. Salaries including October were paid in full while salaries for September were paid at the beginning of the following month. Social
GEORGIAN ECONOMIC TRENDS – 2002 No.3 19 GOVERNMENT FINANCE contributions, which basically are transfers to various funds from paid salaries, were financed at GEL 13.4 million (88 per cent of target). Expenditure target for business trips was set at GEL 5.6 million. Actual spending under this category was GEL 4 million. From this amount GEL 2 million was disbursed from the state reserve fund.
“Other Goods and Services” were purchased to a total of GEL 69.2 million against a targeted GEL 91.5 million. This heading covers a great diversity of state expenditures and needs some clarification. Food for state (military, paramilitary, police) servants, penitentiary system and orphan schools was purchased at a cost of GEL 13.5 million, 84 per cent of target. Georgian diplomatic corps was financed at 89 per cent of budgeted level, GEL 11.7 million were allocated to various diplomatic missions abroad to cover salaries and accommodation costs. Arrears for food purchase and financing diplomatic corps were cleared in the beginning of October. GEL 3.4 million was spent on the organisation of local elections. Another GEL 1 million was disbursed for infrastructure maintenance in mountainous regions. The same category covers payments for electricity and water supply to government agencies. GEL 11.2 million was spent for these supplies. Another GEL 9.9 million was spent for electricity and water supply for compactly residing IDPs. GEL 1.7 has been reclaimed by various commercial enterprises through court decisions.
Subsidies and current transfers was the largest spending category in the period, 32 per cent of total central budget expenditures. This mainly covers expenditures of a social nature. The level of execution for this spending is also higher compared to any other category. The amount of GEL 190.9 million disbursed was 95 per cent of target. GEL 46.6 million was transferred to local budgets for various social spending. Another GEL 7.5 million was disbursed to local budgets to cover expenditure arrears of previous periods for salaries of school teachers. The total amount transferred to social security fund, including arrears of previous year was GEL 36 million, that is, 90 per cent of planned amount. IDP benefits were paid in full and amounted to GEL 32.9 million. The State health insurance company was subsidised by GEL 13.5 million. The subsidy to energy sector was GEL 21.3 million, including a GEL 7 million loan to Tbilisi municipality for natural gas supply. The State TV corporation was subsidised by GEL 7.2 million. GEL 25 million was spent for compensation of food and uniform expenses of military servants.
Debt servicing accounted for 21 per cent of total central budget spending. However, the GEL 126 million paid under this category was only 75 per cent of target. Amounts spent on servicing of domestic debt were slightly higher compared to plan, while payments for state liabilities connected to foreign debt were far below budgeted amounts. Detailed debt servicing figures are provided in the table below.
Table 3.6: Central Budget Expenditures on Debt Servicing, 9 Months 2002 (GEL million)
Budgeted Actual Per cent Total Debt Servicing 166.1 126.0 75.9 Domestic debt 54.7 59.7 109.3 Interest on NBG credit 49.7 50.0 100.6 T-bills discount 4.7 9.7 205.0 Foreign debt 111.4 66.3 59.5 Interest payments 58.8 38.4 65.4 Principal payments 52.6 27.9 53.0 Source: Ministry of Finance
20 GEORGIAN ECONOMIC TRENDS – 2002 No.3 GOVERNMENT FINANCE
Excess spending on domestic debt is conditioned by the fact that government borrowing on the domestic market was higher than expected in order to compensate for non- receipt of SAC funds. (see deficit financing sub-chapter).
Programme expenses were financed only at 53.8 per cent of target. From this amount health care programmes received GEL 12.5 million; disability programmes GEL 2.1 million; unemployment programmes GEL 1.8 million; education programmes GEL 1.4 million; and the population census GEL 2.2 million.
Capital expenditures were financed below any other category. GEL 0.8 million was only 35 per cent of the budgeted amount. This in any event was very small proportion of total expenditures.
Net lending category covers investment projects financed by international financial organisations. In 9 months of 2002 financing of such projects from investment credits amounted to GEL 92 million, GEL 11 million in excess of target, while co-financing from the side of Georgian Government was GEL 13 million, 99 per cent of target.
A functional breakdown of state budget expenditures provides more information on the Government’s spending priorities.
Table 3.7: Central Budget Expenditures by Function, 9 Months 2002 (GEL million) Per cent in Plan Actual per cent total General Government 147.4 150.7 102.2 25.3 Defence 40.3 27.7 68.8 4.7 Law and Order 68.9 57.2 83.1 9.6 Education 29.6 23.0 77.3 3.8 Health care 35.9 30.2 84.1 5.1 Social Security 92.6 81.3 87.8 13.7 Housing 3.3 3.1 92.5 0.5 Culture sports and religion 18.7 16.6 88.5 2.8 Energy 15.6 14.9 95.5 2.5 Agriculture 14.8 6.2 41.7 1.0 Construction and mining 0.9 0.4 45.2 0.1 Transport and communications 1.9 1.2 68.9 0.2 Other economic activities 2.5 1.8 72.1 0.3 Other expenses 220.6 181.6 82.3 30.5 Total 692.9 595.9 86.0 100 Source: Ministry of Finance
General government, social security and other expenses remain the main spending items in the central 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. Social security covers the purchase of goods and services of social nature and social transfers (to the social security fund and to local budgets). Expenditures under the category “other” were interest payments, principal payments and various subsidies.
GEORGIAN ECONOMIC TRENDS – 2002 No.3 21 GOVERNMENT FINANCE
Box 3.1
Statement of the Governing Council on the Stability and Growth Pact Issued on 24 October 2002
The principle of budgetary discipline enshrined in the Treaty and the Stability and Growth Pact are indispensable for Economic and Monetary Union (EMU)
EMU, with a single monetary policy and 12 governments responsible for budgetary policies, needs a fiscal institutional framework. The framework must be simple, enforceable, and ensure that fiscal policies in Member States are sound and sustainable. Such a framework of fiscal policies fosters sustainable growth and employment, is conductive to economic stability, and is a necessary complement of a monetary policy geared to price stability.
The Stability and Growth Pact has been successful in promoting sound public finances and fiscal convergence.
Since agreement was reached on the fiscal rules in the Maastricht Treaty, generally fiscal balances have improved significantly in the Member States. Public debt ratios have been coming down in sustained manner since the mid-1990s for the first time in decades. As a result, most Member States have now reached the budget positions which are close to balance or in surplus. These developments have supported, rather than hampered in employment and real GDP.
The Stability and Growth Pact is in the interest of Member States
The main commitment of Member States under the Stability and Growth Pact is that the fiscal policies should result in medium-term budgetary positions which are close to balance or surplus. This in conjunction with the Maastricht Treaty obligation to avoid excessive deficits and to apply appropriate implementation procedures, secures the sustainability of public finances and provides scope for dealing with the expected fiscal challenges caused by population aging. Moreover, and contrary to the claims of the critics, the Stability and Growth Pact also provides sufficient flexibility after “close to balance or in surplus” positions are reached, as automatic stabilizers can then operate fully. Problems have arisen not because the rules are inflexible, but as a result of some countries` unwillingness to honour their commitment to respect the rules.
The results of fiscal policy in several countries are very disappointing. In this context it is important to recall that the main reason why countries are in budgetary difficulties at present is because they have not used the situation of higher growth to sustainably improve their fiscal position.
We continue to support the initiative of the Commission that all countries with remaining imbalances should commit themselves to implement a clear consolidation strategy with four key elements:
(i)a credible adjustment path, which requires the continuous adjustment of underlying balances by at least 0.5 per cent of GDP per year, (ii) realistic assumptions about the economic environment, (iii) well-specified measures to attain the objective and (iv) rigorous accounting rules and strict monitoring procedures for the implementation of consolidation strategies. These commitments have to be honoured by rapid and decisive action.
The Stability and Growth Pact supports price stability
By ensuring sustainable public finances and by providing enough flexibility for the full operation of automatic in periods of economic weakness as well as strength, the Stability and Growth Pact also has a favourable effect on macroeconomic stability. This facilitates achieving price stability and fosters confidence in Euro area’s economic prospects.
Respecting the provisions of the Treaty and full implementation of the Stability and Growth Pact remain fundamental to Monetary Union and each individual Member State. Full compliance with the fiscal framework will also send important message to accession countries.
Source: European Central Bank; Monthly bulletin, November 2002
22 GEORGIAN ECONOMIC TRENDS – 2002 No.3
CHAPTER FOUR: MONEY AND FINANCE
Besides the traditional sections this chapter introduces developments in Georgian insurance sector as a part of the financial sector. We also continue to provide readers with recent macroeconomic developments in the Eurozone. The chapter contains a review of recent macroeconomic developments in the Czech Republic under the Pre-Accession Economic Programme.
TREASURY BILLS 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. In Q3 the Ministry of Finance issued GEL 66 million of T-Bills bringing the total for Q1-Q3 to GEL 195 million. Annual average interest rates fluctuations do not show any relation to the volumes being issued as the following figure shows.
Figure 4.1: Monthly Volume of Issued T-Bills and Average Weighted Annual Interest Rates
30 000 000 60
25 000 000 50
20 000 000 40 T-Bills issued
15 000 000 30 %
GEL Annual weighted average % 10 000 000 20
5 000 000 10
- 0 Jan Feb Mar Apr May Jun Jul Aug Sep
Source: National Bank of Georgia
The following factors determine the level of interest rates fixed on the T-Bills auctions. Usually non- bank investors bid higher interest rates than banks. Each non-bank investor has less liquidity and puts a higher risk premium in the interest rates. So the lower the share of bank investors and the greater that of non-bank ones, the higher are the interest rates bid and fixed. The second factor is an absence of a schedule of T-Bills issues. Banks are unable to accumulate all the amounts that they can invest because the MoF announces auctions with only one or two days notice. As a result, the interest rates bid differ from those, which would be possible if a preliminary schedule was available.
MONEY SUPPLY Georgia is an import oriented country with low levels of the budget revenues and expenditures. At the same time, the national currency is freely floating against other currencies. Under these circumstances, a 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.
GEORGIAN ECONOMIC TRENDS – 2002 No.3 23 MONEY AND FINANCE
Figure 4.2: Money Supply, December 2000 – September 2002
900,000
Deposits in foreign currencies 800,000 M3 GEL deposits
Currency outside commercial 700,000 banks
600,000
500,000
M2 400,000 M0
300,000
200,000
100,000
0 Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep 00 01 02
Source: GET calculations based on data provided by the National Bank of Georgia
The strict control over the issuing of legal tender results in very modest growth of money in circulation and Lari deposits as well. Figure 4.2 shows the very slow growth of currency in circulation and deposits in Lari. M3 broad money growth happens at the expense of foreign currency denominated deposits. A more detailed table of money supply is available in the Statistical Appendix Tables A4.1-A4.3.
At the same time, the high level of deposit dollarisation indicates that foreign currency (mainly US Dollar at the moment) is the reserve money for the Georgian economy. If the Euro became the currency of reserves and payments in the largest trade partners of Georgia such as Russia, Turkey and Azerbaijan, the role of the reserve currency could be moved to the Euro: more so if Turkey becomes a member of the EU in the future. In describing the high level of foreign currency deposits in Georgian economy the term “dollarisation” is used for simplicity.
Table 4.1: Monetary Ratios 2001 2002 Dec Jan Feb Mar Apr May Jun Jul Aug Sep Dollarisation Ratio % 85,7 85,6 86,0 85,5 84,9 83,7 85,9 84,9 84,7 85,3 Money Multiplier (M2) 0,94 0,93 0,94 0,94 0,9 0,9 0,9 0,9 0,9 0,9 Money Multiplier (M3) 1,70 1,70 1,71 1,75 1,7 1,7 1,8 1,7 1,7 1,7 Source: GET calculations based on data provided by the National Bank of Georgia
We can identify a number of reasons for the high level of deposit dollarisation. The first is the continuing 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. It is a well known fact that very large amounts of foreign currency are transferred from abroad by Georgians working outside their country. One of the main roles of small and low income countries like Georgia is to provide the international market with cheap labour. The nearest and the largest market for Georgians is Russia where the Dollar has a dominant role as a measure of savings. Turkey and Greece are other countries where Georgia’s citizens work. Greece is a member of the EU and the Eurozone (see the previous edition of GET). So that the two main currencies inflow form outside through repatriated incomes.
24 GEORGIAN ECONOMIC TRENDS – 2002 No.3 MONEY AND FINANCE
The second reason for high dollarisation of deposits is an undeveloped domestic financial market. There is no motivation to convert hard currency assets into Lari, since the possibilities to invest them in 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 the State Department for Statistics). 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 hard currencies. 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 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 a 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 the case of Lari devaluation due to a significant share of banks’ liabilities being denominated in hard currencies. And lastly, a high level of deposit 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 making loans in Lari. The introduction of administrative measures such as changing the exchange rate regime and introduction of surrender requirements would lead to an outflow of hard currency from the country and hamper the economy as whole. Moreover, it is possible that the high level of dollarisation is a logical result of the role of Georgia as a low income and cheap labour force country on the international market.
BANKING
Figure 4.3: Loans and Deposits Interest Rates, December 1998 – September 2002 70% GEL time deposits 60% GEL loans
50% FX loans
FX time deposits 40%
30%
20%
10%
0% Jul-98 Jul-99 Jul-00 Jul-01 Jul-02 Apr-98 Apr-99 Apr-00 Apr-01 Apr-02 Oct-98 Oct-99 Oct-00 Oct-01 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02
Source: GET calculations based on data provided by the National Bank of Georgia
GEORGIAN ECONOMIC TRENDS – 2002 No.3 25 MONEY AND FINANCE
The trend of increasing interest rates for Lari denominated deposits stabilised in Q3 2002. In December 2001, banks paid an average of 6.8 per cent annual interest for deposits in Lari while the average annual interest rates paid during Q3 was 11 per cent. As a result, the net interest margin between loans and deposits in GEL decreased. This year is characterised by comparatively higher interest rates on the T-Bills primary market, than on time deposits. (For more explanation see previous editions of GET). In those conditions, it is likely that commercial banks changed their interest rates policy and started to express their preferences for Lari deposits. It is obvious that the volume of loans made in national currency is still very limited so that the existing data do not express the real business done. One can say that net interest margins in national currency decreased only at the expense of increasing deposit interest rates. This indicator could be accepted with reservation. The net interest margin in foreign currencies 1 has been stable in recent years.
As the statistics show, commercial banks put a high risk premium on lending interest rates. That indicates that problems with collateral still persist. As mentioned in previous GET editions, there was also a problem of poor management in commercial banks, especially in the field of credit risk management. However, some progress has been achieved through the improvement of legal aspects of that issue. In July 2002, Parliament adopted amendments to the banking legislation regarding fit and proper criteria for bank managers and persons with qualifying holdings. These criteria toughen existing conditions for bank managers and large shareholders and corresponds to those in international practice. The criteria are focused on investigating the previous business activity of bank managers and large shareholders. They also help supervising authorities to identify whether the such persons had administrative or criminal violations resulting in insolvency of credit institutions.
Box.4.1
Macroeconomic Developments in the Eurozone
The annual Harmonised Index of Consumer Prices (HICP) inflation in September was 2.1 per cent. For October, Eurostat’s flash estimate indicates an annual HICP inflation rate of 2.2 per cent. A base effect associated with energy prices is likely to have been the major factor behind this increase. Looking at the remainder of 2002 and the early part of next year, notwithstanding the recent decline in oil prices, some upward impact on annual HICP inflation rates may occur, reflecting base effects and increases in indirect tax and administrated prices in a number of countries. Although difficult to anticipate, particularly because of volatility of oil prices, a further increase in the annual rates of inflation and a delay in the return to inflation rates below 2 per cent cannot be ruled out. But, the Governing Council thinks that this increase should be only temporary.
In the first half of October 2002, the Euro traded in a narrow range against the US Dollar. In the second half of the month, the Euro was subjected to some temporary downward pressure, which was nevertheless fully reversed towards the end of the month and in early November. The rebound of the Euro against the US Dollar was seemingly related to the release of data indicating a fall in US consumer spending and a rise in unemployment in the country, thereby casting some doubt on the strength of US economic activity. The decision of the US Federal Reserve to cut its target for the Federal funds rate by 50 basis points to 1.25 per cent at its 6 November meeting did not have a notable impact in foreign exchange markets. On 6 November, the Euro was 1 per cent higher than at the end of September and about 11 per cent stronger than its 2001 average.
After remaining broadly stable against the Euro and the US Dollar for most of October this year, the Pound Sterling depreciated vis-à-vis the single currency towards the end of the month and at the beginning of November. On November 6, the Euro traded against the pound sterling at GBP 0.64, which was more than 1.5 per cent above its end-September level and around 3 per cent higher than its 2001 average.
1 Deposits and loans in Euro and US dollars
26 GEORGIAN ECONOMIC TRENDS – 2002 No.3 MONEY AND FINANCE
As regards the analysis under the first pillar of the ECB’s monetary policy strategy, the three months average of the annual growth rates of M3 was 7.1 per cent in the period from July to September 2002. The continuing strong expansion of M3 should be interpreted with caution, since it has been boosted considerably by high uncertainly in financial markets over recent months. At the same time, the low level of short-term interest rates continues to stimulate demand for the most liquid assets, which are included in the narrow aggregate M1. Loans to the private sector have stabilised at growth rates above 5 per cent. In real terms, the current rate of growth in loans is broadly in line with its long-term average. From a medium-term perspective, more liquidity is available than would be needed to finance sustainable, non-inflationary growth. In the previous period this expectation did not prove true. Notwithstanding, the Governning Council does not see risks of this translating into inflationary pressure in the near future.
Concerning the second pillar, recent short-term indicators and survey data suggest that real GDP in the Euro area has continued to grow only moderately in the third quarter of this year. This is in contrast to earlier expectations that a more pronounced upswing would occur in the course of this year. However, the main scenario for the Euro area remains that economic growth is expected to return to rates close to potential in the course of 2003. The expectation of an improvement in economic activity in the Euro area is contingent on a recovery of growth in private consumption, supported by a reduction in actual and perceived inflation rates. This expectation is also conditional on a projected gradual recovery of the world economy and export growth, which together with low interest rates, should help to strengthen investment. Nevertheless, the uncertainty surrounding this scenario remains high. It is therefore difficult, at this juncture, to predict the timing and strength of the economic upswing, both in the Euro area and globally.
Notwithstanding the discovery of accounting irregularities in the US and spillover effects, the stock market correction in the Euro area during 2002 can also be traced to factors specific to the euro area technology and telecommunication sectors as well as insurance and banking sectors. These four sectors accounted for around half of the total stock market decline between end-December 2001 and 6 November 2002. The decline in technology stock prices seems to partly reflect a correction from the high levels seen in the late 1990s and further downward revisions of investors’ earnings expectations in 2002. Declines in the telecommunications sector occurred for similar reasons, while market participants also became concerned about the relatively high level of indebtedness in this sector.
The insurance and banking sectors also experienced severe declines in stock prices during 2002. A large proportion of Euro area insurance corporations’ assets consists of shares, making insurers particularly vulnerable to stock market declines. In addition, recent losses from natural catastrophes have also been high in this sector. The stock market correction also had an adverse influence on the banking sector, particularly during the summer. Notably, banks with relatively low profitability and with insurance company subsidiaries were adversely influenced by plunging stock prices.
The EU Stability and Growth Pact supports price stability in the Eurozone, however resuming the above mentioned it becomes obvious that price stability in medium-term will depend on both internal factors such as the fiscal position of member countries, consumption, investments within the Eurozone as well as international oil prices. 2002 started with some economic recovery but during recent months it became obvious that the US economy will improve less than had been expected. The Japanese economy shows signs of an end to the recession but internal consumption remains very low. Successful emerging markets in Asia gives some confidence for future developments. However, fragility of Latin America countries’ economies clouds that perspective. The possible war with Iraq creates an additional concern within the investor community. What should the lead economies do? This dilemma seemed to require an individual approach from those countries. ECB has refrained from cutting the interest rates for almost a year, however, this decision was made and announced at the beginning of December. The arguments in favour of a cut in the key ECB interest rates have strengthened. As a result, the Governing Council has decided to lower the key ECB interest rates by 50 basis points.
Source: www.ecb.int.
GEORGIAN ECONOMIC TRENDS – 2002 No.3 27 MONEY AND FINANCE
DOMESTIC INFLATION
Table 4.2: 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 105.48 2.0 Feb 106.75 1.2 Mar 107.18 0.4 Apr 109.11 1.8 May 109.11 0.0 June 106.60 -2.3 July 105.42 -1.1 Aug 105.32 -0.1 Sep 105.74 0.4 Source: State Department for Statistics
According to the State Department for Statistics, the accumulated inflation of nine months (since December 2001) reached 2.1 per cent. This average indicator is higher than in 2001. Price developments in Georgia are characterised by seasonality, which is why in July 2002 monthly deflation was –1.1 per cent. That was caused by seasonal decrease of agriculture product prices. In August, monthly deflation was -0.5 per cent. In September prices increased by 0.4 per cent.
Table 4.3: Monthly Producer Price Index, Q1-Q3 2002 (Per cent) Jan Feb Mar Apr May June July Aug Sep PPI growth 0.5 0.9 1.2 2.8 2.9 2.6 1.0 2.0 2.6 Source: State Department for Statistics
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 supplies, machinery, equipment, chemical products, etc. It gives an opportunity to monitor prices development 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 4.3 shows that the PPI has risen steadily during the first five months of 2002. One can say that due to the import-orientation of the economy, an increase of US Dollars in circulation could have a direct effect on the price level. The US Dollar is widely used as a unit of payment in the informal sector so that in the case of a US Dollar depreciation against the Euro, prices for European goods could be pushed up. It is possible to assume two reasons for steady growth in the PPI: one is a
28 GEORGIAN ECONOMIC TRENDS – 2002 No.3 MONEY AND FINANCE relatively rapid growth of foreign currency denominated deposits (mainly USD and Euro) that are 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.
DOMESTIC FOREIGN EXCHANGE MARKET
Figure 4.4: GEL/USD and GEL/EUR Average Monthly Nominal Exchange Rate, December 2000 – September 2002
2.3 2.25 2.2 2.15 2.1 2.05 2 GEL/USD 1.95 GEL/EUR 1.9 1.85 1.8 1.75
1 1 1 1 2 2 2 00 01 0 01 01 01 01 0 01 01 02 0 02 02 02 02 - - - l- t- - - - - l- n-0 r- n-0 u g- p- n-0 r- n-0 u g- p- ec a p u J u e ov ec a p u J u e D J Feb-01Mar A May J A S Oc N D J Feb-02Mar A May J A S
Source: National Bank of Georgia
The average monthly nominal exchange rate of the Lari depreciated against US Dollar in Q2 2002, but was less than in Q1. The Lari depreciated sharply against the Euro, especially in May, June and July, reflecting the trends of a strengthening Euro against the US Dollar.
Box 4.2 Czech Republic Review of Recent Economic Developments under the Pre-Accession Economic Programme
During 2002, economic growth is expected around 3 per cent. In the 1st quarter of 2002 GDP showed a year-on- year growth of 2.5 per cent. The highest growth in 2002 was registered in telecommunications, banking and insurance sector, trade and services for enterprises, research and development.
