Georgia strategy overview

Full strategy  (0.4Mb) Approved 21  Nov 2006

Summary of public comments  (0.2Mb)

Georgia remains committed to and is making progress in applying the principles of Article 1 of the Agreement Establishing the Bank. Following the Rose Revolution of November 2003, the Georgian authorities have demonstrated a strong commitment to democracy and market economy. Since the last country strategy there have been significant achievements in economic reforms but, understandably, challenges still lie ahead. These include the need for further development of democratic institutions and implementation of the rule of law, as well as for progress in resolving conflicts in Abkhazia and South Ossetia.

Economic growth

Economic growth has been impressive during the last two years. In 2005 real GDP growth was 9.3 per cent compared to 5.9 per cent in 2004. The high growth has continued during 2006. This performance was led by strong growth in the industrial sector, especially manufacturing, due in part to the recent privatisations of important enterprises, and to structural reforms aimed at decreasing the informal economy. The construction and telecommunication sectors were boosted by the construction of oil and gas pipelines and have continued to benefit from underlying growth, while agricultural production recovered despite recent flooding. While the recently imposed Russian transport embargo and the bans on imports of Georgian wine and mineral water will have a negative impact on economic growth in 2006 and subsequently, the economy has shown some resilience and is expected to remain stable.

Capital flows related to the construction of the BTC pipeline, privatisations and remittances have contributed to the slight nominal strengthening of the Lari amid repeated interventions, mostly unsterilised, from the National Bank. The money supply has grown sharply in the past two years due to strong capital inflows and increased fiscal spending. This, combined with an increase in energy costs, has led to an increase in annual inflation above the National Bank target of 6 per cent. Containing inflation is a major challenge for Georgia and further improving public expenditure management will be a key to easing inflationary pressures.

Fiscal performance

The fiscal position of Georgia has improved dramatically in the past three years following the Rose Revolution at the end of 2003. Improved tax and customs administration and anti-corruption measures contributed to an increase in budget revenues from 16.2 per cent of GDP in 2003 to an estimated 23.4 per cent of GDP in 2005. The external debt position of Georgia has improved significantly as a result of higher growth rates, a prudent external borrowing strategy from the Government and debt rescheduling in the framework of the Paris Club in 2001 and 2004. Following the Paris Club debt rescheduling in July 2004 (equivalent to USD 161 million), bilateral agreements for debt relief have been reached with all bilateral creditors. The ratio of public external debt to GDP decreased to 27 per cent of GDP in 2005 (down from 36 per cent in 2004).

Over the past two years, Georgia has made good progress toward improving the business climate, as also indicated by the Business Environment and Enterprise Performance Survey (BEEPS), 2005, and has made more progress in making itself business-friendly than any other country according to the World Bank report Doing Business in 2006, improving its ranking world-wide from 112th place to 37th.. At the same time, the large-scale privatisation programme launched in September 2004 has progressed well. The programme envisages the sale or liquidation of more than 1800 remaining state-owned enterprises as well as sale of farm land over an 18 month period. Among large companies already sold are a shipping company, a metallurgical plant, two telecom companies, three energy distribution companies and six hydro power plants. Financial intermediation has seen rapid growth during the past two years albeit from a very low base. Domestic credit to private sector increased from 8.7 per cent of GDP in 2003 to 14.8 per cent in 2005. Banking supervision has been considerably strengthened while the introduction of a gradual increase in capital requirements by the National Bank has contributed to consolidation within the sector.

Structural reforms

Reform measures under implementation by the Government are aimed at gradual improvement of the investment climate over the medium term including creating a level playing field and a legal framework conducive to the development of private enterprise. The new, improved customs code is expected to lead to greater transparency in enforcement, and the authorities are working on strengthening the judiciary. The legal framework for secured transactions has been improved with a new law that came into force in July 2005 and a centralised pledge registry for movable property is being established.

Challenges

Despite its significant progress, Georgia still faces important transition challenges including:

• effective implementation of the energy sector policy adopted by the Government which provide for restructuring, rehabilitation and strengthening of investment incentives with an objective of improving financial and technical performance;
• improving further the business environment, in particular through sustained implementation of anti-corruption measures and through further strengthening of the administrative capacity and the independence of the judiciary system;
• successfully completing the privatisation programme in a fair and transparent manner;
• ensuring fiscal sustainability through further improvements in tax collection, customs legislation, and public expenditure management;
• albeit reduced, corruption remains a problem and sustained efforts will be required to ensure ongoing strengthening of business confidence;
• continued investment in physical infrastructure

Operations

As of October 31, 2006, the Bank had signed a total of 64 investment projects covering energy, transport, agribusiness, general industry and banking for a total commitment of € 389.5 million. Seven projects were in the public sector totalling € 81.6 million (20.9%) and 57 in the private sector, totalling € 307.9 million (79.1%). Net portfolio was € 254.8 million, of which € 192.5 million (75.5%) was disbursed.