The relatively rapid sly increasing potential product and the existing development of the economy indicate that pre-conditions are being created for long-term sustainable higher growth which is a necessary prerequisite for success in both real and nominal convergence to the economic standard of the EU Member Countries.
The improvement of the economic performance is ensured largely by the growth of labour productivity. In 2001 the gross domestic product per employee increased by 2.9 per cent. The growth of GDP was also influenced to some extent by the increase of employment by 0.4 per cent. The growth of labour productivity in industry measured by index of sales in constant prices reached 5 per cent. In 2002 these tendencies continued.
The average gross nominal wage increased in 2001 by 8.5 per cent. Its growth was faster than in 2000, however, the growth rates were slowing down in the course of the year. In the 1st quarter of 2002 wage growth slowed down. The growth of the average gross nominal wage in the whole economy reached 7 per cent (in real terms on the basis of CPI growth of 3.2 per cent), in the corporate sphere 7.2 per cent, in the non-corporate sphere 6.5 per cent.
GEORGIAN ECONOMIC TRENDS – 2002 No.3 29 MONEY AND FINANCE
The terms of trade improved in 2001 by 2.1 per cent (according to the national accounts). Both the development of the prices of oil and oil products and the appreciation of the Czech koruna (CZK) exchange rate influenced their favourable development. Export prices of goods and services fell by 1.1 per cent with the decline of import prices by 3.1 per cent. Improvement of terms of trade accounted for 1.6 per cent of GDP.
In the 1st half of 2002, inflation slowed down and the moving inflation rate fell to 4.9 per cent in June 2002. After the convergence of inflation at the end of the 1990s to the values common in the EU, the rise of the price level in the Czech economy has thus stabilised at a low rate. The main cause of the continuing difference in the development of inflation in the Czech Republic and the Euro zone was the balancing of price relations which was reflected primarily in a higher rate of inflation of regulated items and non-tradable commodities.
With continuing adjustment of regulated prices, price developments in 2001 and in the 1st half of 2002 were influenced mainly by cost drivers. Of the external factors it was mainly the development of oil prices on world markets, which reduced inflation starting from the 2nd quarter of 2001. A similar effect came from the appreciation tendency of the Czech Koruna against the Euro, which intensified in the 1st quarter of 2002.
The koruna nominal exchange rate against the Euro was appreciating in the whole course of 2001. At the end of 2001 and in the first quarter of 2002 the appreciation of the koruna exchange rate accelerated in connection with the ongoing inflow of funds to the Czech Republic and optimism on monetary markets. That was a result from the expectations of increased sale of state-owned property abroad. The central bank responded to this development by interventions on the foreign exchange market and by changes of monetary policy rates. In order to eliminate another unbalanced nominal appreciation of the foreign exchange rate, the CNB and Government also agreed on a common procedure in addressing the impact of inflow of capital from privatisation and other foreign currency revenues of the state. As a result of these measures the strong appreciation of the Koruna against the Euro stopped in May 2002 and the exchange rate stabilised.
The indicators of external balance were improving in 2001. The current account balance for 2001 registered a deficit of 4.6 per cent of GDP (CZK 100 billion) which was 0.7 percentage point less than in 2000. The trade deficit for 2001 reached CZK 117 billion (EUR 3,4 billion) in comparison to CZK 121 billion in the preceding year. Despite the slowdown of economic growth in partner countries the growth rate of the export of goods (13.3 per cent in current prices) exceeded import growth (11.7 per cent). The balance of services and the balance of transfers developed better in 2001 than in the preceding year. The balance of trade in 2001 was positively influenced by the decline of world prices of raw materials and development of exports (products of engineering industry, in particular) to the EU Member Countries except Germany.
In 2001, the net inflow of FDI in the Czech Republic amounted to EUR 5,4 bln, i.e. 8.5 per cent of GDP which was 1.1 percentage points less than in 2000. The inflow was significantly encouraged by the ongoing privatisation of the state property to the hands of foreign investors: revenues from the sale of the state stakes accounted for approx. 30 per cent of the total volume of FDI. Most direct investments (88 per cent of the total amount) came from EU Member Countries. In the sector cross-section the main volume of direct investments was channelled to services (64 per cent) and a smaller portion (36 per cent) to the development of production capacities.
In 2001, the growth rate of the money supply increased. The year-on-year increase of M2 monetary aggregate grew from 5.6 per cent at the end of 2000 to 13 per cent at the end of 2001, primarily as a result of the inflow of foreign capital and worsening of the public finance deficit. In 2001, the total volume of loans (adjusted for extra- monetary effects) started to grow again after two years of year-on-year declines. In December 2001, the year-on- year increase of loans amounted to 2.6 per cent in nominal terms and to 1.8 per cent in real terms (deflated by the price index of industrial producers). Lending recovered primarily due to new loans provided to companies under foreign control and loans to individuals. In Q1 2002, there occurred a year-on-year decline in the growth rate of money supply (9.8 per cent in March 2002) and a stagnation of the growth rate of loans
The general government deficit in 2001 reached 2.4 per cent of GDP. After adjustments for lending minus repayment, i.e. mainly privatisation revenues and other transactions of financial nature it amounted to 5.2 per cent of GDP.
30 GEORGIAN ECONOMIC TRENDS – 2002 No.3 MONEY AND FINANCE
The Czech economy has succeeded in maintaining economic growth also under conditions of slower economic development abroad, mainly in the European Union and in Germany in particular. In 2001, GDP growth was 1.6 percentage points faster than in the EU-15. Thus the process of economic catching-up has been resumed. Although the impact of the economic cooling in major business partner countries has not been very evident so far, certain symptoms of the slowdown of the growth rates of export and industrial production should not be neglected. The risks of a possible slowdown which are intensified by a fast appreciation of the koruna exchange rate and may be manifested with a certain delay should be handled by a consistent pursuit of structural changes and modernisation of economy. The prospect of improvement of the world prosperity creates pre-requisites for a favourable development of the Czech economy.
Source: Ministry of Finance of Czech Republic. www.mfcr.cz
INSURANCE
Introduction Insurance is a component part of the financial sector in a market oriented economy. The mechanism of insurance works through the creation of insurance funds from payments (premiums) by the insured and the use of those funds by the insured in the case of a claim due to occurrence of insured event. Insurance funds are created from individuals’ and companies’ money income or/and savings. Payments by insurance companies (in European legislation-insurance undertakings) are made on the basis of a re-distribution of received premiums. Thus, as in other sectors of finance, insurance reflects the process of a flow of (cash) funds. In a market economy insurance functions include two aspects: • Insurance - as an association of (physical or juridical) persons who will receive payments from insurance undertakings in the case of claims; • Insurance as a sphere of business activity.
The essential idea of insurance is compensation of human life, health, property and business against various possible risks. In the USSR, the existence of business risk in the planned economy was not considered. The state was a monopolist on the market and was represented by the State Companies “Gosstrah” and “Ingosstrah” (department of overseas insurance). There were a number of reforms during the Soviet period introducing agriculture harvest insurance and some kinds of individual life assurance and property insurance but the activity of insurance sector remained limited. The state itself provided financial coverage in the case of state property damage. With the absence of competition, set tariffs and low levels of income meant that the sound development of the insurance sector was not possible.
After the dissolution of the USSR, the insurance business in Georgia (as well as all ex-soviet republics) started a revived and began functioning according to market rules. The main conditions that are necessary for the insurance market’s functioning foresee the existence of the following components: • demand for insurance service from potential insured and the ability of insurers to supply that service; • insurance legislation; • reserves and a tariff creation methodology, investment possibilities and social protection of low income insured; • acknowledgement of insurance as an instrument of economic regulation; and • confidence within the population
The first two components are deeply interdependent: a sound insurance market cannot exist without proper legislation and vice-versa. All of those factors require political and economic stability. Sound macroeconomic stability and a developed banking and financial and legal infrastructure play an
GEORGIAN ECONOMIC TRENDS – 2002 No.3 31 MONEY AND FINANCE essential role for insurance system stability. A growing economy increases the number of possible risks linked with the business activity. At the same time, the level of income and savings of potential customers increases. The diversified financial market gives opportunities to invest funds. All of these factors strengthen the demand for insurance services and the ability of insurance undertakings to supply that service. Unfortunately, a decade after the dissolution of the command economy, the absence of the tradition of insurance within the population and a weak national economy are the core factor, which determine the legal and economic environment for the insurance sector in Georgia.
Legal Aspects Insurance legislation plays a very important role in the establishment a sound and robust insurance system. High quality insurance regulations and standards assure market participants that sound practices are being applied, thereby increasing market transparency and confidence. In Georgia insurance is regulated and supervised by the Insurance State Supervision Service of Georgia (ISSSG). The roles, responsibilities and objectives are clearly defined in the 1995 Law on Insurance. In 1997 a presidential decree established the Insurance State Supervision Service of Georgia. The President of Georgia appoints the head of the ISSSG, who is accountable to the President. However, notwithstanding the above mentioned steps toward setting up sound regulations, the legislative framework requires further development to promote financial soundness of insurance companies, and professionalism and transparency of their activity.
Each class of life and non-life insurance reflects a separate kind of insurance risk, which in its turn requires adequate capital and risk management. Georgian legislation does not provide all classes of life assurance and non-life insurance stipulated by international practice.2 The gap in classification of non-life insurance and life assurance classes is caused in part by the undeveloped insurance market, and in part by limited demand from potential customers, especially for long-term insurance and life assurance services. Insurance undertakings are unable to provide those kinds of services. However, it could be very fruitful to determine in Georgian legislation such traditional classes of life insurance, annuities, tontines, etc3. The same is true for non-life insurance classes that lack security insurance, legal expense insurance, assistance, etc. It would help to develop sound risk management in insurance companies, reinforce external control within companies, and develop new products and the insurance market as a whole.
The question of authorisation and licensing is also essential because it should drive insurance undertakings toward proper and separate management for each class of insurance. Starting an insurance business requires a considerable amount of capital, special expertise, reliable management and a detailed business strategy. That is why licensing control is the main supervisory means by which unsound insurance companies are prevented from entering the market. Georgian Insurance legislation requires separate licensing for each class of insurance, but limited classification of insurance risks diminishes the final aim of that principle. Besides that, Georgian legislation does not require the specialisation of companies along the lines of non-life and life insurance. The very low demand for life insurance from potential customers makes it unprofitable to specialise only on life insurance. However,
2 Hereinafter, as GEPLAC is working on harmonisation of Georgian legislation with that of the European Union, Georgian Insurance legislation will be compared with the European Union Directives on life and non-life insurance. 3 Annuity - a contract which provides an income for a specified period of time, such as a certain number of years or for life. An annuity is like a life insurance policy in reverse. The purchaser gives the life insurance company a lump sum of money and the life insurance company pays the purchaser a regular income, usually monthly. Tontine - a type of life insurance or annuity first introduced by Lorenzo Tonti, a Neapolitan banker, in France in the 17th century. It consisted of a fund to which a group of persons contributed, the benefits ultimately accruing to the last survivor or to those surviving after a specified time, in equal shares.
32 GEORGIAN ECONOMIC TRENDS – 2002 No.3 MONEY AND FINANCE international practice shows that life and non-life insurance operations should be separated, so that one activity cannot be required to support the other.
International experience shows that the joint-stock companies are the most risk-free. They concentrate money from large number of shareholders and several sectors of the economy. Such diversification makes them the most stable against various risks. Georgian legislation requires insurance companies to adopt the legal form of a joint stock (JSC) or a limited liability company (LLC). However, there could be reasons for Georgian insurance companies to move gradually to JSC. It will increase the level of transparency and as a result the level of confidence of that business with the potential clients. However, this issue is linked with such economic aspects as capital adequacy and that requires careful consideration.
Economic Aspects Georgian legislation requires a comparatively small amount of initial capital for life (GEL 600,000), non- life (GEL 500,000) insurance and reinsurance (GEL 1 million). For comparison: the relevant EU Directive requires EUR 2 million for non-life insurance companies, EUR 3 million for life insurance companies. The capital base means the financial sources that work as a cushion against the possible adverse build-up of liabilities and other adverse circumstances such as changes in the litigation system, unexpected expense overruns, etc. Thus it provides information on the financial standing of the company and alerts supervisors to take any necessary action to protect policyholders.
The relatively low capital requirement for Georgian insurance companies is explained by limited demand and supply as well as the almost complete absence of investment possibilities for insurance companies to replace their funds. Future increases in capitalisation will not be possible without the development of the stock market and the credit and tax systems as well. Taking into consideration all the objective reasons that might hinder this process, increases shall be implemented gradually according to an adopted schedule, e.g., as was the case for commercial banks. The process of increasing capital in existing companies should include the valuing both assets and liabilities of those companies. Also capital adequacy requirements should reflect the size and business risk of the insurance system.
ISSSG issues annual reports on the Georgian insurance market and state regulation. The 2001 report provided statistics reflecting increasing of total premium income of insurance companies. As the figure below shows, in five years the total premium income has increased almost five times.
GEORGIAN ECONOMIC TRENDS – 2002 No.3 33 MONEY AND FINANCE
Figure 4.5: Annual Total Premium Income of Insurance Companies of Georgia, 1997-2001
30 000
25 000
20 000
15 000
10 000 GEL thousand GEL 5 000
- 1997 1998 1999 2000 2001
Source: ISSSG
In 2001, the total premium income of insurance companies reached GEL 25.4 million. That was 40 per cent more than in 2000. The share of premium income in GDP was 0.4 per cent, while in 2000 and 1999 it was 0.3 and 0.26 per cent respectively. Notwithstanding the growth trend, this ratio is relatively lower than the average for EU membership candidate countries. The next figure reflects premium income by class of insurance.
Figure 4.6: Gross Premium Income Received by Georgian Insurance Companies in 2000 and 2001 by the existing classes of insurance
7 000
6 000
5 000 Gross Premium Income 2000 Gross Premium Income 2001 4 000
3 000 GEL thousand 2 000
1 000
- L L y ire les ess TP isks ife ic n rance argo L nsion ick C viation y M ial R e A c P Insu Property d S al riers Liability an ic luntar in Obligatory F Land Veh o F General Liability Car V Compulsory MTP ent an Med id rofessional Liabilit cc P A
Source: ISSSG
The figure shows that medical insurance increased dramatically during 2001. It seems that the demand for this class of insurance is increasing. However, the data do not provide information on which particular sub-classes of medical insurance are growing. Taking into account the fact that the short- term insurance contracts prevail, and the level of health service is quite low, one can assume that the
34 GEORGIAN ECONOMIC TRENDS – 2002 No.3 MONEY AND FINANCE medical insurance share rose at the expense of insurance for people who travel in foreign countries and for short-term contracts. The share of life insurance premium income is one of the lowest: demand for that service is very low. Possible reasons for this are: low credibility of the insurance sector within the population and at the same time low income of total potential customers. The other existing sector which depends on the level of customers’ income and savings is property insurance. The contracts on that service are a mainly short term and customers are individuals and companies as well. That is why one can assume that the share of property insurance increases from year to year.
Despite the acknowledged fact that the economic infrastructure and prudent legislation are crucial for developing of the insurance business, the role of marketing should not be underestimated. With market competition insurance companies have to improve existing kinds of services and offer new products that will lead them to provide better service to their customers. Rates of insurance products should be adequate, not excessive and not discriminatory. It is worth re-emphasising the importance of introducing new classes of insurance and life assurance and of developing legal regulations, even though within a strictly limited investment market.
GEORGIAN ECONOMIC TRENDS – 2002 No.3 35
CHAPTER FIVE: INTERNATIONAL TRADE AND FOREIGN ECONOMIC RELATIONS
The external trade deficit increased slightly during January - September of 2002. During this period registered external trade turnover was USD 764 million, of which exports were USD 240 million and imports were USD 524 million. Considering the direction of trade, CIS countries remained the main partners, with 40 per cent of the total imports and 48 per cent of exports, just before the EU and Turkey. These figures underline the importance of proximity and traditional links as key determinants of foreign trade. However, Georgia’s trade links need more diversification.
The composition of exports reveals that Georgia’s main competitive products (with the exception of military aircraft) on international markets are scrap base metals, ferro-alloys and gold, followed by wine and chemical fertilizers. That structure could be improved by measures and instruments aimed at the promotion of labour-intensive products such as textile and clothing and agro-processing.
Such an outcome shows the importance of strengthening market access within the framework of bilateral agreements with neighbouring countries. In that respect, it is worth mentioning that Turkey has granted Georgia GSP status, which in the long run could positively impact on bilateral trade relations.
TRADE TURNOVER, TRADE BALANCE AND DIRECTION OF TRADE The figures below suggest that the growing negative trade balance trend continued during the first nine months of 2002. Recorded external trade turnover was USD 764 million, of which exports were USD 240 million and imports USD 524 million. The trade deficit of USD 284 million is about USD 26 million more than in January-October 2001.
Exports declined by USD 15 million, and the ratio of export coverage of imports decreased during January-September 2002 to 45.8 per cent, while in the same period of 2001 the ratio was 48.7 per cent.
Figure 5.1: Registered Exports, Imports and Trade Balance, Q1 1998 – Q3 2002 (USD thousands) 150
100
50
0 19 9 8 Q2 Q3 Q4 1999 Q2 Q3 Q4 2000 Q2 Q3 Q4 2001 Q2 Q3 Q4 2002 Q2 Q3 -50 Q1 Q1 Q1 1Q Q1
-100
-150 -200
-250
-300 Trade Balance export import
Source: Data from the State Department for Statistics
36 GEORGIAN ECONOMIC TRENDS – 2002 No.3 INTERNATIONAL TRADE AND FOREIGN ECONOMIC RELATIONS
The share of the ten main trade partners in the total registered trade turnover was 74.5 per cent. As indicated in Table 5.1, the main partners in the first nine months of 2002 were Russia, Turkey, Azerbaijan and Ukraine. These countries together represented about 47 per cent of Georgia’s registered trade turnover.
Table 5.1: Registered International Trade Turnover and Direction of Trade, Q1-Q3 2002 (USD thousands) International Trade Turnover Import (CIF) Export (FOB) Trade Turnover USD Per cent USD Per cent USD Per cent Total 523,786 100 240,209 100 763,995 100 Main partner countries (total) 381,064 72.8 188,068 78.3 569,132 74.5 Russia 89,093 17.0 39,477 164 128,570 16.8 Turkey 66,046 12.6 37,907 15.8 103,953 13.6 Azerbaijan 53,376 10.2 27,920 11.6 81,296 10.6 Ukraine 38,760 7.4 7,288 3.0 46,048 6.0 Germany 42,493 8.1 3,501 1.5 45,994 6.0 UK 16,745 3.2 25,140 10.5 41,885 5.5 Turkmenistan 13,458 2.6 22,586 94 36,044 4.7 USA 25,474 4.9 8,717 3.6 34,191 4.5 Italy 23,589 4.5 4,879 2.0 28,468 3.7 Switzerland 12,030 2.3 10,653 4.4 22,683 3.0 Others 142,722 27.2 52,141 21.7 194,863 25.5 Source: State Department for Statistics
During Q1-Q3 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, Q1-Q3 2002
Others 22% CIS (including Russ ia) CIS (including Russia) 40% EU Turkey Turkey 13% Others EU 26%
Source: State Department for Statistics
As for the export side, the main market for Georgian products is still the CIS. The EU’s share is about 19 per cent. Turkey is a destination for 16 per cent of Georgian exports. EU market access is still problematic for Georgian companies due to differences in standards and technical regulations.
GEORGIAN ECONOMIC TRENDS – 2002 No.3 37 INTERNATIONAL TRADE AND FOREIGN ECONOMIC RELATIONS
Figure 5.3: Georgia’s registered exports by region, Q1-Q3 2002
Others 17% CIS (including CIS (including Russia) Rus sia) EU Turkey 48% Turkey 16% Others EU 19%
Source: State Department for Statistics
Box 5.1
EU Trade Policy Measures
The EU market for non-agricultural products (except for textiles and clothing products) continues to be largely open. In addition to tariffs, imported products are subject to value-added tax (VAT) and excise duties in the Member State of destination. The EU has bound 100 per cent of its tariff lines in the WTO, and tariffs applied on products are closely aligned to bound levels. The overall simple average MFN tariff is estimated at 6.4 per cent for 2002. The simple average applied tariff on non-agricultural products is 4.1 per cent, slightly lower than in 2000, due to tariff reductions for certain chemicals, textiles, iron and steel products, and toys. The simple average tariff on agricultural products is, at 16.1 per cent, about four times higher than that on non-agricultural products, with above average tariffs on products subject to the Common Agricultural Policy (CAP). Evidence of tariff escalation remains, in particular on processed products.
Tariffs well above the average also apply to textiles and clothing products. The EU has long maintained restrictions on imports of textile and clothing products from a number of developing countries and transition economies. Following its WTO commitments, the EU integrated a further 18.08 per cent of textiles and clothing products on 1 January 2002, bringing to 51.9 per cent the imports integrated into GATT 1994 since 1995. It involved the lifting of restrictions on 11 product categories, accounting for 15 per cent of products restricted in 1990. To date, the EU has lifted restrictions on 20 per cent of products restricted in 1990, leaving the elimination of the remaining 80 per cent of restricted imports “back-loaded” for the final stage at the end of 2004.
As of 1 January 2002, the EU had in place definitive anti-dumping measures (duties and/or undertakings) on 175 product categories, down from 192 in 1999. The EU is the second most frequent user of these measures, behind the United States, but some 40 per cent of the anti-dumping investigations initiated by the EU are terminated without measures being taken. Products imported from China are the most frequently affected. The EU also had 16 definitive countervailing measures in place, up from 6 in 1999, with products from India the most frequently affected.
Safeguard action was taken in March 2002 on 15 steel products in response to the United States’ safeguard action on steel imports. Supplementary duties are to be triggered by volumes rising above 2001 levels to prevent diversion of trade from the U.S. market onto the EU market. The Commission also proposed the Council agree additional duties of between 8 per cent and 100 per cent on imported products from the United States as “re-balancing” measures, given the failure of the two parties to agree compensation for the Article XIX measure on steel imposed by the United States. The EU continues to make frequent use of the special safeguard (SSG) mechanism under the WTO Agreement on Agriculture to impose “snap-back” tariffs.
38 GEORGIAN ECONOMIC TRENDS – 2002 No.3 INTERNATIONAL TRADE AND FOREIGN ECONOMIC RELATIONS
Since 2000, the EU and the Member States have put in place new regulations for certain products — notably in relation to the safety of products and the disposal of waste — requiring economic operators, including those outside the EU, to adapt. Although international standards may be used as the basis for regulations, to facilitate trade, the Commission has stated that “standards cannot replace governmental responsibility to safeguard a high level of protection concerning health, safety and the environment”. Certain trading partners of the EU perceive these new product regulations as significant trade barriers, and are concerned with preserving the viability of the international standard-setting process. Another concern is ensuring that the multilateral processes for consultation on proposed regulations are effective. While proposed regulations are subject to WTO notification requirements to allow concerned Members to comment, participation in the consultations phase, before the Commission issues the proposal, is also desirable should resources permit.
To build consumer confidence in food safety after a number of food scares on the Community market, the EU adopted a new framework for national food law and food safety procedures. Scientific evidence is to underpin food safety policy, with the precautionary principle to be used where appropriate. A new European Food Safety Authority (EFSA) was also established to provide scientific advice to the Commission on food policy matters, as well as to Member States should they so request. A number of Member States have established authorities with mandates at national level to ensure independent scientific advice. New regulatory requirements have also been put into place with respect to labeling of food products of all origins to ensure traceability.
One area of reported controversy concerns the placement on the EU market of genetically modified organisms (GMOs) and products that may contain GMOs or GMO derivatives. Although the new legislative framework for authorizations is tighter in a number of respects, certain Member States remain opposed to placement on the market without comprehensive labeling requirements on traceability, currently under consideration. Another area of controversy concerns the ban on the use of hormones as growth promoters, on which the Commission has conducted a risk assessment in recent years. Amendments to the legislation are under consideration to ensure compliance with WTO rulings. A key objective of the EU is to manage waste more effectively, as a result of which new requirements on producers have been imposed or are under consideration. The EU directive on end-of-life vehicles and the proposed directive on waste electronic and electrical equipment (WEEE) depart from the previous practice of delegating waste management to public authorities by introducing “producer responsibility” for the treatment, recovery, and disposal of products. This is intended as a financial incentive for producers to design their products to facilitate waste management, particularly recycling. Other requirements could also result from the Integrated Product Policy currently under elaboration.
The burden of conformity assessment procedures is reduced for certain non-EU third countries through Mutual Recognition Agreements (MRAs). New MRAs were recently concluded with Japan and Switzerland, and are already in force with Australia, Canada, Israel, New Zealand, and the United States. A similar outcome is secured for the CEEC under concluded Protocols to the Europe Agreements on Conformity Assessment and Acceptance of Industrial Products (PECAs). Although a number of developing countries would also benefit from a reduced burden of conformity assessment as a result of MRAs, the EU has established its own criteria for such agreements to be concluded.
Source: WTO, TPRB
COMPOSITION OF REGISTERED EXPORTS During January-September the share of 10 product groups represented more than 67 per cent of all registered exports. The export of military aircraft and its parts (HTS chapters 8802, 8803) is still in first place at USD 35.4 million (14.7 per cent of all exports). The destinations for these exports together with traditional partner countries Turkmenistan (50 per cent of all aircraft exports) were, Azerbaijan (37 per cent), and Gambia (7 per cent). Ferrous scrap (HTS chapter 7204) accounted for 11.2 per cent of all exports in the recorded period. Turkey was the destination for 91 per cent of this product category export.
GEORGIAN ECONOMIC TRENDS – 2002 No.3 39 INTERNATIONAL TRADE AND FOREIGN ECONOMIC RELATIONS
Figure 5.4: Georgia’s registered exports by Product Categories, Q1-Q3 2002 (USD million)
Other
Vegetable Products
Products of Chemical Industry
Gold
Mineral products
Aircrafts and Transport Equipments
Beverages, Spirits etc.
Base Metal
- 1020304050
Source: State Department for Statistics
Export of gold (HTS chapter 7108) in semi-manufactured forms was about 9 per cent of all exports, valued at USD 21.8 million. The destination for this export item was UK.
The Georgian wine industry is still heavily dependent on the Russian consumer market, Russia is still the traditional importer of Georgian wines. The destinations of the exports of wine from fresh grapes (HTS chapter 2204) during the recorded period were Russia (78.8 per cent), Ukraine (9 per cent), and USA (4.8 per cent).
Waters, including natural ore mineral waters, accounted 5.7 per cent of all exports. The destinations of the exports of water (HTS chapter 2201, 2202) during January-September 2002 were Russia (75 per cent), Ukraine (12 per cent) and Kazakhstan (3 per cent). Chemical fertilizers (HTS chapter 3102) represented 4.4 per cent of registered exports. The destinations of this category of exports were Gibraltar (25.5 per cent), Turkey (16 per cent), Armenia (16 per cent), Azerbaijan (10.5 per cent) and Germany (10 per cent).
Unfortunately, labour-intensive products such as textiles and clothing and agro-processing play a very limited role in the country’s export potential. Georgia does not even use the quotas granted by the EU. According to an agreement with the European Communities, Georgia's exports of textile and clothing (HS Chapters 50 to 63) could become subject to quantitative restrictions in the European Communities' market if the exported volume exceeded 0.35 to 4 per cent, depending on the product, of total Community imports in the previous year. However, these provisions had never been invoked, and the quantitative limits have not been applied.
Other main export items are: copper ores and concentrates (HTS chapter 2603), Sugar (HTS chapter 1701), Aluminum waste and scrap (HTS chapter 7602), aluminum, unwrought (HTS chapter 7601).
Table 5.2 indicates main registered export items according to the Harmonized Commodity Description and Coding System (HS).
40 GEORGIAN ECONOMIC TRENDS – 2002 No.3 INTERNATIONAL TRADE AND FOREIGN ECONOMIC RELATIONS
Table 5.2: Composition of Registered Exports According to the Harmonized Commodity System, By HTS 4-Digit Categories, Q1-Q3 2002 USD Per cent thousands Total exports 240,209 100 Aircrafts, spacecraft, and parts thereof – 8802, 8803 35,405 14.7 Ferrous waste and scrap: ingots of iron or steel-7204 26,935 11.2 Gold, unwrought or in semi manufactured forms-7108 21,880 9.1 Wine of fresh grapes, including fortified wines -2204; 19,586 8.2 Waters, including natural or artificial mineral waters- 2201, 2202; 13,801 5.7 Mineral or chemical fertilizers, nitrogenous –3102. 10,505 4.4 Ferroalloys -7202 9,403 3.9 Copper ores and concentrates –2603 8,856 3.7 Sugar -1701 8,512 3.5 Aluminum waste and scrap-7602; aluminum, unwrought – 7601 7,415 3.1 Other 77,911 32.4
Source: State Department for Statistics
COMPOSITION OF REGISTERED IMPORTS
Figure 5.5: Georgia’s Registered Imports by Product Categories, Q1-Q3 2002 (USD million)
Ot her
Base Metal
Vegetable Products
V ehicles, Aircraf t s, Vessels
Products of Chemical Industry
Prepered Foodstuffs; Beverages, Spirites, Tobacco etc.
M achinary and M echanical App liances
M ineral Pro duct s
0 20406080100120
Source: State Department for Statistics
Imports were dominated again by mineral products in January-September 2002. Georgia’s dependence on foreign energy continues. The import of petroleum gases, oils, and electrical energy together represented about 21 per cent of total recorded imports. Imports of medicines (HTS chapter) accounted for 6.5 per cent of recorded imports. The share of food (milling industry, wheat) and tobacco is slowly decreasing. Table 5.3 shows the largest imported product groups that together constituted about 45 per cent of total imports in the first nine months of 2002.
GEORGIAN ECONOMIC TRENDS – 2002 No.3 41 INTERNATIONAL TRADE AND FOREIGN ECONOMIC RELATIONS
Table 5.3: Composition of Registered Imports According to the Harmonized Commodity System, By HTS 4-Digit Categories, Q1-Q3 2002 USD Per cent thousands Total imports 523,786 100 Petroleum oils and oils from bituminous minerals (other than crude) 61,848 11.8 – 2710 Petroleum gases -2711 39,074 7.5 Medicines –3004 33,926 6.5 Cane or beet sugar -1701 20,917 4.0 Motor cars and other motor vehicles- 8703 15,732 3.0 Tobacco and manufactured tobacco substitutes –2402 13,401 2.6 Wheat -1001 11,989 2.3 Electrical energy – 2716 11,500 2.2 Airplanes, other aircraft, spacecraft and spacecraft launch 11,021 2.1 vehicles– 8803 Meat and edible offal of poultry- 207 8,054 1.5 Electrical apparatus for line telephony or line telegraphy-8517 8,052 1.5 Other 288,272 55 Source: State Department for Statistics
GUUAM-OSCE Preparatory Committee Was Held in Kiev on 4-5 November The GUUAM Free Trade Agreement was signed in July 2002, based on article XXIV of the GATT, according to which regional integration agreements may take several forms, depending on the degree of the integration. Among the recognised forms of regional integration are free trade agreements (FTA). The GUUAM FTA contains 27 articles covering various aspects of multilateral trade, including customs duties, technical requirements, import and export, harmonization of customs procedures, transit, etc. Article 16 of the Agreement notes that the Contracting Parties, in the six months following the signing of the Agreement, shall work out a Protocol on Rules of definition of country of origin of commodities.
If preferential trade arrangements are to be granted for goods produced or grown in countries, it has to be possible to determine which goods or products are really produced in the GUUAM countries. The rules of origin exist to identify the goods produced in the member of FTA and to ensure that the benefits provided through the preferential trade arrangements are confined to those products originating in FTA member country.
OSCE Assisting GUUAM Countries in Implementation of GUUAM FTA OSCE had been requested to provide support to GUUAM countries to facilitate the implementation of the Free Trade Agreement. In co-operation with the Ministry of Foreign Affairs of Ukraine, OSCE organised a working party (WP) meeting on the GUUAM FTA in Kiev on 4th November. The event gathered high ranking officials and more than forty experts and representatives from international and regional organisations (EFTA, CEFTA, BSEC, the Eurasian Economic Community, the EU and GEPLAC), research and economic policy institutes and OSCE participating states.
During the meeting, representatives of GUUAM States introduced the GUUAM Free Trade Agreement and the trade regime of GUUAM countries. There were presentations on EFTA and CEFTA experience as well as WTO policy and rules about regional trade agreements. The WP identified areas of technical assistance that shall be provided to facilitate the implementation of the GUUAM Free Trade Agreement.
42 GEORGIAN ECONOMIC TRENDS – 2002 No.3 INTERNATIONAL TRADE AND FOREIGN ECONOMIC RELATIONS
The following proposals for assistance have been identified: institutional development/building; and supporting GUUAM states setting up an institutional, organisational and operational framework for implementing their FTA. For that purpose, it was proposed that GUUAM experts should learn about EFTA and CEFTA experience. Internships and study visits are envisaged.
Experts will review the applicability of CIS "rules of origin" in the GUUAM FTA context. The review of existing GUUAM foreign trade procedures, formalities and rules with a view to simplify and streamline will also be considered.
Box 5.2
EU Preferential Rules of Origin
One of the main purposes of the rules of origin is to ensure that goods produced in other countries and simply transshipped or given minimal processing in a beneficiary country do not benefit from trade preferences. Goods shipped to the EU market must comply with the rules of origin requirements if they are to benefit from the preferential tariff treatment provided. Goods not complying with the rules of origin requirements will be denied preferential treatment and normal duty will apply to the goods. The EU rules of origin, comprise three elements: 1. Origin criteria; 2. Direct consignment conditions; 3. Documentary evidence.
Origin criteria
The rules of origin determine how and when a product can be considered as originating in a beneficiary country. The origin criteria are defined as follows: a product shall be considered as originating in a beneficiary country if it has been either wholly obtained or undergone sufficient working or processing in that country.
The European Community Custom Code (ECCC) lays down a list of products considered to be wholly obtained. The following are considered to be wholly obtained in a country: (a) Mineral products extracted from its soil or from its seabed; b) Vegetable products harvested there; (c) Live animals born and raised there; (d) Products obtained there from live animals; (e) Products obtained by hunting or fishing conducted there; (f) Products of sea fishing and other products taken from the sea by their vessels; (g) Products made on board their factory ships exclusively from products referred to in (f) ; (h) Used articles collected there fit only for the recovery of raw materials; (i) Waste and scrap resulting from manufacturing operations conducted there; (j) Products extracted from the sea-bed or below the sea-bed which is situated outside its territorial waters, provided that it has exclusive exploitation rights; (k) Products produced there exclusively from products specified in (a) to (j).
A product is considered to be wholly obtained in a beneficiary country when it does not contain any imported input. When imported inputs are used in the manufacturing process of a finished product, the ECCC requires that these non-originating materials be sufficiently worked or processed. The ECCC specifies what is considered sufficient working or processing as follows: "... products which are not wholly obtained in a beneficiary country or in the Community are considered to be sufficiently worked or processed when the conditions set out in the new Single List are fulfilled."
The new EU preferential rules of origin are laid down in the new and more comprehensive Single List, which contains the applicable requirements for origin determination. Thus, in the current scheme, the only general rule to be followed in order to determine the origin of a product is to establish the HS tariff classification of the product and check if the conditions laid down in the Single List for that specific product are fulfilled.
GEORGIAN ECONOMIC TRENDS – 2002 No.3 43 INTERNATIONAL TRADE AND FOREIGN ECONOMIC RELATIONS
The total value of the non-originating materials used in the manufacture of a given product shall not exceed 5 per cent of the ex-works price of the product, subject to certain conditions.
Insufficient working or processing
In some cases, insufficient working and processing may result in a change of tariff heading and the final product is not considered as originating in the country in question. The ECCC provides the following list of what would be considered insufficient working or processing:
- Operations to ensure the preservation of products in good condition during transport and storage (ventilation, spreading out, drying, chilling, placing in salt, sulphur dioxide or other aqueous solutions, removal of damaged parts, and similar operations); - Simple operations consisting of the removal of dust, sifting or screening, sorting, classifying or matching (including the making-up of sets of articles, washing, painting, cutting-up); - Changing the packaging and the breaking-up and assembly of consignments, placing in bottles, flasks, bags, cases or boxes, fixing on cards, boards or other things, and all other simple packaging operations;
- Affixing marks, labels and other similar distinguishing signs on products or their packaging;
- Simple mixing of products, whether or not of different kinds, where one or more components of the mixture do not meet the conditions laid down by the Regulation to enable them to be considered as originating products;
- Simple assembly of parts of products to constitute a complete product;
- Slaughter of animals.
Direct consignment conditions
The second part of the rules of origin relates to the modalities of transport of goods from the preference-receiving country to the EU market. Once the goods in question have complied with the origin criteria, the exporter has to make sure that the shipment of his products follows the provision laid down in the ECCC. This requirement aims to ensure that goods shipped from a beneficiary country are the same goods as those presented at the port of entry into the EU and that they have not been manipulated or further processed in third countries during shipment. As a general rule, of the ECCC requires that a product must be transported directly. According to the same article, the following shall be considered as transported directly from the beneficiary country to the EU or from the EU to the beneficiary country.
Documentary evidence
Apart from the documentary evidence relating to the direct consignment conditions, evidence of the originating status is provided by a certificate of origin duly filled in by the exporter and officially certified by the competent authorities in the exporting beneficiary country. Exporters must be aware that the certificate of origin is one of the official documents on which the EU customs authorities rely in order to grant GSP benefits to their goods. Therefore, it is of vital importance that it should be filled in correctly and in accordance with the rules contained in the ECCC.
Source: EU Customs Code (ECCC)
Turkey Grants Preferential Treatment to Georgia In line with an agreement with the EU, Turkey granted preferential treatment to selected countries and territories, which are classified as developing countries in World Bank statistics, except Armenia and the Greek Cypriot Administration.
44 GEORGIAN ECONOMIC TRENDS – 2002 No.3 INTERNATIONAL TRADE AND FOREIGN ECONOMIC RELATIONS
According to the provisions of the Customs Union Agreement between Turkey and the EU, Turkey has to adapt the EU’s Generalized System of Preferences (GSP), which regulates autonomous customs duty preferences in favour of the least developed countries and developing countries. Turkey has started to apply GSP along with the Import Regime of 2002, which gave an opportunity to the Turkish industry to get raw materials cheaply. Since the Customs Union between Turkey and the EU does not cover agricultural products, they are exempted from the Regime. In the beginning, the GSP regime has been arranged for approximately 2,450 units of raw materials and semi-finished goods, which do not have any, or adequate domestic production. The products concerned were generally selected from (HS codes) chapters 28,29,37,38,82,84,85. The scope of goods will be expanded in the future in accordance with the needs of the Turkish industry.
Preferences are classified according to the sensitivity of the products as “sensitive” and “non-sensitive” similar to the EU’s new GSP Regime. Duties on non-sensitive products are fully eliminated while those on sensitive products are reduced.
GEORGIAN ECONOMIC TRENDS – 2002 No.3 45
CHAPTER SIX: PRIVATISATION
OVERVIEW There was some progress in privatisation of medium and large enterprises (MLE) in the third quarter of 2002. The Ministry of State Property Management (MSPM) has sold the majority shareholdings of joint stock companies Elmavalmshenebeli and Elektrovagonshemketebeli Plant. Two large enterprises were offered and sold at zero reserve price auctions 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 January. There is still no progress in the privatisation of energy sector and telecommunications. The MSPM is going to offer state owned shares of eighteen enterprises through the Georgian Stock Exchange trading system in December.
SMALL ENTERPRISE PRIVATISATION The privatisation of small enterprises in Georgia started in 1993. The Figure 6.1 shows the dynamics of the small enterprise privatisation by year. The largest numbers of enterprises were privatised in 1995, when the Georgian economy started to stabilise and in 1998, when the largest zero reserve price auctions were held. Since then it seems that privatisation is approaching its end because the amount of available objects is diminishing. However, privatisation of large enterprises is still underway (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
As shown in Table 6.1, 486 small enterprises have been privatised in the first nine months of 2002. As of 1st October 2002, 14,017 small enterprises had been approved for privatisation and 16,641 small enterprises have been actually privatised1 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 the parts of MLEs and became independent units after restructuring of the latter.
1 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.
46 GEORGIAN ECONOMIC TRENDS – 2002 No.3 PRIVATISATION
In the third quarter of 2002, 191 enterprises were actually transferred to private ownership. The sectoral and regional breakdowns show that the basic trends are unchanged. Most 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 made some progress 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 9 months of 2002.
Table 6.1: Small Privatisation by Sector (MSPM classification) as of 1 October, 2002 % of total Privatised Sector Approved Privatised privatised in 2002 1 Manufacturing 412 331 2.0 8 2 En e r g y 82 88 0.5 8 3 Bread products 142 127 0.8 2 4 Agriculture & food 801 981 5.9 74 5 Construction 452 386 2.3 16 6 Trade 4,723 5,538 33.3 105 7 Services 5,616 7,353 44.2 190 8 Oil products 172 174 1.0 - 9 He alth 848 643 3.9 17 10 Social sphere 536 759 4.6 51 11 Transport 233 261 1.6 15 Total 14,017 16,641 100.0 486 Source: Ministry of State Property Management
The acquisition of small enterprises by insiders is still widespread, which in many cases diminishes government revenues and retards efficient operation of the small enterprises. However, the existing resale market seems to be effective enough to ensure the acquisition of assets by more capable owners and increasing competition puts pressure on companies to increase efficiency.
MEDIUM AND LARGE ENTERPRISE PRIVATISATION In general, privatisation of medium and large enterprises that are still in state ownership is facing difficulties. Many of the tenders failed to attract bids and the enterprises are left unsold. Even in the 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. In this situation insider buyouts which took place in the third quarter of 2002 (JSC Elmavalmshenebeli and Elektrovagonshemketebeli Plant), may be considered as progress.
In the third quarter of 2002, there were no changes in approving and actual incorporation of state enterprises. Table 6.2 shows that as of 1st October 2002, the number of the medium and large enterprises approved for establishment as JSCs has remained unchanged at 1,426. The total number of medium and large enterprises established as joint stock companies is 1,362. During the first nine months of 2002, only 3 JSCs were established. The highest numbers of both approved for and actually incorporated state enterprises are in the Agriculture and Food sector.
GEORGIAN ECONOMIC TRENDS – 2002 No.3 47 PRIVATISATION
Table 6.2: Corporatisation of MLEs by Sector (MSPM Classification) as of 1st October, 20022 Es tablis he d 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 Com m unications 120 131 0 Social sphere 57 57 1 Healthcare 56 58 0 En e r g y s e cto r 66 130 0 Total 1,426 1,362 3
Source: Ministry of State Property Management
Under the conditions of the World Bank Structural Adjustment Credit III (SAC), in order for the release of the second tranche, at least 20 out of 29 of the largest enterprises from the first priority list should be privatised or liquidated. As of November 2002, eighteen enterprises have been privatised from the first priority list and in nine enterprises, liquidation/bankruptcy procedures have been started. One JSC (Sakhidroenergomsheni) has been taken out the first priority list of privatisation. 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.
In the third quarter, the MSPM has privatised four large enterprises from the first priority list. Among them was JSC Elmavalmshenebeli, producing electric locomotives. Since it is one of the largest enterprises in Georgia and its privatisation process previously had some difficulties (having been offered for sale several times but without success), it was restructured and the assets not related to the production process were separated from the charter capital of the enterprise. A 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. The director of the enterprise won the tender in July. 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 MSPM has also sold the majority shareholding of JSC Medea (wool cloth factory). An international tender to privatise the majority shareholding of the enterprise was announced on 19 July. The shareholding was offered with a symbolic opening price of USD 5 000. An individual won the tender 20 September.
The shareholdings of JSC Kutaisi Automobile Plant and JSC Sakartvelos Traktori have been offered at a zero reserve price auction on 5 July. The auction was completed on 7 October and both shareholdings were sold. 58 per cent of the shares of JSC Sakartvelos Traktori were sold for GEL 154,450 and 30 per cent of the shares of JSC Kutaisi Automobile Plant were sold for GEL 229,674.
2 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.
48 GEORGIAN ECONOMIC TRENDS – 2002 No.3 PRIVATISATION
Zero reserve price auctions, where the shares offered are distributed proportionally to the payments made by the bidders, still remain the most effective way to privatise enterprises in Georgia. However, this method of privatisation may have a negative impact on the future operation of the enterprise. New owners have no commitments or obligations to carry out rehabilitation or restructuring of the privatised object. As at the zero reserve price auction shares are distributed among all bidders, thus, it may allow acquisition of an enterprise by many different owners with no common strategy and different goals and ambitions. This may significantly delay efficient operation of the enterprise and even keep it idle.
The MSPM started liquidation procedures in the JSC Elva. An independent auditor has already evaluated the assets of the enterprise subject to liquidation and 1.37 per cent of the assets have been already sold at different auctions, the process of liquidation should have been completed in 2002. JSC Saktseoliti is also subject to liquidation. A liquidator has worked out liquidation programme and the process should be also completed by the end of 2002. JSC Saksamtometalurgia is also in the liquidation process. According to the liquidation plan, 80 per cent of the assets not crucial for the functioning of the residual enterprise are offered at auction. The liquidation commission is trying to collect the payments from the debtors of the enterprise and when this issue is solved the rest of the assets of the enterprise will be offered for sale. Liquidation of unviable, 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 facing bankruptcy procedures. Among them are JSCs Tami, Kimbochko, Tkibulnakhshiri, Azot, Sakabreshumi and Chiaturmanganumi. Bankruptcy procedures lead to reorganisation or liquidation of an insolvent enterprise. In some cases the courts allow implementation of the rehabilitation programmes in the enterprise, which through reorganisation may lead to the improvement of the efficiency of the enterprise. JSC Azot is already fulfilling a rehabilitation programme set by the court. In the first half of 2002, the enterprise’s output was GEL 30,2 million, which is higher than the entire output of the last year. The management of the JSC Sakabreshumi has submitted a rehabilitation programme to the court, which had raised a bankruptcy suit against the enterprise. The programme for 2002-2004 envisages the financial-economic improvement and structural reorganisation of the enterprise. As of January 2002 the JSC has arrears of GEL 139,624. The programme estimates the revenues during the rehabilitation period as GEL 383,768, which will cover the arrears, and the rest should be reinvested in the enterprise. The Court still has to approve the rehabilitation programme. Under the terms of its rehabilitation programme JSC Chiaturmanganumi has signed an agreement with the Singapore company Delta-Export to supply 200,000 tonnes of manganese per year. 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. Privatisation of efficient enterprises will be much easier and will result in larger revenues to the state.