Over the coming strategy period, the Bank will further support the process of economic and democratic reform in Georgia, leveraging on the improved fiscal and external position and progress with reforms and privatisation. Georgia is one of the countries included in the Early Transition Countries Initiative (ETCI). Over the past strategy period the Bank has almost doubled its portfolio (increase by 84%) and tripled the number of operations signed annually from 2003 to 2005, with nearly all new commitments made in favour of the private sector, largely reflecting the impact of the ETCI (launched in mid 2004) and with the support of substantially increased technical cooperation, particularly that financed from the ETC Multi Donor Fund. The ETCI has provided effective mechanisms for better targeting a broad range of projects that address availability of finance in regions throughout Georgia and across a broader range of sectors. Increased availability of grant co-financing in particular has enabled substantial work to be initiated for Municipal projects in regions urgently in need of rebuilt municipal services. The Bank’s activities over the coming strategy period will continue to focus primarily on support targeting the development of the private sector, including through an intensified policy dialogue with the authorities on improving the investment climate. In view of Georgia’s limited sovereign borrowing capacity, the Bank does not anticipate pursuing sizable sovereign operations unless these involve adequate grant co-financing from other sources.

Operational objectives

The EBRD’s main operational objectives will be:

• Investment climate – Policy dialogue with the authorities will be continued and further enhanced, in close coordination with the local business community, other IFIs and international donors and will aim at addressing critical bottlenecks to local private sector investment and FDI. To this end, the Bank will continue to provide stand-alone technical assistance as appropriate, including for legal transition work and to promote public-private sector dialogue.
  
  
• Infrastructure – Investments in support of energy security and efficiency, and strengthening of essential infrastructure will be a priority for the Bank. Key sectors for the EBRD support will be power and energy, municipal and transit infrastructure. Given the importance of the power sector to the overall political, social and economic stability of Georgia and the region, particular efforts will continue to be directed to the successful completion of the Enguri Rehabilitation project and toward investments supporting renewable energy. Priority will also be given to the development and implementation of a number of municipal infrastructure projects, mainly on a non-sovereign basis and if accompanied by appropriate regulatory and institutional reform, including for smaller municipalities. Securing ongoing levels of donor grant support will be critical to success.
  
  
• Enterprise Sector – The Bank will actively expand funding of local businesses, particularly SMEs and micro enterprises. Support will mainly be provided through the ETCI specialised enterprise funding instruments, i.e. non-bank microfinance institutions (NBMFI) framework, Medium-sized Co-financing Facility (MCFF), equity via the Direct Investment Facility (DIF), debt via the Direct Lending Facility (DLF), as well as through traditional tools such as credit lines with local banks and the Trade Facilitation Programme (TFP). It is anticipated that the agribusiness sector will figure prominently given its importance to the Georgian economy, including regional and rural development. Providing financing for leasing operations in support of agriculture and construction activities will receive particular attention. The SME sector will be further strengthened through the TurnAround Management (TAM) and Business Advisory Service (BAS) Programmes. Areas of particular focus will be management skills, market positioning, information systems, technical and environmental upgrades.
  
  
• Financial Sector – The EBRD will continue to expand support to existing and new partner banks in Georgia. Support will typically include expanded TFP and MSME lines of credit as well as mortgage loans. In an effort to address capital adequacy constraints and sector consolidation, the Bank will seek new equity investments in local banks. Intensive implementation of the Bank’s MCFF with selected local banks will continue. Additionally, the Bank will work to support the development of the non-bank financial sector with a specific focus on leasing, insurance and private pension schemes.

The government’s ability, commitment and willingness to continue reform are crucial for the successful implementation of the proposed strategy. Close co-operation with the donor community and in particularly with the EC within the framework of the European Neighbourhood Policy as well as collaboration with the US supported Millennium Challenge Georgia will also be important factors to success. This co-operation efforts will be undertaken within the context of the Government’s effective leadership of donor co-ordination.

EBRD local presence

Recognising the need for enhanced staff and technical resources in the field to ensure the ongoing success of the ETCI and to deepen its engagement with the domestic business communities, the Bank has now established a Regional Hub in Tbilisi. Under this arrangement, the number and seniority of staff positioned in the field and available to directly support from Tbilisi the growth of a healthy portfolio in Georgia, as well as in the other the Caucasus countries and Moldova is in the process of being strengthened.