Beyond the enterprises of the first and second priority lists the major event in the privatisation of MLEs was the privatisation of Elektrovagonshemketebeli Plant by tender in August 2002. The director of the enterprise paid USD 1,300,000 for the shareholding. He is to fulfil the conditions of the tender, including bringing USD 1 million in new investment, increasing output and retaining the work force.
The MSPM is going to offer state owned shares of eighteen enterprises through the Georgian Stock Exchange trading system in December. The total nominal value of the shares offered at auction is USD 4,005,394. The majority shareholding of one enterprise (90 per cent) is offered at the auction, while the rest of the offers are minority shareholdings. Among the enterprises are: AES Telasi (Tbilisi
GEORGIAN ECONOMIC TRENDS – 2002 No.3 49 PRIVATISATION electricity distribution company), two gas operating companies, tea and wine factories and electrical Wagon Repairing Factory.
Energy sector The Poverty Reduction and Economic Growth Programme (PREGP) of Georgia sets as a priority the privatisation of energy sector assets. 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. However, there was no progress in privatising the assets of the energy sector in the first nine months 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. Privatisation of Tbilgazi (Tbilisi gas distribution company), which was on the agenda for several times, is still undecided.
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 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 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 are to present technical and financial proposals. The tendering commission will assess the technical proposals according to the system of points. If the technical proposal of a company reaches the passing point, the financial proposal of the same company will be evaluated by the commission. The unsealing of bids will take place on 15 January 2003.
Box 6.1
Long-term Contracting for Water and Wastewater Services
Providing safe and affordable drinking water and wastewater services for citizens is a necessary but costly endeavour. Simply staying apprised of the latest science and regulations takes considerable resources. Implementing changes as needed to provide quality drinking water and treated wastewater requires significant investments, manpower, and expertise.
Cities strive to cope with these challenges through a variety of means, one of which is contracting with private companies. Public-private partnerships (PPPs or P3s) allow local governments to stretch tax money by taking advantage of private-sector efficiencies and management approaches that can reduce costs. Recent regulatory changes now enable public-private partnerships on a long-term basis of up to 20 years. Long-term partnerships can create innovative solutions to water infrastructure problems, and in the current regulatory climate, contracting with a private company can provide a community with a long-term partnership that best serves citizen needs.
50 GEORGIAN ECONOMIC TRENDS – 2002 No.3 PRIVATISATION
The reasons for shifting to long-term contracting are dominated by cost savings and improved compliance with environmental standards, but we find other motivations as well. These differing motivations are reflected in the variety of forms that long-term contracts take, from financing to outsourcing management, operations and maintenance.
Why Contract long term?
Municipalities enter into long term public private partnerships for water and wastewater services to achieve a number of goals, including:
Reducing costs, both capital and O&M costs; Increasing efficiency; Enhancing risk management; Meeting capital investment needs; Achieving regulatory compliance; Overcoming lack of local expertise through private-sector experience; and Saving time
Some of these objectives may be contradictory. For example, it may not be possible to extract the greatest financial value and, at the same time, reduce rates. Similarly, cities may not be able to realise significant cost reductions and, at the same time, protect employees entirely. These choices are predicated on trade-offs, i.e. what can be exchanged for the guarantees afforded by a privatisation agreement. For example, city officials may choose to sacrifice some immediate savings by mandating a no-layoff clause and reducing the workforce only through attrition, which is more plausible through long-term agreements. Also, the officials may choose the stability and continuity of a 10- or 20-year contract over greater immediate financial gains possible through a short-term agreement.
The essence of public-private partnerships is the type and breadth of guarantees that are rare and difficult to achieve under public operation and management. Essentially, the guarantee aspect translates to an enhanced risk-management advantage. The more responsibility given to the private sector, the better the risk profile from the government’s viewpoint. Guarantees in long-term water and wastewater contracts often include:
Guaranteed annual operating budget and costs; Guaranteed system operations, regulatory compliance, service quality; Guaranteed contraction costs and facility start-up schedules; Guaranteed customer service and response; and Guaranteed revenues and revenue collection.
Achieving these guarantees and goals often requires a long-term commitment to improving the quality and efficiency of municipal water and wastewater service delivery.
In addition to direct costs, compliance, performance, and financial benefits, long term contracts for water and wastewater services can enable local leaders to concentrate their energies on other programmes and functions. The day-to-day management of utility systems has become a burden in many communities, draining professional and management resources that can be better focused on other municipal and community needs.
In addition, partnerships lead to increased accountability, improved service levels, capital improvements, and additional benefits to the community.
Source: Long-term Contracting for Water and Wastewater Services by R.A. Johnson, J. McCormally and A.T. Moore
GEORGIAN ECONOMIC TRENDS – 2002 No.3 51
CHAPTER SEVEN: EMPLOYMENT, INCOMES AND THE SOCIAL SAFETY NET
The situation on the labour market remains largely unfavourable. In the last few years unemployment rate figures have remained quite high. Generally compatible with other transition economies, it is very likely, that they conceal overwhelming underemployment, hidden and disguised unemployment, and the dominance in the labour market of subsistence agricultural self-employment, without which the unemployment rate would have been much higher. Average salaries across the economy are persistently below half the minimum subsistence level for an average family. The labour force is gradually shrinking due to both long-term unemployment and migration caused by the complicated economic situation. Unemployment and underemployment contribute to household budget problems, and, therefore, to growing poverty. The majority of the working age population is without a stable job or any job whatsoever - underemployed or non-employed (including the unemployed and those outside the labour force). Hired employment accounts for just about 20 per cent of the working age population, while 40 per cent of the hired employees work at budgetary organisations and are paid extremely low salaries. The share of the employed and self-employed in the informal economy in total employment is growing together with the growing informal sector. The majority of jobs are unstable and paying low salaries.
HOUSEHOLD SURVEY For the analysis of the labour market, GET usually uses the results of the SDS on-going Household Survey1, that suggest quite interesting and informative data that are internationally comparable2. In a situation when the data on registered unemployment, due to low registration, hardly reflect the real size of the unemployment, and can rather serve as a measure of registration only, the survey results are the only ones that can render a more or less realistic notion of labour market developments and such important indicators as employment and unemployment rates, labour force participation rate, the population outside the labour force, and household incomes and expenditures.
The survey results are usually available on a quarterly basis. This time, however, the SDS survey data cannot be used to analyze the current trends, as they have not been available for publication since Q1 2002, when the SDS introduced new questionnaires for the on-going household survey. Therefore, the latest figures at our disposal were the ones for Q4 2001. Initially, the introduction of the new questionnaires delayed data processing. Later on, however, though the data was largely processed, the SDS would not make any of them obtainable even as preliminary ones. As the SDS explained, the results that the application of the new questionnaires yielded differed from those of the previous years too much (no surprise concerning that questionnairs applied were different), and, therefore, time was needed to analyse which element of the newly adopted questionnaires could have caused such a difference. As can be assumed from the new questionnaires, when made available, the survey results are likely to be more comprehensive, detailed, and effective as a basis for analysis, than those obtaind using the old questionnaires (the new questionnaires imply more complete information on those engaged in informal sector, secondary employment, company size, job stability, part-time employment, and underemployment, though, in accordance with internationally applied methodology, the survey does not take into consideration the size of remuneration). However, the
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 comparable 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).
52 GEORGIAN ECONOMIC TRENDS – 2002 No.3 EMPLOYMENT, INCOMES AND THE SOCIAL SAFETY NET reason for the substantial difference between the old and new final data should be found, since otherwise, it will be difficult to use the new results to build time series or monitor trends. While, these kind of differences might have been caused by the questionnaires that are better suited to reflect the real picture, it is not surprising if such difference is purely technical, i.e., accounted for by various methodologies applied.3 Therefore, figures obtained using old and new methodologies should be compared with caution.
UNEMPLOYMENT The latest currently available data for the economic status are for 2001. In the absence of new data, and since the anecdotal evidence suggests no dramatic changes on the labour market, it seems worth publishing them again for those who read GET for the first time. As the table below shows, in 2001, the national unemployment rate quarterly indicators did not change dramatically, compared to a year before. At the end of 2001, the national unemployment rate was 10.3 per cent by the “strict” standard and 15.1 per cent – by the “loose” methodology4. The gap between the two measurements at 4-6 percentage points, reflecting a rather big difference between the numbers of the unemployed who were actively looking for a job and those not doing so, clearly indicates a trend whereby the share of “discouraged” workers in total unemployment is persistently high (34 per cent on average over 2000- 2001), that in its turn reveals long-term unemployment and a tough labour market, when the unemployed are not looking for a job, as they do not believe the job they might find is worth active search.
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.
Registered unemployment bears little relation to the real size of the unemployment. After the reorganisation of the State Employment Service, the unemployed have to undergo a re-registration procedure. Since the beginning of 2002, according to the SDS monthly report, as of the 1st November, 37,200 unemployed were registered at the State Employment Service offices as a result of a re- registration procedure that followed the reorganisation of the agency. The share of those who bother
3 We have already come across a similar inconsistency, when comparing economic status figures of 1998-1999 and 2000-2001. Since economic status data where drawn from the SDS Labour Force Survey in 1998-1999, and starting from 2000 – from the SDS household survey, differences between the methodologies applied in the respective surveys, apparently, accounted for substantial changes in labour market indicators. 4 While according to the ILO “strict” standard “discouraged” workers (i.e., those unemployed who are not actively looking for job) are considered to be outside the labour force, according to the ILO “loose” methodology they are counted as part of the labour force.
GEORGIAN ECONOMIC TRENDS – 2002 No.3 53 EMPLOYMENT, INCOMES AND THE SOCIAL SAFETY NET to register in the estimated “strict” measurement unemployment is approximately 18 per cent and about 11 per cent of the estimated “loose” measurement unemployment. For the majority jobless the re-registration procedure is not worth going through in order to be eligible for the monthly GEL 14 (approximately USD 6) paid as benefit.
According to the old survey figure, the labour force participation rate ranged between about 63 and 68 per cent over the recent years (66.4 per cent at the end of 2001) together with a relatively low national “strict” standard unemployment rate would suggest quite a favourable economic activity and household incomes situation, if not for anecdotal evidence suggesting a frequent incidence of underemployment, low remuneration, an overwhelming number of people in agricultural self- employment5 and a large number of pension age workers, who have to remain active on the labour market, to compensate for the token pension assistance.
Long-term unemployment is one of the most characteristic features of the Georgian labour market. It undermines the employability of those who have been without job for extended periods, as long-term unemployed are likely to be losing their qualification, as well as access to information on jobs and networks that would be helpful in finding job. Special programmes and policy measures are required to reintegrate the “discouraged” workers into the labour force and return them into the labour market.
EMPLOYMENT While hired employment has been on a downward trend, self-employment has been dominating the labour market in recent years: it accounted for over 61 per cent of the total employment and about 55 per cent of the labour force in Q4 2001 (see Table A7.1 of Statistical Appendix). A labour market characterised by shrinking hired employment and widespread self-employment is an indication of a situation unfavourable for businesses that could create jobs. In such circumstances people tend to take up low-income and unstable jobs or engage in self-employment activities, often in the informal sector.
In contrast to a stagnant and shrinking formal sector, the informal sector is dynamic and growing. It 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). The informal sector typically includes three types of people: employees operating in informal-sector firms or in informal employment arrangements within registered firms, micro-entrepreneurs and self-employed. The majority of jobs, especially in cities, are created in the informal sector that, as overall employment, is dominated by irregular self-employment represented largely by unrecognised, unrecorded and unregulated small-scale activities.
Self-employment is mainly represented by agricultural self-employment (84 per cent of the total) that is largely a pre-defined status, as explained above. In its turn, over half of agricultural self-employed (58 per cent, according to the latest available SDS household survey data of 2001) are unpaid family workers, i.e. those who do not have any cash income from their agricultural activity. While in developed economies unpaid family workers typically account for as little as virtually 0 to 4 per cent of employment6. In Georgia the share of this category of self-employed village dwellers in total
5 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. 6 “Key Indicators of the Labour Market 2001-2002”, ILO.
54 GEORGIAN ECONOMIC TRENDS – 2002 No.3 EMPLOYMENT, INCOMES AND THE SOCIAL SAFETY NET employment amounts to as much as 39 per cent, supporting the assumption of a highly unproductive agriculture. These people, though not counted as unemployed, are most likely to be at a high risk of poverty.
Another category that might be at a high poverty risk accounts for almost 12 per cent of total employment are the so called “own-account workers”, i.e., self-employed who neither have any employees nor are shareholders or members of co-operatives. Rural poor are likely to experience a lack of cash income, while poverty in cities involves insufficient food supply and under-nourishment. While the relatively moderate unemployment rate in Georgia as a transition economy is mainly due to self-employment, the vast majority of self-employed, are likely to be exposed to a different degree of poverty risk.
Of those employed or self-employed in accordance with the 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.
Pending the SDS household survey results for 2002, that, judging by the questionnaires applied, are supposed to offer much more complete information than before, anecdotal evidence suggests that many of those working are underemployed. Among those in hired employment, part-time and temporary employment are widespread and, unlike full-time stable jobs, are often the case. As labour demand is not sufficient to utilize all the labour resources, underemployment becomes inevitable, and people have to accept part-time and short-term low-paid casual work. Such jobs sometimes can be the only option for those who enter or re-enter the labour force, as well as for those with outdated skills and for low-qualified workforce.
In September 2002, the Georgian Economic Development Institute (GEDI), with the support of "Open Society-Georgia Foundation", carried out an opinion survey whose main purpose was to determine the degree of the readiness of the Georgian public to accept the main principles of the draft new Tax Code. The survey included three sub-surveys that covered respectively 300 tax officers, 855 businessmen and 600 employed citizens. While the findings of an opinion survey are usually quite interesting, separately taken, they can in no way be treated as a reference for analysing the economic situation in general, or the situation on the labour market particularly. First of all, questions in any opinion survey imply the respondents’ subjective judgements to find out their attitude to a particular subject, as opposed to household or labour force surveys, where all questions are formulated so that the answers could be classified to fit to official definitions. Secondly, as the purpose of this concrete opinion survey was not determining economic status of the population but their views and readiness to participate as potential taxpayers, correspondingly, the respondent target groups did not include all the categories of working age population (e.g., unemployed, those outside the labour force, etc.), and did not encompass equally all the regions of Georgia (e.g., over 68 per cent of employed respondents were residents of Tbilisi). Therefore, though the survey tables include some figures on employment, they can only be a matter of interest illustrating people’s perception of the situation, and should not be used for drawing conclusions, or comparing them with a household survey or a labour force survey’s findings, as in addition to the above reasons, the samples are also very different7.
According to the results of the opinion survey, of 600 employed respondents, approximately 14 per cent considered themselves underemployed, about 77 per cent said they had a primary job
7 E.g., the sample of the SDS household survey is 3,300 households throughout Georgia.
GEORGIAN ECONOMIC TRENDS – 2002 No.3 55 EMPLOYMENT, INCOMES AND THE SOCIAL SAFETY NET only and 9 per cent had both primary and secondary jobs. Over 42 per cent worked in budgetary organisations and almost 37 per cent – in private firms, while 9 per cent were engaged in self- employment. As rural areas with the vast majority of the self-employed are not represented in the survey, it is no surprise, that the share of self-employment appears to be low, and it is very likely to reflect the urban situation.
See below some more findings of the GEDI opinion survey that give an indication of the employment situation in cities.
Figure 7.1: Economic Status Related Selected Answers of GEDI Opinion Survey8, September 2002 (Per cent)
How many of your family members are How many of your family members are fully employed? underemployed?
5 members 2 members 3 members 4 members 1% 1 member 1% 5% 36% 18% 3 members 15%
2 members 1 member 43% 81%
How many of your family members are unemployed?
3 members 4 members 6% 1%
2 members 17%
1 member 76%
Source: Data from GEDI opinion survey, September 2002
Underemployment is widespread. 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
8 The opinion survey, conducted by the GEDI in September 2002, covered 600 employed respondents from Tbilisi (68.2 per cent) and other 6 large cities in Georgia.
56 GEORGIAN ECONOMIC TRENDS – 2002 No.3 EMPLOYMENT, INCOMES AND THE SOCIAL SAFETY NET 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.
INCOMES, SALARIES AND WAGES Though during the last two years no positive changes took place in financial position of majority of employed respondents of GEDI opinion survey (about 63 per cent), many of them (52 per cent) have optimistic expectations for the coming two years. The financial position of 35 per cent of them remained stable, and over 28 per cent experienced to different extents a worsening of their economic situation over the two past years. While 63.5 per cent of employed respondents are paid fixed monthly salaries and 7.5 per cent are paid on a daily basis, remuneration of about 23 per cent is sporadic, depending on the occasional work accomplished.
While monthly family income of about 48 per cent of employed respondents was way below or just above the minimum subsistence for an average family at up to GEL 250, 43 per cent of them assessed their family income as average (see figure below). An insignificantly tiny share of the respondents – 0.3 per cent - qualified their family income as “high”. However, almost 49 per cent of them rendered assistance to poor relatives during the past year, and approximately 33 per cent had at least one permanent dependent outside their households.
9 The Secretariat to the Governmental Commission for Elaborating PREGP is currently working on the final document of PREGP.
GEORGIAN ECONOMIC TRENDS – 2002 No.3 57 EMPLOYMENT, INCOMES AND THE SOCIAL SAFETY NET
Figure 7.2: Family (Household) Income Related Selected Answers of GEDI Opinion Survey, September 2002 (Per cent)
To which category would you attribute your What is the size of your family average family according to your family income? monthly income?
Higher GEL 1,000 - Above GEL 1,500 1,500 middle Low GEL 600 - 3% 1% 6% 28% 1,000 8% Under GEL 100 17%
GEL 400 - 600 17%
Middle Lower 43% GEL 250 - 400 GEL 100 - 250 middle 23% 31% 23%
Source: Data from GEDI opinion survey, September 2002
According to the latest available SDS household survey figures – i.e., those of Q4 2001, the average monthly nominal salary of hired employees across the economy was GEL 98 and its share in the minimum subsistence of a family of four was 45 per cent. Over 43 per cent of all waged and salaried workers – budgetary organisations10 employees – were earning on average GEL 58.5 per month. Employees of public enterprises and organisations accounting for over 22 per cent of hired workers were paid GEL 107.4 per month on average. Monthly remuneration of private sector employees (about 29 per cent) 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.
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 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 According to the SDS, the official minimum subsistence, calculated according to the old methodology, introduced in early 1990s, was GEL 107.1 for an average consumer in Q3 2002, GEL 122.1 for a working man, and GEL 212.5 for an average family of four. A new methodology has long been ready at the SDS and until recently it used to publish it as an “alternative” minimum subsistence11. It can be
10 A budgetary organisation is a public organisation fully financed by the state budget. 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. 11 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.
58 GEORGIAN ECONOMIC TRENDS – 2002 No.3 EMPLOYMENT, INCOMES AND THE SOCIAL SAFETY NET argued which of the methodologies better takes into consideration the real basket that can secure a reasonable minimum subsistence. 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 - GEL 127.8 (Q4 2001). 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.
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 strategic objective. The Secretariat to the Governmental Commission for Elaborating PREGP is currently working on the final document of PREGP that, after being considered at a Government meeting in early December, was to be accomplished in one month’s time. The main goals of 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, has already started, 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
GEORGIAN ECONOMIC TRENDS – 2002 No.3 59 EMPLOYMENT, INCOMES AND THE SOCIAL SAFETY NET 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.
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 Q3 2002).
The state pension fund - United State Social Safety 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 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 (pay-as-you-go) 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 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 fines 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.
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.
60 GEORGIAN ECONOMIC TRENDS – 2002 No.3 EMPLOYMENT, INCOMES AND THE SOCIAL SAFETY NET
The existing PAYG pension system fails to carry out its basic function - providing basic minimum pensions to the elderly. Average taxable salaries/wages are low resulting in the low replacement rate14 of the current PAYG universal pension system. The average pension flat rate of the majority of pensioners is around 15 per cent of the average hired employees’ monthly salary. The majority of pensioners are either relying on 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 they place the most vulnerable elderly at poverty risk that may further result in social disintegration, marginalisation and social exclusion.
As the GEDI opinion survey results show (see more details on the survey above), over 30 per cent of the employed respondents in their old age hope to be supported by their children, almost 39 per cent would rely on real estate to sustain and 7 per cent would accumulate money. While only 1 per cent of respondents believe the current pension system is in the position to secure their well being when they reach pension age, another 22 per cent would opt for another pension system. While over 8 per cent of the working respondents are of pension age, therefore, supporting themselves, 99 per cent of respondents are very likely to have dependents: 1 or 2 of their family members are pensioners, who are most likely to live on their working children’s income. This finding supports the expectations of the 30 per cent, in whose opinion the most reliable way to secure normal living standards in old age is to grow “good children”.
PENSION 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 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.
14 The average pension in terms of the average wage.
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By the time the new pension system is in place, the Fund is to be merged with the State Medical Insurance Company15. The United State Social Insurance Fund will be collecting the payroll tax16 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 broaden 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 pension17. 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, the state pension system is supposed to provide a 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.
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 Parliament, however, they were not considered at its autumn
15 Presidential decree of 31st December 2002 “On Forming the United State Social Insurance Fund of Georgia – A Legal Entity Subject to Public Law”. 16 In 1998, this function was transferred from the fund to tax inspection. 17 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.
62 GEORGIAN ECONOMIC TRENDS – 2002 No.3 EMPLOYMENT, INCOMES AND THE SOCIAL SAFETY NET 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.
REVIEW OF DRAFT LAWS
Draft Law on Mandatory Social Insurance The reformed social protection of the population, including pension system is to be based on insurance principles, which 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 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.
Draft Law on Mandatory Insurance Pensions 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
GEORGIAN ECONOMIC TRENDS – 2002 No.3 63 EMPLOYMENT, INCOMES AND THE SOCIAL SAFETY NET persons having reached pension age18 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 part19.
According to the draft law, state working pension will be financed out of insurer’s (the United State Social Insurance Fund, 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 (personilized) account will be calculated on the basis of the mandatory insurance contribution paid to the insurer’s budget. The defined-contribution part of the state working pension will be granted on the basis of the funds accumulated on the insured’s defined-contributions individual account. The state will undertake obligation of subsidizing the liabilities of the insurer – the United State Social Insurance Fund (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 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 (28 per cent – social insurance contribution, 3 per cent – medical insurance contribution and 1 per cent – employment fund 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).
Draft Law On Introducing Individual (Personalized) Registration and Individual Accounts in the System of Mandatory Social Insurance 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 a contribution that, unlike the present payroll tax, would be directly linked to future benefits. The World Bank is
18 Currently, the pension age is 60 years of age for women and 65 years of age for men. The draft law “On State 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. 19 Defined-contribution schemes (DC) specify in advance the contribution, but not the benefit, which depends on the accumulated contributions (and the rates of return on investments).
64 GEORGIAN ECONOMIC TRENDS – 2002 No.3 EMPLOYMENT, INCOMES AND THE SOCIAL SAFETY NET expected to allocate USD 1.5 million for introduction of individual registration and equipping the fund with an automated system of management of individual accounts.
Box 7.1
Pension Reform in Latvia
Latvia was the first transition country to introduce a systemic reform of its public pension system. It was also the first transition country to implement the “notional defined contribution” (NDC) approach to pension reform, in which benefits are linked to individual contributions and to the retirement age. The new NDC system, adopted in late 1995, is already in place, as the first of the three-pillar structure that will constitute the reformed Latvian pension system. The adoption of a NDC system as the first pillar and the gradual introduction of funded pillars will avoid the high transactions costs typically incurred in the move to a funded pension system.
In view of the drawbacks of the PAYG system and the prospects for a rapidly aging population, pension reform was placed on the agenda in Latvia in the mid-1990s. A new pension law was introduced in November 1995, together with several pieces of legislation aimed at a major restructuring of the Latvian social security system. (On that occasion, parliament approved seven new laws covering old-age pensions, sickness, disability, maternity, unemployment and funeral benefits). The main objectives of these reforms were to ensure the affordability and efficiency of the Latvian welfare system, while reducing the labour market distortions inherent to the old defined- benefit system. After a careful review of the possible options for pension reform, it was decided that a mixed model, combining elements of PAYG and funded systems, would be the most appropriate route for Latvia. Given Latvia’s demography, some funding of the system was needed to reduce the burden on future generations. However, the cost of switching to a fully funded system was considered too high.
The new pension law, effective from January 1996 for all those retiring after 1995 (leaving current pensioners unaffected), envisaged the gradual introduction of a multi-pillar system in Latvia. The first step in the implementation of the new system was the introduction of a mandatory first pillar consisting of a modified PAYG system that combined a benefit structure based on notional defined-contribution (NDC) accounts with a minimum guaranteed pension. This scheme was to be supplemented at a later stage by two funded pillars, one mandatory and one voluntary.
The new NDC system introduced strong incentives for individuals to work longer and pay contributions. Instead of raising the mandatory retirement age for men, actuarial provisions are used in the calculation of the pension formula in order to encourage individuals to continue working past the minimum retirement age (to be gradually unified at 60 for both men and women). The system is also more robust to demographic changes, since the pension formula ensures that benefits adjust to changes in life expectancy. To reduce the excessive tax burden under the old system, a five per cent cut in the social insurance contribution was to have been implemented gradually until the contribution rate reached 33 per cent in 2001. This schedule has not been implemented, however, as the authorities plan to cut the rate to 33 per cent in one step in 2002. On the other hand, the employees’ share is being gradually increased until 2002, when the social insurance contribution will be split equally between employer and employee.
By correcting some of the distortions of the existing PAYG system, the new NDC system is expected to lead over time to lower expenditures and increased revenues. On the expenditure side, savings should result from the move from wage indexation to price indexation, and the reduction of benefits to early retirees (most categories have been phased out and the benefits of the remaining ones are adjusted according to actuarial criteria). On the revenue side, improvements should follow from increased incentives to report income, participate in the formal sector and postpone retirement, as well as from improved tax administration. One important measure taken to strengthen tax administration was the consolidation of social tax collection with other tax collection under the State Revenue Service in January 1998.
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The NDC System (First Pillar)
The basic element of the 1995 reform was the establishment of a stronger link between benefits and contributions, which is expected to result over time in increased compliance and coverage. This is to be achieved through the implementation of a system of notional accounts within the first pillar. In this system, a record is made of contributions (up to a ceiling) paid by employee/employer into the individual notional accounts, but in contrast to funded schemes, no real funds are accumulated into the accounts, only “notional capital”. The main characteristics of the new NDC system are:
• The existing generation of pensioners continues to be supported by payroll contributions.
• The pension benefit is calculated by dividing the total funds “accumulated” in each individual account (the “notional capital”) by the post-retirement average life expectancy of the individual’s cohort.
• The “rate of return” on the notional capital is given by the rate of growth of the sum of wages on which contributions are collected (the contribution wage base).
• Benefits are indexed according to changes in consumer prices until the year 2000, and after that based on both wage and price changes.
• Non-contributory benefits were shifted to the state budget, eliminating cross-subsidization of benefits.
Funded Pillars
The introduction of privately managed funded pillars will take place in two stages, the first comprising the development of the regulatory and institutional framework for the voluntary (third) pillar, and the second involving the introduction of the mandatory second pillar, using the reserve funds accumulated with the operation of the new NDC system (first pillar). Legislation for the operation of private pension funds was passed in July 1997 and these funds are now in the process of receiving licenses. Contributions to the funds will be exempt from income tax. (Pension benefits became taxable under the 1996 tax law.) The third pillar will be intended essentially for those wishing to save for higher retirement income.
The second pillar (initially conceived as a mandatory funded pillar based on privately managed savings accounts) will be the last one to be introduced. Originally envisaged for 1998, it was later scheduled for 1999-2001, to allow time for the establishment of an appropriate regulatory framework, the development of capital markets, and the accumulation of savings from the reforms implemented in the first pillar – to avoid increasing the payroll tax or resorting to debt financing. The choice between voluntary and mandatory participation in the second pillar is still under debate, although the original concept suggested mandatory participation. It is expected that for those joining the labour force today, roughly one third of their total pension will come from the funded pillar.
Source: Republic of Latvia: Selected Issues and Statistical Appendix, IMF Staff country Report No. 98/47, May 1998
66 GEORGIAN ECONOMIC TRENDS – 2002 No.3
CHAPTER EIGHT: EU-GEORGIAN RELATIONS
GEORGIA’S TRADE WITH THE EU In first nine months of 2002 Georgia’s trade with the Member States of the European Union amounted to USD 180 million. This is 23.5 percent of Georgia’s total trade turnover1. During the reporting period the EU-Georgian trade reduced slightly, by 2.7 per cent, compared to the same period of the previous year. Imports from European countries reduced slightly as well (by 4.2 per cent). There was a small increase in exports from Georgia to the EU countries of 2.1 per cent. In the first nine months of 2002, Georgia had a negative trade balance with all EU Member States except UK. Compared to the previous year, Georgia’s trade deficit with EU countries decreased by 7.1 per cent, which could be explained by overall reduction of EU-Georgian trade turnover. Germany, UK and Italy remain the largest trade partners for Georgia. Turnover of these countries with Georgia constitutes about 68 per cent of the total Georgia-EU trade in January-September, 2002.
Table 8.1: Georgia’s Trade with the EU Countries (USD thousands) Q1-Q3 2002 Q1-Q3 2001 Countries Turnover Import Export Balance Turnover Import Export Balance Austria 8,524 8,254 270 -7,984 8,720 8,046 675 -7,371 Belgium 5,941 4,487 1,454 -3,034 12,422 5,651 6,771 1,120 Denmark 6,559 6,258 300 -5,958 4,303 3,899 404 -3,494 Finland 1,646 1,646 - -1,646 9,471 9,471 - -9,471 France 12,034 9,515 2,519 -6,996 13,821 13,514 307 -13,207 Germany 45,994 42,493 3,501 -38,993 55,982 50,445 5,537 -44,909 Greece 8,552 5,808 2,744 -3,065 5,371 3,364 2,007 -1,357 Ireland 467 333 134 -199 689 688 1 -688 Italy 28,469 23,589 4,879 -18,710 22,952 15,858 7,094 -8,765 Luxembourg 168 168 - -168 137 137 - -137 Netherlands 12,759 9,714 3,044 -6,670 9,945 7,107 2,838 -4,268 Portugal 930 831 99 -732 1,023 934 89 -845 Spain 2,659 2,101 559 -1,542 2,971 1,484 1,486 2 Sweden 3,128 3,111 18 -3,093 1,819 1,043 776 -267 UK 41,885 16,745 25,140 8,395 35,140 19,404 15,736 -3,668 Total 179,715 135,054 44,661 -90,392 184,765 141,045 43,721 -97,324 Source: State Department for Statistics
EU TECHNICAL ASSISTANCE PROJECTS IN GEORGIA: TRACECA2 The Transport Corridor Europe Caucasus Asia (TRACECA) programme was launched at a conference in Brussels in May 1993. The participants in this conference were the trade and transport ministers of eight TRACECA countries (five Central Asian republics - Kazakhstan, Uzbekistan, Turkmenistan, Kyrgyzstan, Tadjikistan and three Caucasian republics – Georgia, Azerbaijan and Armenia). During the conference participants agreed the implementation of the EU funded programme, which aimed at the development of a transport corridor from Europe to Central Asia through the Black Sea and Caucasus.
The main objectives of the Brussels conference were to stimulate and develop trade and transport co- operation among the participating countries, to identify problems in these sectors and promote the Central Asian Trans-Caucasian Europe corridor.
1 Georgia’s total trade turnover amounted to USD 764 million (State Department for Statistics) 2 In this section materials from the European Commission and TRACECA official website have been used as a reference.
GEORGIAN ECONOMIC TRENDS – 2002 No.3 67 EU-GEORGIAN RELATIONS
In 1996 Ukraine and Mongolia joined the TRACECA programme and in 1998 Moldova became a member.
The TRACECA programme is envisaged by the EU as an alternative to the existing routes in the region and represents the EU’s global strategy towards the Newly Independent States and meets the following objectives:
• To support the political and economic independence of the republics and to strengthen their capacity to access European and World markets through alternative routes • To enhance regional co-operation among the TRACECA members • To attract investment from international financial institutions and the private sector in the region • To establish a link between the TRACECA route and the Trans-European Networks (TEN).
During the last ten years the European Union has spent more than EUR 136 million on transportation projects through the TRACECA programme. During this period the situation in trade facilitation, road rail and maritime transport sector was assessed by sector working groups with representatives of the TRACECA member countries.
During the last ten years the EU has implemented 38 technical assistance projects and 11 investment projects in Georgia through the TRACECA programme.
One such project was the Feasibility Study for new Terminal Facilities in the Georgian ports of Poti and Batumi. The feasibility study assessed the situation in Poti and Batumi ports and suggested what kind of terminals should be installed there. Apart from this, the objectives of the feasibility studies were to: examine existing and potential traffic flows between Georgian ports and other Black Sea port terminals; provide recommendations for the cargo facilities for Georgian ports; give an overview of traffic potential; verify and adapt existing designs for terminal developments; and prepare documentation for justification of investment. This project lasted one year (1997-1998) and the European Union spent EUR 1.5 million.
It is important to mention that on the basis of feasibility study for the Poti port, in 1999 the Poti- IIyichevsk rail ferry was opened. This project was also EU funded and amounted to 15 million Euro.
Another important project under TRACECA was the rehabilitation of the Red Bridge and the construction of the TRACECA Bridge on the Georgian-Azerbaijanian border. The project started in April 1997 and was completed in October 1998. The budget of the project was EUR 2.5 million.
The TRACECA Bridge will play an important role in the region because of the development of the energy industry in the Caucasus region. This requires the transportation of oversize loads, which cannot be carried by rail.
At the time of break up of the Soviet Union the construction of a new bridge was already under way. The TRACECA programme financed completion of this construction, and also built associated border crossing posts and to extend the nearby Tauz rail bridge in Azerbaijan. The main objectives of the project were to inspect the old bridge, to assess the partially completed new TRACECA Bridge and to finish construction of the bridge and its nearby roads and to construct the Azeri and Georgian border posts.
68 GEORGIAN ECONOMIC TRENDS – 2000 No.3 EU-GEORGIAN RELATIONS
As already mentioned, all these goals were achieved in October 1998 and the TRACECA Bridge today is under operation.
During the last years railway traffic grew significantly in the Caucasus: especially container traffic and transportation of refined petroleum between the Caspian Sea and the Black Sea. For safety and the proper functioning of the transportation system, the development of existing infrastructure was decided. For this purpose, Georgia, Armenia and Azerbaijan requested the EU to fund the project for optical cable systems. The use of optical cable in railway networks has become intensively accepted in Western European countries, especially on main lines due to the high performances of this technology. The optical cable has become imperative for modern operation of railway systems. In 1999, the TRACECA programme launched the special project for supply of an optical cable system for communication and signaling to the Railways of Georgia, Azerbaijan and Armenia. The project lasted one year and the EU spent EUR15 million. The project creates a west-east link between the Georgian seaport of Poti on the Black Sea and the Azerbaijanian seaport of Baku on the Caspian Sea, branching off to the south of Tbilisi towards Yerevan. The project also included the supply, installation and testing of equipment, training of staff and technical supervision of workers.
Currently, TRACECA is working on a Harmonization of Border Crossing Procedures project. This project will support the creation of a harmonized transport corridor within the region and facilitate economic relations between the Caucasian-Central Asian countries and Europe.
The Harmonization of Border Crossing Procedures project aims to establish harmonized border crossing procedures between the Caucasian and Central Asian countries, to promote the movement of traffic in the TRACECA corridor and to create the foundations for approximation with EU practices. The project also will strengthen regional co-operation between these countries. (See TRACECA map at the end of this issue of GET.)
Box 8.1
Trans-European Networks
The idea of Trans-European Networks (TEN) emerged by the end of the 1980s in conjunction with the proposed Single Market. It made little sense to talk of a big market, with freedom of movement within it for goods, persons and services, unless the various regions and national networks making up that market were properly linked by modern and efficient infrastructure.
The construction of Trans-European Networks is also an important element for economic growth and the creation of employment.
According with these objectives, the Community is developing guidelines covering the objectives, priorities, identification of projects of common interest and broad lines of measures for the three sectors concerned (Transport, Energy and Telecommunications). The European Parliament and the Council approved these guidelines after consultation of the Economic and Social Committee and the Committee of the Regions.
A large number of projects of common interest have benefited from financial support of the Community budget through the TEN-budget line as well as the Structural Funds and Cohesion Fund. The European Investment Bank (EIB) has also greatly contributed to the financing of these projects through loans.
On July 1996 the European Parliament and Council adopted Decision N° 1692/96/EC on Community guidelines for the development of the trans-European transport network (TEN-T). These guidelines cover roads, railways, inland waterways, airports, seaports, inland ports and traffic management systems which serve the entire continent, carry the bulk of the long distance traffic and bring the geographical and economic areas of the Union closer together.
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The legal basis for the TEN-T is provided in the Treaty on the European Union. Under the terms of Chapter XV of the Treaty (Articles 154, 155 and 156), the European Union must aim to promote the development of trans- European networks as a key element for the creation of the Internal Market and the reinforcement of Economic and Social Cohesion. This development includes the interconnection and interoperability of national networks as well as access to such networks.
In accordance with these broad objectives, the Community developed the above-mentioned guidelines, a general reference framework for the implementation of the network and identification of projects of common interest. The time horizon to complete the network is 2010. The maps in Annex I of Decision 1692/96/EC illustrate the outline of the trans-European transport network as planned for 2010. The guidelines also include a list of 14 projects to which the Essen European Council (1994) attributed particular importance.
Decision 1692/96/EC is addressed primarily to Member States, as they are primarily responsible for realisation of the TEN-T. A number of financial instruments have been set up at Community level, each with their own legal basis, in order to conduct the development of the TEN-T and to support Member States financially in specific cases.
Unfortunately, work is not advancing as rapidly as expected when the idea of trans-European networks was launched. As indicated in the 1998 TEN-T implementation report, investments in the trans-European network projects in 1996-1997 was about EUR 38 billion, while the financial resources needed to complete the network in 2010 are estimated to be EUR 400 billion. If the rate of funding does not increase between now and 2010, there is a serious likelihood that the network will not be fully completed, in particular the railway and inland waterway components. This becomes more serious as traffic flows are rising on several routes.
The European Parliament and the Council adopted in May 2001 Decision N° 1346/2001/EC which amends the TEN-T guidelines as regards seaports, inland ports and intermodal terminals. It specifies also more in detail the criteria for projects of common interest in relation to these infrastructures. With this amendment the multimodal dimension of the network is emphasised as seaports and inland ports become fully part of the network.
In view of the delays in completing the planned network, the Commission considers that a headlong rush to create new infrastructure routes cannot be the answer to the capacity requirements. Instead, the planned revision of the guidelines should confirm that it is necessary to complete what was decided in 1996 by focusing Community activities and projects on reducing the bottlenecks on major routes and on a small number of major projects. Against this background the Commission proposed in October 2001 a new amendment for the TEN-T guidelines to tackle the new challenges facing transport and to help to meet the objectives of the new transport policy as described in the White Paper on a European transport policy for 2010. It aims at reducing the bottlenecks in the planned or existing network without adding new infrastructure routes by concentrating investments on a few horizontal priorities and a limited number of new specific projects.
In parallel the Commission has proposed to amend Regulation (EC) 2236/95, laying down general rules for the granting of Community aid in the field of trans-European networks. It concentrates on raising the current maximum level of Community support of 10 per cent to 20 per cent for specific projects, namely cross-border rail projects in areas with natural barriers and projects in frontier regions of the candidate countries.
The intention of the Commission is to revise the TEN-T Guidelines more fundamentally in 2004, to take account of Enlargement and expected changes in traffic flows. New outline plans for the period 2020-2025 will be drawn up with the aim of efficiently channeling tomorrow’s trans-European traffic in an enlarged Union. In this context the Commission will look at the idea to concentrate on a primary network made up of the most important infrastructure for international traffic and cohesion on the European continent, introduce the concept of 'sea motorways' and include sections of pan-European corridors situated on the territory of candidate countries, including those which will still not be members of the Union at that time.
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 all the year round. The Turkish side is ready to allot a USD 10 million credit for finishing the
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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 Promotion, presented the Programme for Supporting Small and Medium Enterprises of th
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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 development and decentralisation. The total cost of the project is USD 28 million. The two sides discussed the terms of the credit agreement.
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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 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
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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, 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.
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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 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 t
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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 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.
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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 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.
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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
OCTOBER
4 International Cooperation The communiqué was signed in New York on cooperation between the USA and GUUAM. The document confirms the readiness of the parties to continue cooperation on concrete projects. In particular, the USA plans to take an active part in designing and financing the project on efficient functioning of the GUUAM transport corridor. The USA also expressed readiness to support projects in customs control and trade.
5 Industry Rustavi Metallurgic Works (RMW) and Italian financial group Ares Export- Import S.R.L. signed an agreement for a 15 year program of RMW rehabilitation and assumption of the debt of the company. From the USD 240 million foreseen by the program for rehabilitation, USD 130 million is for enterprise development, USD 108 million for debt repayment. The rehabilitation program will last until 2017.
7 Banking “AGROMRETSVBANKI” has been renamed “ PEOPLE’S BANK”.
7 Cooperation Representatives from 30 countries, including Georgia, took part in the 5th economic summit of Eurasia in Istanbul. The Summit was organised on the initiative of the Turkish NGO Marmara Group and Chamber of Commerce of Turkey. Along with issues of intensification of economic cooperation, the summit participants discussed anti- terrorism combat. The deputy Minister of Economy, Industry and Trade, Paata Charakashvili, represented Georgia.
8 Pipeline Magne Selgeflot, co-chairman of insurance broker and consulting company AON (USA) informed President Eduard Shevardnadze at October 8 meeting, that AON is ready to insure Baku-Tbilisi-Ceyhan chief export pipeline (CEP).
9 Transport Chairman of National Assembly of Armenia Armen Khachatrian met with the speaker of Georgian Parliament Nino Burjanadze on October 9. At the meeting he raised the issue of restoring a railway line through Abkhazia.
10 Industry JSC Tbilaviamsheni (TAM) celebrated its 60th anniversary.
10- Conference Tbilisi hosted the 5th Conference of American-Georgian Business Council 11 (AGBC) on the issues of economic security of Georgia and improvement of business environment in the country.
11 Development President Eduard Shevardnadze presented to the Parliament of Georgia a Program of Georgia’s Political and Socio-Economic Development.
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12 Oil / Gas The draft law “On introducing changes and amendments into The law on oil and gas” was discussed at the session of the parliamentary committee on sectoral economy. According to the changes, the National Agency on Oil and Gas Resources will be granted the right to control not only the sector of oil and gas extraction, but their processing and transportation as well. The agency function will also be to give licenses, to determine tariffs for transportation companies, and elaborate new standards for raw material and oil products quality together with Sakstandarti.
17 Processing industry an agreement on implementation of the project for rehabilitation of the processing industry in agriculture was signed by David Kirvalidze, the Minister of Agriculture and Food Products and Michael Farbman, director of USAID Caucasus office. USAID is ready to allocate USD 20 million for this purpose.
18 Credit USD 20 million (about GEL 44 million) was transferred by the World Bank to the Georgian National Bank account. These resources are designated for covering the state budget deficit.
22 EU assistance Avtandil Jorbenadze, the Minister of State, met with the Ambassadors of EU member-countries and discussed the issue of EU financial assistance to Georgia.
22 Cooperation During a two-day visit to Georgia of the governmental delegation of Arab Republic of Egypt (ARE) and as a result of work of joint intergovernmental commission, three documents were signed: protocol of joint intergovernmental commission on economic, technical and scientific cooperation; memorandum on mutual understanding on cooperation in the sphere of health care and pharmaceutical industry; and protocol on cooperation of chambers of commerce of two countries.
25 Cooperation A symposium (“Technologies and Financing”) under the aegis of Turkish organization DEIK (Foreign Economic Relation Board) and Georgian-Turkish Business Council was held in Tbilisi.
25 EU Assistance A presentation of EU project “On Harmonization of Georgian Customs Legislation with that of EU” was held in Tbilisi. The project aim is to bring Georgian customs legislation into compliance with the European one. Duration of the project is 18 months. Consultants from Austria and Holland will assist the Georgian side. 10 per cent of the grant sum of EUR 850,000 will be financed from the budget of Georgia.
29 Pipeline Tbilisi hosted the first session of board of directors of BTC (BAKU-TBILISI- CEYHAN) pipeline company.
31 Oil David Robson, president of Canargo Energy, informed President Eduard Shevardnadze at October 31 meeting, that the company started drilling a well 5,000 meter deep on the territory of Norio-Martkopi. Mr. Robson mentioned that the region will probably open a new page in the oil industry of Georgia.
NOVEMBER
2 Energy Georgia received a USD 38.5 million credit from the EBRD and USD 5 million
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dollar grant from European Commission for the Enguri hydro power plant (Enguri HPP) rehabilitation. The full rehabilitation of the Enguri HPP requires USD 120 million.
6 Peter Shaw Peter Shaw, a former member of the Agrobusinessbank board of directors, head of the group of experts of TACIS technical assistance program, kidnapped on June 18 in Tbilisi, was released on November 6.
7 Industry A ceremony of putting into operation a new furnace with the capacity of 20,000 tons of glass packaging per year was held at Ksani Glass Packaging Factory (JSC MINA) According to the calculations of experts, the annual production of the enterprise will increase up to 40 thousand tons of high-quality glass bottles of wide assortment. A new furnace was assembled through the credit presented to JSC Mina (Glass) by the International Financial Corporation (IFC).
9 Transport Giorgi Lashkhi, manager of the Georgian-American company “Caucasus Airlines”, announced that the company started regular flights to Baku and Yerevan. The company aims at serving the South Caucasian countries. The first flight was conducted to Yerevan.
11 Wine In the international competition “Internaitonal Wine Challenge 2002” held in London, a Georgian wine “Talisman” produced by JSC Telavi Wine Cellar, was awarded a bronze medal and a certificate of quality. About 10,000 wines from all the wine-producing countries of the world were presented at the competition.
12 Seminar The Seminar “Cooperation in Energy Sector in Caucasus and in Neighbouring Countries”, held on November 11-12, was organized by the Ministry of Economic Cooperation of Germany and German credit bank of development KfW. The representatives of Azerbaijan, Armenia, Georgia, Iran, Russia and Turkey discussed the prospects of forming a single energy space.
13 Cooperation First meeting of representatives of GUUAM National Business Council was held in Tbilisi. A plan of GUUAM Business Council work for 2002-2003 was approved.
14 Business Tbilisi hosted an official opening of two enterprises, parts of Omega Group holding – a tobacco factory “Omega Georgian Tobacco” (OGT) and printing house “Omega Tegi”.
14 Assistance At a press-conference the representatives of Canadian International Development Agency (CIDA) and International Financial Corporation (IFC) (the WB group), informed about a new project, the aim of which is to promote development of business and corporate management (private entrepreneurship, leasing companies and improvement of system of management in private companies). The project cost foreseen for two years is USD 1.46 million, the CIDA provides USD 1.14 million and IFC USD 324,000. The project co-ordination will be conducted by WB.
15 New Ambassador President Vladimir Putin of Russia appointed Vladimir Chkhikvishvili as a new ambassador of Russia to Georgia.
17 Energy German bank, KfW, adopted a decision on allotting EUR 8 million credit for
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rehabilitation of Georgia’s regional energy networks. The credit agreement should be ratified by the Parliament of Georgia.
21 Parliament The plenary session of the Parliament adopted in the third reading the changes into the law on protection of the consumers rights, presented by the Anti- monopoly service. Thus, from January 1, 2003, it will be obligatory to have Georgian inscriptions on the imported pharmaceutical produce and from March 1 on food, cosmetic and domestic produce.
22 Transport The Parliament of Georgia ratified an agreement with the Kingdom of Belgium on cooperation in the sea freight and passenger transportation.
26 Energy On the basis of merging companies LLC Electricity Control and JSC Electricity Transmission a new energy company was founded - LLC State Electricity of Georgia (SEG). The only shareholder is the state. From December 3 the Irish company ESB International, the tender winner, will conduct the management of the company. Over a five year long management contract ESB International should manage a World Bank credit of USD 50 million, which will be spent on re-equipment and modernization of united energy company and reduction of commercial and technical losses.
27 Cooperation Georgia becomes a member of council of CIS Trade-Industrial Chambers. The Council involving 9 CIS countries, was formed on November 27 in Moscow.
DECEMBER
4 Assistance Credit agreement on the project of Municipal Development and Decentralization and the project of Forestry Sector Development were signed on December 3, 2002 by Mirian Gogiashvili, the Minister for Finance, and Tevfic Yaprak, head of the World Bank mission in Georgia. A decision of financing these projects (total USD 35 million) was adopted on August 1, 2002, by WB Board of Directors.
9 Customs The new customs terminal at Georgia – Russia border was opened on December 9 near Rocki Tunnel at the checkpoint “Nizhni Zaramag”.
9 Assistance Georgia will receive EUR 2 million from the EU for financing programmes in agriculture. According to information of David Kirvalidze, the Minister of Agriculture and Food Products, this is the first tranche of EUR 12 million, which Georgia should have received this year.
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APPENDIX I: FUTURE PROSPECTS OF CAUCASIAN ENERGY AND TRANSPORTATION CORRIDOR THE ROLE OF CAUCASIAN ENERGY CORRIDOR IN EUROPEAN ENERGY SECURITY
Remarks to America-Georgia Business Council Conference by Howard Chase, Director, European Government Affairs, BP, Brussels
Tbilisi, September 11, 2002
INTRODUCTION It is a great pleasure to be here this morning and to meet up with many old friends from my days in Washington – and indeed before that in Moscow, London and Baku. Thank you to Mamuka Tsereteli and the America-Georgia Business Council for such a generous invitation.
As the Chairman said – I recently moved from Washington to Brussels to head up the BP Government Affairs team in Europe.
It is well known – certainly by this audience – that over recent years BP has become probably the largest oil and gas company in the United States. Less well known perhaps is the parallel transformation of our strategic position in Europe.
After recent major acquisitions BP is now the largest oil company in Germany as well as the UK – to which we can add substantial and growing interests in Spain, Greece, Russia, Poland, Turkey, Norway and many smaller European economies.
In fact - the size of the BP company in Europe now is larger than the entire global company back in 1995.
All of this will give me plenty of involvement with the EU authorities. I can promise you that I already know about more Brussels directives, rules and regulations than I ever dreamed could exist.
But the task is not only internal. I have also been asked to focus on the issues of bringing energy into Europe – from Russia, from Algeria and North Africa, from the Middle East and last but certainly not least – from the Caspian.
It is a fascinating brief and one that is I think very relevant to this conference today.
BRUSSELS PERSPECTIVE What are my impressions from my first three months in Brussels?
Well most significantly for this audience - there is a clear and growing awareness of the importance of the Caspian and Caucasian region to European economic and security interests.
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Numerous conversations already with the Commission, the Council and the Permanent Representations – have all pointed in this direction.
First and foremost this reflects the fundamental shift in global perspective since 11th September 2001. The importance of the Caucasian connection through to the Caspian and Central Asia – at the cross roads of Europe, Russia and the Middle East – is clear to everyone.
Second - events since 11th September have also concentrated attention on the security of global energy supplies. There is a growing understanding that the Caspian and Central Asia are becoming an important new source of energy for world markets. This has also helped to focus attention in Europe on the broader regional and security agenda.
And finally and perhaps most tellingly – the news of the actual start of the BTC project has captured much interest and comment in the European media – and perhaps even caused some reassessment amongst those who said it could never happen.
It has happened – it is happening – and this in itself is enough to concentrate interest and attention through in the European capitals.
BAKU-TBILISI-CEYHAN Mention of BTC also allows me to perform one essential task here today – to add my warm congratulations to those who have worked so tirelessly over many years to turn this project into a reality. Many of these people are on the platform and in the audience today.
We should take great pride in everything we have achieved – and continue to work together with commitment and determination to bring this great project to a successful conclusion.
EUROPEAN ENERGY SECURITY It is worth reflecting a little more on the question of security of energy supplies into Europe. The importance of this issue was highlighted by the publication last year of a European Commission Green Paper on energy security. Just three weeks ago the Commission issued two Draft Directives on security of oil and natural gas supplies – including proposals for enhanced compulsory stock arrangements.
Key statistics from these reports are worth consideration. The EU now imports around 70 per cent of its crude oil requirements – by 2030 this figure will rise to 90 per cent. Meanwhile Europe today imports around 40 per cent of its natural gas consumption – by 2030 this figure is forecast to rise to nearly 70 per cent.
In our view these statistics are reason for careful thought but not for over-reaction. Europe may be growing more dependent on energy imports - but it is surrounded by plentiful sources of supply. The need is for healthy competition to bring these supplies to market at the right time with the right investment at a competitive price for consumers.
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IMPORTANCE OF CAUCASUS ENERGY CORRIDOR This brings us immediately to the importance of the Caucasian energy corridor.
In our view Caspian oil could provide around 25 per cent of global incremental oil demand over the next decade. The BTC project – through the Caucasian corridor - allows this oil to reach world markets without adding to oil flows through the Bosporus – and also adds to regional infrastructure diversity and therefore energy security.
And it does this with a commercially strong and viable project.
In terms of strategic importance - these facts speak for themselves.
In addition the Caspian has world scale natural gas reserves – that can also provide a competitive alternative for natural gas supplies into Turkey and southeast Europe. Again the Caucasian energy corridor will provides the critical infrastructure link in bringing this energy to market.
It is important to continue all efforts to ensure that this gas is able to establish a competitive foothold in the Turkish and southern European markets.
POLICY RESPONSE The appropriate policy response to these opportunities is a matter for governments and for the institutions of the EU. However, a few ideas can be proposed for consideration.
The starting point is to develop a greater level of political interest from Brussels and the other major European capitals. As I said earlier – I think there are real signs of greater engagement. We will play our part as BP in Europe in working to inform and encourage this debate.
The next step should then lie in the strengthening of formal mechanisms for engagement of the Caucasian countries with Brussels and the EU institutions. Europe needs a more robust framework for managing relationships with the world beyond its newly expanded boundaries. The Caucasus should be seen as an important part of this overall picture.
This of course also needs a reciprocal commitment from Caucasian countries towards Europe – including a commitment to engagement, to conflict resolution and to the progressive adoption of EU economic, social and legal norms and expectations.
Finally this should all be seen in the context of the broader relationship with the United States and Russia.
The success of the BTC project strengthens the linkages with Europe and underlines the broader strategic nature of the relationship. We need a bold and imaginative approach to take full advantage of the opportunities open to us.
Thank you.
GEORGIAN ECONOMIC TRENDS – 2002 No.3 87
APPENDIX II: ACHIEVEMENTS AND FAILURES OF CEFTA: THE LESSONS FOR GUUAM
By Dr. Henryk Czubek and Dr. Edward Molendowski, Krakow University of Economics,Poland
It is hard to imagine, but at the end of the year 2002 Central European Free Trade Agreement (CEFTA) will celebrate its 10th anniversary. When trying to recollect the starting points and reasons, which were the guiding points of the CEFTA’s first days, it has to be remembered that not everybody was very enthusiastic at the original negotiations, and even during the first days of the organisation’s functioning loud sceptical voices were heard.
But can we name CEFTA a real organisation? It does not have a normal functioning administrative body. It does not have main headquarters. It does not have its own funds. It does not function as an independent actor in international negotiations. There are many things CEFTA does not have. Still it has some attraction and value for its participants. Started as a common agreement containing a list of mutually exchanged concessions it has became now a major point of attraction for economies of some Central European countries.
INITIAL PROBLEMS It was not an easy time when the first discussions and negotiations about the possible FTA linking three countries had started. All three countries (CEFTA founding states): Czechoslovakia, Poland and Hungary did not pay much attention to their mutual trade exchange at the beginning of the 1990s. For them the priority was the tightening of co-operation with West European countries and the recovery of the former links with the newborn states emerging after the collapse of the Soviet Union. Even the tradition of their mutual commercial contacts was not working to bring us closer together. For the majority of the post-war period our common trade was only 4-5 per cent of our total foreign trade. We have been perceiving our economy structures as mutually competitive, fighting for the same foreign markets and experiencing the same downturn of the business cycle.
There was, however, one major accelarating factor. All of our three countries had been already very much advanced in negotiations with the European Union on the association treaties, the so-called Euro Agreements. There was a bigger threat looming, that the mutual trade contacts of three Central European countries could experience bigger tariff and non tariff barriers than the trade of the given countries with the European Union. It resulted in a conclusion on December 2 st, 1992 in Krakow, of the Central European Free Trade Agreement, which came into force on March 1st, 1993.
The Agreement assumed that the free trade area among the participating states (for the beginning three of them: Czechoslovakia, Poland and Hungary then four when Czechoslovakia split into two independent states) would be gradually established not later than January 1st, 2001.
The main idea behind the negotiations of the Agreement was that the mutual concessions resulting from tariff liberalisation had to be symmetrical for the participating parties. It was maybe less evident for industrial goods, but became self-evident for agricultural goods.
What is important, that from the very beginning in the main body of the Agreement there was a division between industrial and agricultural commodities.
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INDUSTRIAL GOODS In case of industrial goods, they had been divided into three lists: A, B and C with different timetables of tariffs liberalisation assigned to each of them.
Starting from the List C, it contained commodities perceived as the most sensitive to foreign competition and, therefore, it was agreed they required the longest period of protection. On the List B were put commodities less sensitive to foreign competition and they required a shorter period of protection. List A was to contain not sensitive goods and, therefore, not requiring any period of protection.
The following technical solutions emerged: • from the beginning of the operation goods from List A were to enjoy a zero rate of tariff; • tariffs for the goods on List B were to be gradually eliminated in three equal, annual steps; and • tariffs for the goods put on List C were to be gradually eliminated in seven equal, annual steps.
For each product the basic duty to which the successive reduction was to be applied had been the Most Favoured Nation rate of duty applied on February 29th, 1992. However, if after entry into force of the Agreement any tariff reduction was to be applied on an erga omnes basis, in particular, reductions implemented as a result of the multilateral trade negotiations, such reduced duties would replace the basic duties.
After one year of the Agreement’s operation the decision was taken at the meeting of the Joint Committee (highest governing body of CEFTA) in Budapest on April 29th, 1994 that the liberalisation of tariffs in industrial goods should be accelerated and shortened from 8 to 5 years. It was just the first of such steps. Next moves came after the Prime Ministers’ meeting in Poznan on November 25th, 1994 and in Jasna on September 11th , 1996. At the end of those meetings it was agreed that after January 1st, 1997 the countries of CEFTA should have a free trade area among themselves in industrial goods with only very few exceptions. The longest expired on January 1st, 2002 and it was Poland who was the longest defender of its market for automobile imports, but that was a result of other agreements with foreign investors in that sector of industry.
To put it into a summary, the approach adopted in industrial goods was the commodities categorisation according to the grade of their sensitivity to foreign competition and then a dynamic, even accelerated, process of tariff liberalisation. Coming back to the problem of the symmetry of benefits derived for the parties, it could be discussed when lowering the tariffs, since every country had different starting levels of its MFN tariff and, hence, every country was gaining different level of benefits. It seems that each country was satisfied with the outcome it obtained as a result of the gradual tariff liberalisation. It means that either the time schedule of the liberalisation was acceptable to every party or it simply did not matter. Once the tariffs were totally eliminated there wass no longer any point to discuss that issue, since each party enjoyed the same freedom of trade with all participants.
Such a quick transition from full protection in industrial goods to full liberalisation had to be somehow explained, and it has some reason behind it. The explanation can be found partially in data contained in Table 1. It refers to the trade in goods between Poland and Hungary but that pattern of development was similar for the commercial links in industrial commodities of other countries too. What is worth noting is the fact that the dynamics of the mutual trade in commodities classified to List A was much bigger than the trade exchange experienced in other Lists. The very positive fact is that the CEFTA countries managed to create a free trade area among themselves two years earlier than was foreseen for the relevant free trade agreements of the given countries with the European Union. It means that
GEORGIAN ECONOMIC TRENDS – 2002 No.3 89 ACHIEVEMENTS AND FAILURES OF CEFTA: THE LESSONS FOR GUUAM for the period of two years in some areas partners coming from the CEFTA countries enjoyed bigger custom preferences than the partners from EU countries.
There were some additional factors facilitating the increase of trade between our countries. One of the major ones was the openness to foreign direct investment. Poland and Hungary are both leaders in Central Europe. Hungary enjoys the highest inflow of the foreign capital per capita in our countries and Poland receives the largest absolute amounts. Foreign investors were found and eager to make quick use of the liberalised tariffs and it has been reflected, for example, by the huge increase of the industrial semi-products deliveries for the car industry from Poland to Hungary (a case of GM investment in both countries) and strengthening of the traditional big deliveries in chemical and pharmaceutical products from Hungary to Poland (case of ICN, Glaxo-Wellcome investment in both countries). The tariff liberalisation attracted foreign investors but it worked the other way round as well. Every year, once the quotas for car deliveries within the exception to List C had been utilised, there were pressures from the multinationals for broadening the scope of liberalisation.
The tariff liberalisation was a main step towards increased trade, but another step was the unification of the rules of the origin and bringing it in line with European Union regulation in this respect. Plenty of the companies being sourced from the Union countries and delivering its products to the CEFTA market were able to make use of the diagonal cumulation rules.
However, there was one big obstacle to mutual trade in industrial goods that has not been successfully provisioned in the text of CEFTA. These were all the technical and safety certificates and mutual acknowledgment of the laboratories tests done in the countries party to the agreement.
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Table 1: Industrial Commodities Exchange Between Poland and Hungary According to the CEFTA lists, 1993 - 1999 Position 1993 1994 1995 1996 1997 1998 1999
P O L I S H I M P O R T Total (USD thousand) 117,925 166,496 256,270 289,644 405,039 450,616 500,247 List A 61,919 84,957 132,747 271,402 387,211 414,599 461,059 List B 34,777 54,049 79,984 0 0 0 0 List C 5,987 8,666 11,041 4,517 0 0 0 List C (w)x 15,242 18,824 32,498 13,725 17,828 36,017 39,188 Structure( per cent) 100.0 100.0 100.0 100.0 100.0 100.0 100.0 List A 52.5 51.0 51.8 93.7 95.6 92.0 92.2 List B 29.5 32.5 31.2 0.0 0.0 0.0 0.0 List C 5.1 5.2 4.3 1.6 0.0 0.0 0.0 List C (exceptions) 12.9 11.3 12.7 4.7 4.4 8.0 7.8 Dynamics 141.2 153.9 113.0 139.8 111.3 111.0 (former year =100%) List A 137.2 156.3 204.5 142.7 107.1 111.2 List B 155.4 148.0 0.0 0.0 0.0 0.0 List C 144.7 127.4 40.9 0.0 0.0 0.0 List C (exceptions) 123.5 172.6 42.2 129.9 202.0 108.8 P O L I S H E X P O R T Total (USD thousand) 146 921 168 102 253 549 293 998 339 292 415 094 472 629 List A 96 909 97 481 151 060 266 222 317 627 381 973 383 404 List B 39 985 57 544 74 161 0 0 0 0 List C 10 027 3 854 11 187 9 841 0 0 0 List C (exceptions) 0 9 223 17 141 17 935 21 665 33 121 89 225 Structure (per cent) 100.0 100.0 100.0 100.0 100.0 100.0 100.0 List A 66.0 58.0 59.6 90.6 93.6 92.0 81.1 List B 27.2 34.2 29.2 0.0 0.0 0.0 0.0 List C 6.8 2.3 4.4 3.3 0.0 0.0 0.0 List C (exceptions) 0.0 5.5 6.8 6.1 6.4 8.0 18.9 Dynamics 114.4 150.8 116.0 115.4 122.3 113.9 (former year =100%) List A 100.6 155.0 176.2 119.3 120.3 100.4 List B 143.9 128.9 0.0 0.0 0.0 0.0 List C 38.4 290.3 88.0 0.0 0.0 0.0 List C (exceptions) 0.0 185.9 104.6 120.8 152.9 269.4
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AGRICULTURAL GOODS A different approach was adopted towards tariff liberalisation in agricultural goods. Here the scepticism was the biggest from the very beginning.
The experts were afraid for at least three reasons: • situation on the domestic agricultural markets, where both Hungary and Poland were net exporters and Czechoslovakia was expected to be soon in that position too did not favour broad opening of the home markets, though, both Hungary and Poland were interested in increasing agricultural exports but not at the price of opening up home markets; • necessity to restructure some parts of agriculture that were not able to adjust quickly enough to the requirements of market economy; • reluctance to unify agricultural policy in all its internal and external dimensions.
However, it must be emphasised that in the initial phases of the negotiations on agricultural issues in CEFTA and even during the first period of its functioning, it was Poland that acted the most vigorously in favour of trade liberalisation in that sector of economy.
As a result, in the original text of CEFTA and its first annexes the parties granted themselves very limited scope for tariffs reduction. It related mainly to goods which are not sensitive and, for example, in Polish-Hungarian relations these were deliveries of Hungarian grapes and sun-flowers and deliveries of Polish eggs, honey, flowers and vegetables. For other goods, such as meat and corn, the countries opened mutual quotas, but they have been at such a low level that they covered less than one percent of annual consumption in the given countries.
After a while the initial hesitations were overcome and starting from January 1st, 1996 the new scheme in agriculture trade was adopted. Again a model of 3 lists was used: A, B and C/D. The main difference in comparison with industrial goods was the static form of those lists. First the goods were classified to the given list. Next, the single tariff reduction proper for the given lists were accepted and they were deemed to last as long as they were not changed. There were, however, declarations (Meeting of the Agricultural Ministers on January 24th, 1994) that starting from January 1st, 1998, all tariffs on agricultural goods should be eliminated. This remained only words, since some problems appeared with the smooth application of the existing agreement on tariffs reduction.
Therefore, starting from January 1st, 1996, the rules governing the selection of goods to the given lists and the tariff reduction applicable to them were as follows: • List A containing goods of low sensitivity, where the tariffs were at once entirely eliminated. These were the following goods: some live animals for breeding, sea fishes, flowers, lemons, wheat, some animal and vegetable fats and others. • Lists B containing goods with a medium level of sensitivity where the tariffs were lowered to the same level for all countries (the idea was that it should be the lowest level binding at the time of negotiations). These were about 120 items and mainly: beef, pork, pluck, milk, cream, cabbage, salad, water melons, barley, oat, grains, sausages, sugar confectionary without cocoa. • List C/D with such goods for which the countries agreed on tariffs in the course of bilateral negotiations and which are applicable only for the import of a given commodity from a given country into another given country. It was very often attached with quota limitations. The initial assumption was that the tariffs level should be not higher than 50 per cent of the proper MFN tariff. These goods are as follows: poultry, fresh eggs, cheese, onion, cucumber, apples, rape and sunflower oil, sugar, chocolate, bread, ice cream and others. • The list of other remaining agricultural goods that were not covered by any liberalisation scheme.
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The static feature of the solution adopted in agricultural goods relates to the fixed level of tariff protection which was adopted by parties to the Agreement, and they did not lay down any timetable for their reduction.
Soon, some problems began to appear. They were connected with the different internal policies applied on the agricultural markets of the interested countries. This is a sector of economy where state regulations and all forms of support play a big role. Some countries tried to subsidise heavily both the internal production and the export sales of the agricultural goods, and it obviously distorted the competition conditions among the interested parties.
A difficult issue emerged with the lack of proper safeguards against re-export of agricultural goods. It was related to the various external tariffs level of the CEFTA countries towards the third parties. This enabled the import of the given goods to the country with the lowest external tariff and next re- exporting it to the countries with the higher external tariff.
Also the traditional structure of the agricultural deliveries played a role. In cases where the import from CEFTA came in the form of the basic agricultural raw resources like corn, meat, or semi-processed goods like tomato concentrate, it appeared too big a problem in importing to countries like Poland, where the farmers’ parties are strong in politics. When there were really big increases in the deliveries of processed goods ready to consume, like chocolate and sweets, there was not so much of a problem. In this case the big role of multinationals is not to be overlooked.
These problems led to safeguards, the application of which was foreseen in the text of the Agreement. Unfortunately, it brought some retaliatory measures on the side of countries which did not agree with the long lasting safeguard measures. All these events gave rise to a long series of mutual consultations and it seems that for the time being the majority of the problems were solved. In order to facilitate better understanding of the common agricultural problems a new body within CEFTA’s very modest organisational structure was set up. This is the Sub-Committee on Agriculture that consists of Secretaris of State in the Agriculture Ministers (Deputy Ministers of Agriculture) of the given countries, and it certainly helped in solving some problems.
It has to be stressed, however, that the introduction of liberalised tariffs for the majority of the agricultural goods certainly contributed to the increase of the common trade in these goods among the CEFTA countries. Still some countries gained bigger benefits from the liberalisation in this sector of economy (the problem of the symmetry in benefits), but nobody can claim to be an ultimate looser.
The obvious proof of the positive results of liberalised trade in agriculture goods among the CEFTA countries can be found in Table 2. It refers again to trade in these goods between Poland and Hungary but that pattern of development was similar for the commercial links in agricultural commodities of other countries too. What is again worth noting is the fact that the dynamics of the mutual trade in agricultural commodities classified to List A was much bigger than the trade exchange experienced in other Lists (with the exception of 1996).
GEORGIAN ECONOMIC TRENDS – 2002 No.3 93 ACHIEVEMENTS AND FAILURES OF CEFTA: THE LESSONS FOR GUUAM
Table 2: Agricultural Commodities Exchange Between Poland and Hungary According to the CEFTA lists, 1996 - 1999 Position POLISH EXPORT POLISH IMPORT 1996 1997 1998 1999 1996 1997 1998 1999 Total ( USD thousand) 15,784 43,748 55,059 64,168 135,352 167,581 142,577 124,125 List A 4,321 7,700 19,167 24,115 14,952 20,445 27,686 35,895 List B 5,124 6,125 9,115 7,595 59,693 50,107 60,512 40,881 List C/D 2,566 7,787 9,668 11,560 49,767 81,612 42,639 35,415 No liberalisation 3,773 22,136 17,109 20,898 10,940 15,417 11,740 11,934 Structure ( per cent) 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 List A 27.4 17.6 34.8 37.6 11.0 12.2 19.4 28.9 List B 32.5 14.0 16.6 11.8 44.1 29.9 42.4 32.9 List C/D 16.3 17.8 17.6 18.0 36.8 48.7 29.9 28.5 No liberalisation 23.9 50.6 31.1 32.6 8.1 9.2 8.2 9.6 Dynamics 277.2 125.9 116.5 210.9 123.8 85.1 87.1 (former year =100%) List A 178.2 248.9 125.8 62.0 136.7 135.4 129.7 List B 119.5 148.8 83.3 786.0 83.9 120.8 67.6 List C/D 303.5 124.2 119.6 430.5 164.0 52.2 83.1 No liberalisation 586.7 77.3 122.1 52.3 140.9 76.1 101.7
OVERALL INFLUENCE OF CEFTA The experiences of the CEFTA member countries in terms of their mutual trade volume growth are very diversified (The detailed data are presented in the statistical annex).
There are some crucial points to be remembered when trying to analyse the results of the mutual trade within CEFTA.
First, the dominant role of four founding members of CEFTA is to be emphasised. Four countries - Czech Republic, Hungary, Poland and Slovakia - accounted for 84 per cent of the mutual export within the group of seven countries (founding four plus Slovenia, Romania, Bulgaria) in 1993 and for 74 per cent in 2001 when CEFTA already officially consisted of seven countries. The same figures are valid in respect to the mutual import of these countries in the given years. One can see a decrease of 10 percentage points in the share of the founding members in the group intra-trade but still they remain major players in this field. Therefore, the rest of the presentation concentrates on the mutual trade of four founding members of CEFTA, since they are still a driving force of CEFTA inter-trade growth.
The fact that both Slovakia and Czech Republic used to be one country gives some kind of exaggeration to the relative magnitude of their mutual trade relations when compared to any other relations in the group. It can be easily seen in Figures 1and 2. The total share of Slovakian and Czech exports in the CEFTA overall mutual export activity was 73.5 per cent in 1993, but with the passage of time it went down to 53.5 per cent in 2001. In the case of import the respective figures were 69.9 per cent in 1993 and 45.9 per cent in 2001.
Both Czech Republic and Slovakia were and have remained major mutual trade partners within the CEFTA exchange of goods. This is the fact which is exemplified in Table 3.
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Table 3: Slovakian-Czech trade as Fraction of Their Trade with CEFTA Founding Members (Per cent) Share of Slovakia 1993 2001 Share of Czech Republic 1993 2001
in Czech export 82.3 50.0 in Slovakian export 79.2 51.5
in Czech import 85.0 59.8 in Slovakian import 92.8 70.7
Figure 1: Shares of Individual CEFTA Countries in the Total Export Value of CEFTA
39.7%
30.5% 33.7%
37.6% 39.5% 37.8% 23.0% 36.4% 37.2% 34.9% 40.00% 32.0% 35.00% 19.1% 23.8% 30.00% 23.0% 16.5% 8.6% 25.00% 17.6% 14.7% 16.9% Czech Rep. 11.4% 12.5% 13.7% 20.00% 9.4% 9.5% Slovakia Poland 15.00% 4.48% 3.80% Hungary 10.00% 4.90% 3.22% Slovenia 5.00% Romania 1.5% 1.5% Bulgaria 0.00% 1993 1994 1995 1996 1997 1998 1999 2000 2001
The decrease of the Czech-Slovakian share in CEFTA intra-trade observed in Figures 1 and 2 has been working mainly in favour of the increase of Polish share in CEFTA intra-trade and less so in the case of the Hungarian share.
GEORGIAN ECONOMIC TRENDS – 2002 No.3 95 ACHIEVEMENTS AND FAILURES OF CEFTA: THE LESSONS FOR GUUAM
Figure 2: Shares of Individual CEFTA Countries in the Total Import Value of CEFTA
36.0%
33.9% 26.1%
40.0% 35.3% 33.9% 19.8% 31.6% 29.4% 26.4% 26.1% 25.9% 35.0% 20.0% 30.0% 21.8% 20.2% 9.2% 21.4%16.0% 25.0% 14.9% Czech Rep. 10.6% 11.6% 20.0% Slovakia 5.3% Poland 15.0% 2.7% 9.4% Hungary 10.0% 4.3% Slovenia 5.0% 3.5% Romania 3.2% Bulgaria 0.0% 1993 1994 1995 1996 1997 1998 1999 2000 2001
When comparing the dynamics of the Polish CEFTA trade with the dynamics of the global Polish foreign trade and additionally taking as a base period of comparison the year 1993, one observes a clear increasing positive difference between these two figures. These trends are depicted in Figures 3 and 4.
Figure 3: Difference in Export Growth Rate (CEFTA Dynamics – Total Export Dynamics) (1993=100 per cent)
200 171.2 150
100 71.5 50 4 0 -6 -10 Percentage points Percentage -12.2 -16.4
-50 -44.6 -43.3 -51.8 -100 -102.1 -112.8
-150 1994 ... 1997 ... 2001 Poland Czech Rep. Slovakia Hungary
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Figure 4: Difference in Import Growth Rate (CEFTA Dynamics – Total Import Dynamics) (1993=100 per cent)
200 189.4
150 136.9 100
50 45.8 36.6 24.4 16.3 0 -8.8 -10 -50 Percentage points
-100 -59.3 -88.6 -119.5
-150 -135.5 1994 ... 1997 ... 2001
Poland Czech Rep. Slovakia Hungary
It is only Poland that can claim to be an absolute winner in terms of the trade volume growth within CEFTA in comparison with other trade directions, whereas other countries had opposite experiences in this respect. However, nobody can deny that their trade with CEFTA did not increase accordingly.
In the cases of Slovakia and Czech Republic such a development of events can be explained with their initial strong mutual trade contacts that with the course of time were weakening and replaced by the commercial contacts with other non-CEFTA countries.
A very interesting story is represented by the Hungarian experience. The Hungarian economy has become in recent years evidently an export-driven economy. The share of exports in GDP ranges at the level of 50 per cent and even exceeds it. This is due to the fact of the very dynamic increase of the Hungarian trade with the industrialised countries which substantially surpassed the dynamics of trade with other CEFTA countries.
GENERAL SUMMARY OF THE CEFTA RESULTS CEFTA led to the reversal of the negative trend in the mutual trade of the participating countries. It facilitated the adjustment of the CEFTA countries to the global market economy. The multiple modifications and joining of the new members (Slovenia from 1.1.1996, Romania from 1.1.1997, Bulgaria from 1.1.1999 and Croatia from 1.3.2003) prove the viability and attractiveness of the organisation. It played a major role in the conditions for agricultural trade and even disagreements on number of issues led to the better understanding of mutual positions and contributed to the elaboration of methods for solving such disputes.
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In terms of the trade volumes, CEFTA proved to be a success story, and it certainly assisted participating countries in overcoming some of the difficulties with the weak domestic demand.
The Polish case of this story is depicted in Figures 5 and 6.
Figure 5: Dynamics of the Polish Export, 1994 – 2000 (1993=100 per cent)
400 350 300 250 200 150 100 50 0 1994 1995 1996 1997 1998 1999 2000
Total EU CEFTA
Figure 6: Dynamics of the Polish Import, 1994 – 2000 (1993=100 per cent)
600 500 400 300 200 100 0 1994 1995 1996 1997 1998 1999 2000
Total EU CEFTA
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CONCLUSIONS FOR GUUAM Looking back on some of CEFTA’s results, both positive and negative, only very general recommendations can be formed for other countries intending to follow the route of free trade.
The main points of reasoning can be grouped as follows:
• try to classify the commodities to different groups of sensitivity;
• adopt the various schemes of a gradual approach in liberalisation for the selected commodities groups but give a realistic deadline for the final tariff elimination;
• be careful with concessions on domestic market protections given either to foreign investors or to other lobbying bodies;
• be conclusive on the mutual acknowledgment of the technical and safety certificates and laboratory testing;
• try to harmonise the rules of origin regulations;
• try to find the best ways of solving potential disputes from the very beginning;
• only with the active participation of the foreign investors can the full potential of an adopted free trade agreement be realised;
• do not leave too big differences in the external tariffs of the countries involved since it can lead to negative issues like re-export; and
• before starting serious liberalisation in agricultural trade try hard to harmonise the internal policies of the given countries in respect to that sector.
The above list does not exhaust the possible fields of danger for such an endeavour like a free trade area but it certainly attempts to categorise them and still leaves plenty of space for discussion and for looking for the best possible solution.
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GEORGIAN ECONOMIC TRENDS – 2002 No.3 105 STATISTICAL ANNEX
CEFTA TRADE EXCHANGE (USD million) [according to IMF data] Importer
Total export to Year Poland Czech Rep. Slovakia Hungary Slovenia Romania Bulgaria Global export CEFTA
Exporter
Poland 342.54 117.80 174.27 13.54 36.37 31.68 716.20 14,143.10
Czech Rep. 316.78 2,571.10 236.28 100.92 28.72 44.96 3,298.76 11,773.60
Slovakia 159.22 2,311.31 247.63 37.88 24.13 16.68 2,796.85 5,460.03
1993 Hungary 162.70 264.00 80.90 62.00 184.90 23.30 777.80 8,597.70
Slovenia 87.41 49.56 26.71 87.68 19.01 45.28 315.64 6,240.90
Romania 20.10 9.60 5.80 117.00 11.90 102.90 267.30 4,892.10
Bulgaria 19.47 13.33 10.49 19.09 0.00 64.91 127.29 2,319.33
Total import from CEFTA 765,67 2,990.34 2,812.80 881.94 226.24 358.03 264.80 8,299.83
Global import 18 834,40 13,805.30 6,967.74 12,386.90 6,865.94 6,521.70 4,480.65
Poland 456.11 159.00 183.57 18.68 31.60 45.21 894.18 17,240.10
Czech Rep. 554.13 2,344.25 378.90 165.33 46.85 64.03 3,553.49 14,280.70
Slovakia 189.30 2,504.12 365.74 45.79 26.69 11.65 3,143.28 6,691.07
1994 Hungary 222.00 197.70 143.60 196.00 197.20 32.10 988.60 10,587.60
Slovenia 96.32 82.51 30.33 98.68 12.44 14.30 334.59 7,232.26
Romania 14.00 75.90 7.50 161.40 17.30 103.00 379.10 6,159.60 Bulgaria 18.50 14.35 10.32 20.91 26.04 58.73 148.85 3,401.20 CEFTA TRADE EXCHANGE (USD million) [according to IMF data] Importer
Total export to Year Poland Czech Rep. Slovakia Hungary Slovenia Romania Bulgaria Global export CEFTA
Exporter
Total import from CEFTA 1,094.25 3,330.70 2,695.00 1,209.21 469.14 373.51 270.29 9,442.10
Global import 21 569,10 16,325.00 7,272.14 14,449.40 8,025.93 7,113.00 4,719.08
Poland 698.20 279.38 267.36 32.46 57.61 46.14 1,381.15 22,894.90 Czech Rep. 920.43 2,762.69 353.35 238.87 55.23 74.11 4,404.68 17,178.10
Slovakia 378.01 3,030.06 390.90 96.01 42.62 18.12 3,955.71 8,578.99 1995 Hungary 337.10 207.40 212.90 255.80 357.40 38.40 1,409.00 12,861.40
Slovenia 104.85 132.03 51.70 114.60 20.97 12.59 436.75 8,389.29
Romania 39.10 21.00 10.10 174.40 22.00 71.10 337.70 8,061.10
Bulgaria 24.10 18.50 9.50 23.30 21.90 95.60 192.90 5,220.42
Total import from CEFTA 1,803.60 4,107.18 3,326.28 1,323.91 667.03 629.43 260.46
Global import 29,049.70 22,973.10 9,647.54 15,483.30 9,645.39 10,387.60 5,469.27
CEFTA TRADE EXCHANGE (USD million) [according to IMF data] Importer
Total export to Year Poland Czech Rep. Slovakia Hungary Slovenia Romania Bulgaria Global export CEFTA
Exporter
Poland 847.36 280.04 310.20 43.15 73.78 47.88 1,602.41 24,439.80 Czech Rep. 1,205.76 3,121.13 390.84 227.84 72.72 66.89 5,085.18 22,132.40
Slovakia 426.88 2,739.01 403.34 88.29 57.17 19.67 3,734.35 8,830.50 1996 Hungary 387.77 289.70 251.03 219.98 277.56 32.49 1,458.54 13,144.70
Slovenia 141.51 146.56 57.21 105.42 22.29 9.31 482.30 8,311.88
Romania 51.80 16.30 28.40 159.70 17.30 67.50 341.00 7,644.50
Bulgaria 31.13 23.26 11.50 24.84 4.12 75.37 170.22 4,780.67
Total import from CEFTA 2 244,85 4,062.19 3,749.31 1,394.34 600.68 578.89 243.74 12,873.99
Global import 37 136,70 30,685.20 12,029.90 16,209.10 9,429.23 9,963.60 4,891.37
Poland 912.23 313.98 383.04 49.48 79.41 63.40 1,801.54 25,750.70
Czech Rep. 1,294.30 2,902.62 422.10 206.46 89.76 59.42 4,974.65 22,503.70
Slovakia 504.65 2,455.83 430.73 100.97 64.00 24.88 3,581.05 9,638.78
1997 Hungary 510.37 321.63 265.25 290.82 316.73 43.17 1,747.99 19,099.90
Slovenia 155.47 147.34 56.43 120.45 24.43 12.57 516.69 8,371.96
Romania 100.80 17.30 24.50 187.20 16.20 56.90 402.90 8,386.60
Bulgaria 27.93 15.94 11.53 21.46 7.41 59.61 143.88 4,313.59 CEFTA TRADE EXCHANGE (USD million) [according to IMF data] Importer
Total export to Year Poland Czech Rep. Slovakia Hungary Slovenia Romania Bulgaria Global export CEFTA
Exporter
Total import from CEFTA 2,593.52 3,870.28 3,574.31 1,564.98 671.33 633.94 260.34 13,168.70
Global import 42,307.40 29,687.00 12,891.80 21,234.00 9,357.38 11,142.00 3,879.56
Poland 1,022.73 337.25 470.15 72.82 123.41 64.40 2,090.75 28,228.50 Czech Rep. 1,489.15 2,811.90 502.39 230.93 169.07 97.74 5,301.18 26,419.70
Slovakia 632.62 2,179.44 468.49 89.11 92.84 26.94 3,489.44 10,720.30
1998 Hungary 529.40 372.15 332.32 240.96 564.27 46.90 2,085.98 23,005.40
Slovenia 181.27 149.75 72.76 141.48 42.82 19.27 607.35 9,034.35
Romania 82.26 12.74 21.35 219.20 33.40 77.97 446.92 8,314.57
Bulgaria 55.28 15.89 22.05 33.49 32.60 52.73 212.04 4,150.00
Total import from CEFTA 2,969.98 3,752.71 3,597.62 1,835.20 699.82 1,045.13 333.21 14,233.66
Global import 47,053.30 31,777.40 14,380.40 25,727.00 10,067.60 11,882.20 5,044.32
CEFTA TRADE EXCHANGE (USD million) [according to IMF data] Importer
Total export to Year Poland Czech Rep. Slovakia Hungary Slovenia Romania Bulgaria Global export CEFTA
Exporter
Poland 1,040.85 356.51 538.87 100.50 129.09 71.05 2,236.88 27,406.90
Czech Rep. 1,462.91 2,175.83 468.89 270.84 137.87 95.03 4,611.38 26,238.20
Slovakia 547.48 1,847.39 459.02 86.16 76.00 28.04 3,044.10 10,233.40
1999 Hungary 515.47 371.99 275.03 265.53 461.78 57.68 1,947.48 24,848.80
Slovenia 189.50 157.99 57.83 144.21 41.50 25.02 616.05 8,504.66
Romania 120.06 14.80 11.94 270.81 43.13 136.66 597.40 8,508.98 Bulgaria 29.06 15.02 7.81 23.91 44.52 52.82 173.12 3,755.12
Total import from CEFTA 2,864.48 3,448.03 2,884.95 1,905.71 810.69 899.06 413.49 13,226.40
Global import 45,911.00 31,148.20 12,453.40 27,893.90 9,888.98 10,600.50 5,220.00
Poland 1,198.58 438.45 650.74 131.73 161.44 81.31 2,662.25 31,643.60 Czech Rep. 1,573.24 2,222.20 542.09 236.13 165.14 99.02 4,837.82 28,941.00
Slovakia 694.70 2,065.25 577.92 117.08 97.59 35.90 3,588.43 11,873.60 2000 Hungary 604.90 465.30 288.40 279.80 574.20 76.20 2,288.80 28,087.30
Slovenia 225.92 151.31 69.24 168.33 48.57 27.89 691.27 8,728.39
Romania 101.61 20.50 26.17 355.16 55.42 289.53 848.39 10,366.50
Bulgaria 27.63 16.82 5.55 28.67 27.34 84.61 190.62 4,759.88 CEFTA TRADE EXCHANGE (USD million) [according to IMF data] Importer
Total export to Year Poland Czech Rep. Slovakia Hungary Slovenia Romania Bulgaria Global export CEFTA
Exporter
Total import from CEFTA 3 228,00 3,917.77 3,050.01 2,322.91 847.49 1,131.55 609.84 15,107.57
Global import 48 939,80 35,067.60 14,054.20 32,187.10 10,089.30 13,054.40 6,361.64
Poland 1,431.92 516.65 755.35 128.12 226.46 90.20 3,148.72 36,049.70 Czech Rep. 1,579.68 2,225.29 645.49 226.13 250.09 105.60 5,032.28 30,052.00
Slovakia 733.31 2,100.17 678.91 123.36 124.11 34.12 3,793.98 12,631.30 2001 Hungary 601.41 547.20 405.22 306.24 753.86 104.76 2,718.69 30,153.40
Slovenia 242.25 167.19 83.24 156.02 58.35 32.23 739.28 9,189.48
Romania 100.30 36.00 32.10 371.40 65.60 202.20 807.60 11,386.40
Bulgaria 34.74 21.87 8.86 33.26 19.41 128.84 246.97 5,062.08
Total import from CEFTA 3,291.68 4,304.34 3,271.37 2,640.43 868.87 1,541.70 569.12 16,487.51
Global import 50,68.50 38,008.40 16,242.70 33,473.60 10,124.60 15,552.80 7,182.35 ,
STATISTICAL APPENDIX
CONTENTS *
Table A3.1: State Budget Revenues, 9 months 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 A4.4: Urban Consumer Price Index and Inflation
Table A5.1.1: Registered Foreign Trade Balance, Q1 – Q3 2002
Table A5.1.2: Registered Foreign Trade Balance, Q1 – Q3 2002
Table A5.2.1: Georgia’s Registered Exports and Imports by Harmonized Tariff Schedule (HTS) Chapters, Q1 – Q3 2002
Table A5.2.2: Georgia’s Registered Exports and Imports by Harmonized Tariff Schedule (HTS) Chapters, Q1 – Q3 2002
Table A6.1: Establishment of JSCs by Region, as of 1st October, 2002
Table A6.2: Small Privatisation by Region, as of 1st October, 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.
106 GEORGIAN ECONOMIC TRENDS – 2002 No.3 Table A3.1: State Budget Revenues, 9 months 2002 (GEL million) Year target 9 month Actual 9 The difference Actual as per cent of Actual as per cent target month 9 month target of Year target revenues
Total ravenues and grants 928.6 697.1 615.3 -81.8 88.3 66.3 Tax revenues 771.3 573.2 541.4 -31.7 94.5 70.2 income tax 19.9 14.5 12.8 -1.7 88.3 64.6 Profit tax 9.6 7.1 6.9 -0.2 97.3 71.7 VAT 374.8 271.3 267.5 -3.8 98.6 71.4
On domestic products 203.5 148.2 147.0 -1.2 99.2 72.2 On imports 171.3 123.1 120.5 -2.6 97.9 70.4 Excise duty 104.7 75.7 59.9 -15.8 79.1 57.2
On domestic products 27.1 19.8 14.9 -4.9 75.2 55.0 On imports 77.6 55.9 45.0 -10.9 80.5 58.0 Customs duty 59.2 43.1 32.3 -10.7 75.1 54.6 1% social tax 5.5 4.0 4.5 0.4 110.9 81.1 Fixed tax 0.0 2.6 Non-tax revenues 79.1 66.0 55.1 -10.9 83.5 69.7 Revenues of Special State Funds 198.3 157.9 155.4 -2.6 98.4 78.3 Social security Fund 156 127.0 129.0 2.0 101.6 82.7 Roads Fund 42.3 31.0 26.4 -4.6 85.2 62.3 Grants 77.5 57.4 18.3 -39.1 31.8 23.6 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 Jul-02 Aug-02 Sep-02
NET INTERNATIONAL RESERVES -335,729 -363,822 -365,946 -368,539 -386,075 -388,686 -407,404 -389,618 -376,578 -372,591 Gold 1,058 1,058 1,058 1,240 1,240 1,240 1,295 1,295 1,295 1,302 Foreign Exchange 331,803 334,294 334,674 328,613 320,195 321,691 320,243 391,388 398,777 392,871 Use of IMF resourses -587,559 -618,555 -620,661 -613,335 -622,454 -626,561 -632,222 -686,899 -681,640 -672,013 Other Foreign Liabilities -81,031 -80,618 -81,016 -85,056 -85,056 -85,056 -96,721 -95,402 -95,010 -94,752
NET DOMESTIC ASSETS 765,585 795,219 801,285 801,330 820,709 825,742 844,962 837,588 837,088 833,201 Net Claims on General Government 739,129 750,264 757,859 730,654 742,995 747,865 746,563 742,007 745,625 753,434 Net Claims on Republican Government 749,415 758,754 765,676 742,910 751,255 754,929 757,004 754,697 755,006 766,505 O/w Loans to Republican Government 767,625 776,925 786,625 767,625 770,625 773,625 782,322 781,295 784,745 789,945 Net Claims on United Social Security Fund -925 -983 -791 -732 -834 -527 -293 -264 -85 -284 Other Extrabudgetary Funds (net) -9,361 -7,507 -7,026 -11,524 -7,426 -6,537 -10,149 -12,427 -9,296 -12,787 Claims on the Rest of Economy 78,335 81,760 82,122 82,092 82,061 82,012 93,032 91,881 91,673 91,547 Net Claims on Banks 677 507 501 519 -441 419 12 22 11 11 Other Assets (net) -52,555 -37,313 -39,198 -11,936 -3,906 -4,555 5,355 3,677 -220 -11,790
RESERVE MONEY (M1) 429,857 431,397 435,339 432,791 434,634 437,055 437,557 447,969 460,510 460,610 Currency in Circulation 365,669 361,839 369,189 361,629 366,022 365,492 363,913 371,258 382,096 380,511 Banks' Deposits 64,188 69,557 66,150 71,162 68,612 71,563 73,645 76,711 78,414 80,099 Required Reserves 53,300 55,815 57,844 57,613 59,571 58,803 61,046 63,144 66,004 68,237 Balances on Correspondent Accounts 10,888 13,742 8,306 13,549 9,041 12,761 12,599 13,567 12,410 11,862 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 Jul-02 Aug-02 Sep-02
NET FOREIGN ASSETS 3,708 -9,102 -32,892 -16,365 -7,531 -14,973 -11,275 -13,622 7,230 25,453 NFA (CONVERTIBLE) 3,708 -9,102 -32,892 -16,365 -7,531 Gold 4 4 4 4 4 4 4 4 3.5 3.5 Foreign Exchange 151,118 177,262 169,400 157,085 158,219 140,469 189,902 165,902 186535.0 207507.4 Foreign Liabilities -147,414 -186,368 -202,296 -173,454 -165,753 -155,446 -201,181 -179,527 -179308.4 -182057.4
NET DOMESTIC ASSETS 379,887 399,787 426,777 427,432 417,693 417,107 432,874 442,299 435,537 416,940 Domestic Credit 479,469 494,024 523,137 525,725 541,136 540,121 533,129 546,130 542,905 527,731 Net Claims on General Government -14,513 -21,106 -15,677 -10,181 -3,620 -11,739 -23,259 -16,795 -23,719 -51,315 Net Claims on Republican Government -2,415 -5,282 -3,125 1,371 7,997 1,609 -5,075 6,115 -14,665 -39,817 Claims on the Rest of Economy 493,982 515,130 538,814 535,905 544,755 551,860 556,387 562925.5 566623.2 579046.2 Other Assets (net) -99,582 -94,237 -96,360 -98,293 -123,442 -123,014 -100,254 -103831.8 -107367.5 -110791.5
DEPOSIT LIABILITIES 383,595 390,685 393,884 411,066 400,901 392,659 411,685 428,677 442,767 442,393 Domestic Currency Deposits 54,989 56,358 55,063 59,794 52,669 55,937 49,682 64940.7 67864.7 64822.9 Foreign Currency Deposits 328,606 334,327 338,821 351,272 348,232 336,722 362,003 363735.9 374902.4 377570.5 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 Jul-02 Aug-02 Sep-02
NET FOREIGN ASSETS -332,021 -372,924 -398,838 -384,904 -393,606 -403,660 -418,679 -403,240 -369,348 -347,138 Gold 1,061 1,061 1,061 1,243 1,243 1,243 1,299 1,299 1,299 1,306 Foreign Exchange 482,921 511,556 504,074 485,698 478,414 462,161 510,145 557,290 585,312 600,379 Foreign Liabilities -816,003 -885,542 -903,973 -871,845 -873,263 -867,064 -930,123 -961,829 -955,959 -948,822
NET DOMESTIC ASSETS 1,064,466 1,108,247 1,144,757 1,142,256 1,151,284 1,152,529 1,185,429 1,182,960 1,174,736 1,145,263 Domestic Credit 1,296,932 1,326,049 1,363,118 1,338,471 1,366,192 1,369,999 1,372,723 1,380,019 1,380,202 1,372,712 Net Claims on General Government 724,616 729,159 742,182 720,474 739,375 736,126 723,304 725,212 721,906 702,119 Net Claims on Republican Government 747,000 753,473 762,551 744,281 759,253 756,538 751,929 760,812 740,341 726,688 Treasury Obligations 15,925 14,555 14,785 16,411 21,384 20,259 22,670 26,248 29,750 29,358 Net Claims on Local Government -4,333 -3,221 -3,282 -3,676 -2,596 -4,429 -7,205 -8,339 -488 -3,338 Net Claims on Pension Fund -925 -983 -791 -732 -834 -527 -293 -264 -85 -284 Other Extrabudgetary Funds -17,126 -20,110 -16,296 -19,399 -16,447 -15,455 -21,127 -26,998 -17,862 -20,947 Claims on the Rest of Economy 572,316 596,890 620,936 617,997 626,816 633,872 649,419 654,807 658,296 670,593 Other Items (net) -232,466 -217,801 -218,362 -196,215 -214,908 -217,470 -187,294 -197,059 -205,466 -227,448
BROAD MONEY (M3) 732,445 735,323 745,918 757,352 757,678 748,869 766,749 779,719 805,388 798,126 Broad Money, excluding foreign currency deposits (M2) 403,839 400,996 407,097 406,081 409,446 412,148 404,746 415,983 430,486 420,555 Currency Outside Banks (M0) 348,850 344,638 352,034 346,286 347,516 346,736 345,150 351,043 362,621 355,732 Currency in Circulation 365,669 361,839 369,189 361,629 366,022 365,492 363,913 371,258 382,096 380,511 Currency in Commercial Banks -16,819 -17,201 -17,155 -15,343 -18,506 -18,756 -18,763 -20,216 -19,475 -24,778 Deposit Liabilities (GEL) 54,989 56,358 55,063 59,794 61,930 65,412 59,596 64,941 67,865 64,823 Foreign Currency Deposits 328,606 334,327 338,821 351,272 348,232 336,722 362,003 363,736 374,902 377,570 Source:National Bank of Georgia (1) Annualised by the NBG since 1998 Table A4.4: Urban Consumer Price Index and Inflation
Period Inflation Rate (per Price index cent) (i) from previous period
Monthly 2000 Dec 100.00 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 100.00 103.42 1.40 2002 Jan 102.00 105.48 2.00 Feb 103.22 106.75 1.20 Mar 103.64 107.18 0.40 Apr 105.50 109.11 1.80 May 105.50 109.11 0.00 June 103.08 106.60 -2.30 Jul 101.94 105.42 -1.10 Aug 101.84 105.32 -0.10 Sep 102.25 105.74 0.40 Source: GET calculations based on data provided by the State Department for Statistics Table A5.1.1: Registered Foreign Trade Balance, Q1-Q3 2002 (USD thousands) Countries Q1-Q3 2002 Q1-Q3 2001 Import Export Import Export Total foreign trade 523,786 240,208 523,451 255,217 CIS 206,016 117,367 188,394 114,646 Armenia 6,189 14,294 9,098 9,757 Azerbaijan 53,376 27,920 52,925 7,961 Belarus 553 1,303 1,282 866 Kazakhstan 4,001 1,823 4,163 3,431 Kyrgizstan 144 67 200 - Moldova 142 90 204 87 Russia 89,093 39,477 63,631 55,093 Tajikistan 2 380 122 222 Turkmenistan 13,458 22,586 16,852 28,707 Ukraine 38,760 7,288 38,762 7,796 Uzbekistan 298 2,140 1,156 727
EU 135,054 44,661 141,044 43,721 Austria 8,254 270 8,046 675 Belgium 4,487 1,454 5,651 6,771 Denmark 6,258 300 3,899 404 Finland 1,646 - 9,471 - France 9,515 2,519 13,514 307 Germany 42,493 3,501 50,445 5,537 Greece 5,808 2,744 3,364 2,007 Ireland 333 134 688 1 Italy 23,589 4,879 15,858 7,094 Luxembourg 168 - 137 - Netherlands 9,714 3,044 7,107 2,838 Portugal 831 99 934 89 Spain 2,101 559 1,484 1,486 Sweden 3,111 18 1,043 776 UK 16,745 25,140 19,404 15,736 Source: State Department for Statistics Table A5.1.2: Registred Foreign Trade Balance, (USD thousands) Countries Q1-Q3 2002 Q1-Q3 2001 Import Export Import Export Other countries Afganistan 0 4 2 15 Albania - - 1 121 Algeria - - - 241 Argentina - - 10 - Australia 367 51 296 16 Bahama Islands 3,102 - 303 324 Bangladesh - 9 - - Butane 1 11 10 - Bolivia - 149 - - Bosnia and Hercegovina - 25 - 3 Brazil 9,291 - 3,563 3 Belize - 58 - - Virgin Islands (GB) 3,929 - 232 20 Bulgaria 10,983 147 7,986 443 Canada 228 33 652 27 Sri-lanka 57 15 54 1 China 4,943 703 2,336 786 Taiwan (China) 435 7 220 - Comubmia 30 3 18 80 Costa-rika 134 - - - Croatia 2,365 25 484 1 Cuba 0 - - - Cyprus 860 48 2,239 80 Czech Rep. 2,647 490 1,935 217 Dominica 25 - - - Dominican Rep. 120 - - - Ecuador 478 - 373 - Ecuadorian Guinea - - 40 - Estonia 102 55 64 - Gambia 2 2,446 - - Gana - 73 - 100 Giblartar 917 4,531 343 464 Guinea - 15 - 46 Honduras - 3 147 - Hong-Kong (China) 199 17 291 1 Hungary 3,833 76 4,187 300 Island 0 - 27 - India 3,305 1,338 1,216 3,870 Indonesia 165 50 2,245 97 Iran 6,214 2,425 3,885 3,195 Israel 845 449 482 450 Jamaica 82 - 3 - Japan 3,657 682 1,340 990 Jordan - 41 13 116 Kenya - - 3 - Corea PDR 289 43 12 - Corea Rep. 271 952 590 90 Lebanon 192 - 1,359 11 Latvia 589 216 845 386 Libya - 4 - - Liechtenstein 31 - 123 874 Lithuania 873 1,510 4,148 2,340 Malawi 128 - 240 - Malaysia 0 0 52 3 Malta 2 28 30 - Mauritania 168 - 34 - Mexico - 5 2 1 Monaco 6 - - - Mongolia - 245 - 167 Maroco - 2 18 - Mozambique - - - 5 New Zealand 718 - 479 - Newer 1,453 - 1,736 15 Norway 179 3 110 - Pakistan - 7 - - Panama - 618 - - Peru 46 6 - - Philippines 60 - - 20 Poland 2,239 192 2,571 732 Romania 2,970 73 15,016 425 San-Marino - 1 10 - Saudi Arabia 135 1 2 22 Singapore 407 198 131 244 Slovakia 564 4 446 181 Vietnam 22 3 22 - Slovenia 1,985 9 5,205 3 South Africa 124 9 15 58 Zimbabwe 678 - 757 - Switzerland 12,030 10,653 9,644 12,657 Syria 262 593 324 443 Thailand 313 2 95 - Tonga - - 11 - United Arab Emirates 4,244 1,830 5,858 1,196 Tunisia - 8 - - Turkey 66,046 37,907 83,239 58,025 Macedonia 31 5 46 25 Egypt 50 20 188 6 Tanzania - - 4 - USA 25,474 8,717 25,330 6,797 Yugoslavia 740 22 274 5 Zambia - 15 - - Source: State Department for Statistics Table A5.2.1: Georgia's Registred Exports and Imports by Harmonized Tariff Schedule (HTS) Chapters, Q1-Q3 2002 (USD thousands) HTS Category Import Export 01 - Live Animals 403 5 02 - Meat and edible meat offal 10,666 1,500 03 - Fish and crustaceans, molluscs and other aquatic invertebrates 1,029 96 04 - Dairy produce; birds eggs; natural honey; edible products of animal origin, not elsewhere specified or included 3,245 731 05 -Products of animal origin, not elsewhere specified or included 16 0 06 -Live trees and other plants; bulbs, roots and the like; cut flowers and ornamental foliage 132 176 07 -Edible vegetables and certain roots and tubers 1,441 467 08 -Edible fruit and nuts; peel of citrus fruit or melons 1,809 3,890 09 -Coffee, tea, maté and spices 1,249 3,394 10 -Cereals 12,282 4,294 11 -Products of the milling industry; malt; starches; inulin; wheat gluten 7,223 - 12 -Oil seeds and oleaginous fruits; miscellaneous grains, seeds and fruits; industrial or medicinal plants; straw and fodder 192 461 13 -Lac; gums, resins and other vegetable saps and extracts 140 12 14 -Vegetable plaiting materials; vegetable products not elsewhere specified or included 21 9
15 -Animal or vegetable fats and oils and their cleavage products prepared edible fats; animal or vegetable waxes 5,509 38 16 -Preparations of meat, of fish or of crustaceans, molluscs or other aquatic invertebrates 1,930 18 17 -Sugars and sugar confectionery 22,162 8,688 18 -Cocoa and cocoa preparations 3,513 399 19 -Preparations of cereals, flour, starch or milk; bakers' wares 3,020 96 20 -Preparations of vegetables, fruit, nuts or other parts of plants 1,509 770 21 -Miscellaneous edible preparations 4,422 276 22 -Beverages, spirits and vinegar 1,992 37,293 23 -Residues and waste from the food industries; prepared animal feed 699 2 24 -Tobacco and manufactured tobacco substitutes 19,407 968 25 -Salt; sulfur; earths and stone; plastering materials, lime and cement 3,800 447 26 -Ores, slag and ash 34 13,617 27 -Mineral fuels, mineral oils and products of their distillation; bituminous substances; mineral waxes 116,666 14,691 28 -Inorganic chemicals; organic or inorganic compounds of precious metals, of rare earth metals, of radioactive elements or of isotopes 2,728 3,787 29 -Organic chemicals 1,163 69 30 -Pharmaceutical products 35,804 2,395 31 -Fertilizers 149 10,505
32 -Tanning or dyeing extracts; tannins and their derivatives; dyes, pigments and other coloring matter; paints and varnishes; putty and other mastics; inks 1,973 201
33 -Essential oils and resinoids; perfumery, cosmetic or toilet preparations 6,029 766 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 3,600 45 35 -Albuminoidal substances; modified starches; glues; enzymes 534 6
36 -Explosives; pyrotechnic products; matches; pyrophoric alloys; certain combustible preparations 1,018 49 37 -Photographic or cinematographic goods 311 2 38 -Miscellaneous chemical products 3,569 374 39 -Plastics and articles thereof 10,183 1,085 40 -Rubber and articles thereof 2,839 19 41 -Raw hides and skins (other than furskins) and leather 162 1,007 42 -Articles of leather; saddlery and harness; travel goods, handbags and similar containers; articles of animal gut (other than silkworm gut) 247 1 Source: State Department for Statistics Table A5.2.2: Georgia's Registred Exports and Imports by Harmonized Tariff Schedule (HTS) Chapters, Q1-Q3 2002 (USD thousands) HTS Category Import Export 44 -Wood and articles of wood; wood charcoal 2,260 3,285 45 -Cork and articles of cork 794 21 46 -Manufactures of straw, of esparto or of other plaiting materials; basketware and wickerwork 3 - 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 13,943 177 49 -Printed books, newspapers, pictures and other products of the printing industry; manuscripts, typescripts and plans 3,811 326 50 -Silk 50 - 51 -Wool, fine or coarse animal hair; horsehair yarn and woven fabric 248 16 52 -Cotton 121 1
53 -Other vegetable textile fibers; paper yarn and woven fabric of paper yarn 8 - 54 -Man-made filaments 863 0 55 -Man-made staple fibers 988 15
56 -Wadding, felt and nonwovens; special yarns, twine, cordage, ropes and cables and articles thereof 310 8 57 -Carpets and other textile floor coverings 484 6 58 -Special woven fabrics; tufted textile fabrics; lace, tapestries; trimmings; embroidery 43 2 59 -Impregnated, coated, covered or laminated textile fabrics; textile articles of a kind suitable for industrial use 253 5 60 -Knitted or crocheted fabrics 88 - 61 -Articles of apparel and clothing accessories, knitted or crocheted 628 65 62 -Articles of apparel and clothing accessories, not knitted or crocheted 662 471 63 -Other made up textile articles; sets; worn clothing and worn textile articles; rags 2,839 1,512 64 -Footwear, gaiters and the like; parts of such articles 2,605 26 65 -Headgear and parts thereof 16 0 66 -Umbrellas, sun umbrellas, walking sticks, seatsticks, whips, riding-crops and parts thereof 53 - 67 -Prepared feathers and down and articles made of feathers or of down; artificial flowers; articles of human hair 4 - 68 -Articles of stone, plaster, cement, asbestos, mica or similar materials 1,678 18 69 -Ceramic products 3,494 34 70 -Glass and glassware 6,360 176 71 -Natural or cultured pearls, precious or semi-precious stones,precious metals, metals clad with precious metal and articles thereof; imitation jewelry; coin 213 22,477 72 -Iron and steel 9,119 36,686 73 -Articles of iron or steel 8,836 1,246 74 -Copper and articles thereof 597 3,460 75 -Nickel and articles thereof 7 94 76 -Aluminum and articles thereof 2,069 7,638 78 -Lead and articles thereof 17 82 79 -Zinc and articles thereof 25 3 80 - Tin and articles thereof 14 - 81 -Other base metals; cermets; articles thereof 123 2 82 -Tools, implements, cutlery, spoons and forks, of base metal; parts thereof of base metal 551 163 83 -Miscellaneous articles of base metal 1,769 36
84 -Nuclear reactors, boilers, machinery and mechanical appliances; parts thereof 54,498 5,082 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 40,086 3,378 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 10,416 1,621 87 -Vehicles other than railway or tramway rolling stock, and parts and accessories thereof 25,375 754 88 -Aircraft, spacecraft, and parts thereof 15,413 35,405 89 -Ships, boats and floating structures 28 57 90 -Optical, photographic, cinematographic, measuring, checking, precision, medical or surgical instruments and apparatus; parts and accessories thereof 9,132 673 91 -Clocks and watches and parts thereof 180 33 92 -instruments; parts and accessories of such articles 10 19 93 -Arms and ammunition; parts and accessories thereof 703 1,561 stuffed furnishings; lamps and lighting fittings, not elsewhere specified or included; illuminated sign illuminated nameplates and the like; prefabricated buildings 5,926 158 95 -Toys, games and sports requisites; parts and accessories thereof 740 161 96 -Miscellaneous manufactured articles 477 565 97- Works of art, collectors' pieces and antiques 32 33
Source: State Department for Statistics Table A6.1: Establishment of JSCs by Region, as of 1st October, 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 October, 2002 (Number of enterprises) Merged with Approved for Total privatised medium or Region 2002 Liquidated privatisation or liquidated large enterprises Abkhazia 8 - - - - Achara 327 171 - 21 - Tbilisi 4,689 5,156 91 412 - Guria 321 470 8 3 71 Lanchkhuti 64 110 5 - 17 Ozurgeti 200 259 1 3 40 Chokhatauri 57 101 2 - 14 Racha-Lechkhumi and lower Svaneti 171 279 6 2 50 Ambrolauri 60 96 2 1 18 Lentekhi 32 47 - - 23 Oni 48 73 3 1 9 Tsageri 31 63 1 - - Samegrelo and upper Svaneti 1,117 1,542 16 184 279 Abasha 88 98 - 3 14 Zugdidi 211 282 2 7 - Martvili 55 58 4 2 19 Mestia 12 24 1 3 3 Senaki 250 428 1 140 104 Chkhorotsku 39 65 2 - 23 Tsalenjikha 52 68 3 15 15 Khobi 146 140 1 2 59 Poti 264 379 2 12 42 Imereti 2,770 3,145 121 187 582 Kutaisi 626 830 47 71 211 Tkibuli 224 200 5 - 49 Tskaltubo 274 304 8 10 29 Chiatura 273 314 17 68 44 Bagdati 73 113 5 - 36 Vani 68 106 - 1 17 Zestafoni 424 426 24 12 52 Terjola 132 154 - - 20 Samtredia 446 460 9 19 59 Sachkhere 95 87 2 - 16 Kharagauli 71 75 3 5 14 Khoni 64 76 1 1 35 Kakheti 1,099 1,335 50 71 178 Akhmeta 179 182 1 18 28 Gurjaani 141 170 4 13 19 Dedoplistskaro 89 132 28 34 3 Telavi 218 272 1 3 36 Lagodekhi 74 66 6 - 15 Sagarejo 132 129 - 3 10 Signagi 140 229 6 - 34 Kvareli 126 155 4 - 33 Mtsketa-Tianeti 327 411 10 25 71 Akhalgori 18 18 - - 5 Dusheti 89 132 3 1 12 Tianeti 58 68 3 12 12 Mtslheta 133 158 1 12 42 Kazbegi 29 35 3 - - Samtskhe-Javakheti 612 931 23 9 109 Adigeni 82 115 10 - 5 Aspindza 30 49 - 1 - Akhalkalaki 66 104 8 1 10 Akhaltsikhe 246 369 4 7 56 Borjomi 160 250 1 - 34 Ninotsminda 28 44 - - 4 Kvemo Kartli 1,156 1,632 53 20 154 Rustavi 357 472 15 4 60 Bolnisi 65 138 1 6 - Gardabani 276 289 7 - 36 Dmanisi 21 73 - - 7 Tetritskaro 115 241 8 4 17 Marneuli 287 382 22 6 10 Tsalka 35 37 - - 24 Shida Kartli 896 1,045 39 47 161 Tskhinvali - 5 - 5 - Gori 317 376 7 19 52 Kaspi 203 203 17 - 15 Kareli 141 183 5 - 62 Khashuri 235 278 10 23 32 Java - - - - - MSPM 524 524 69 - -
Total 14,017 16,641 486 981 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 * The latest available figures
ABBREVIATIONS
ACDI Agricultural Co-operative Development International BSEC Black Sea Economic Co-operation CAP Common Agricultural Policy CASE Centre for Social and Economic Research CEFTA Central European Free Trade Agreement CHF Swiss Frank 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 ECCC European Community Custom Code ECU European Currency Unit EFSA European Food Safety Authority EFTA European Free Trade Agreement 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 FTA Free Trade Agreement 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 GEDI Georgian Economic Development Institute 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 GUUAM Regional organisation founded in 1997 as a political, economic and strategic alliance (Georgia, Ukraine, Uzbekistan, Azerbaijan and Moldova) H Half year ha hectares HS Harmonised Commodity Description HTS Harmonised Tariff Schedule ICC International Chamber of Commerce IDP Internally Displaced Person
GEORGIAN ECONOMIC TRENDS – 2002 No.3 119 ABBREVIATIONS
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 KWD Kuwait Dinar KWh Kilowatt hour LDC Least Developed Countries LFS Labour Force Survey LIBOR London Inter-bank Offered Rate MFA Multi-fiber Agreement MFN Most Favoured Nations status MoF Ministry of Finance MoHSS Ministry of Healthcare and Social Safety MRAs Mutual Recognition Agreements 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 SFr Swiss Frank SIS State Institute of Statistics of Turkey STI State Tax Inspectorate TBT Technical Barriers on Trade agreement TEN Trans-European Networks 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
120 GEORGIAN ECONOMIC TRENDS – 2002 No.3 ABBREVIATIONS
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 WP Working Party WTO World Trade Organisation
GEORGIAN ECONOMIC TRENDS – 2002 No.3 121