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Can Georgia Develop a Knowledge-Based Economy?

Wednesday, April 23, 2014
News Making Money

“Messages Sent by Government to the Business Community are Confusing,” Former EBRD Director

Written by Mariam Papidze, The FINANCIAL

03/06/2013 07:27 (323 Day 23:48 minutes ago)


The FINANCIAL -- Paul-Henri Forestier, former EBRD Director for the Caucasus, Moldova and Belarus, has reflected about the new Co-Investment Fund established by the Georgian Government recently. “I doubt that the Co-Investment Fund like others will somehow cause the hesitation of investors in making their decisions,” he told The FINANCIAL last Wednesday, after finishing his mission as Director for the region.



He also said that the slowdown in the Georgian economy is not because of the new Government as it started before the elections in October last year.

“There are three funds that are being talked about. One is the agricultural fund, another is the former partnership fund, and the third is the private equity fund which at this stage is a little bit mysterious to all of us. It would take utopia to make these three funds work, in my opinion. I mean the idea that a huge amount of money invested in the country is about to come through different funds. Are you going to make a decision to invest in the country if you hear that the Prime Minister is going to invest 3 million? That is why I doubt that the Co-Investment Fund like others will somehow cause the hesitation of investors in making their decisions.”

Opposition’s Criticism towards the new Georgian Government became more evident after National Bank of Georgia said that the country’s economy is experiencing a slowdown in growth. The European Bank of Reconstruction and Development also changed its outlook on the Georgian economy saying that growth will be up to 3% instead of the 5% predicted last year.

“Some of the projects that EBRD already agreed with the previous government have been delayed as Georgian Dream representatives think that certain projects should not be prioritized at the moment. But all the major projects are definitely being implemented,” said Paul-Henri Forestier. However, he does believe that “we should not dramatize the whole thing”.

“I think we should not dramatize the whole thing.”

“Official figures say that growth in the first quarter was 1.7 percent. The fact that the economy will not grow by 6 percent is not surprising. Our forecast is that GDP growth will be 3 percent. These indicators might not be welcome but we should look at the following facts: the main trading partners of Georgia are Turkey, the EU and Russia. Growth in the EU is flat; growth in Russia is going down the tube, growth in Turkey is still there but not at the same pace. If Georgia achieves 3 percent growth in GDP this year, it is pretty good compared to any of the others. The question is - when is it going to pick up again? Where will the foreign direct investment come from? It was expected to come from Russia. Russians are thinking that it is time to invest in Georgia. Investing in real estate is fine because it helps construction, it helps develop the economy, but it could be a real estate type of activity.

“It is very interesting to see that the Georgian Lari is appreciating. Because the economic growth has slowed down import has decreased, but there is still a little money which is coming from people living abroad. Therefore, balance of payments in Georgia has improved. National Bank is in fact trying to control the currency to make sure that it does not appreciate too much because it will not help the economy if the GEL starts going up too much.”

“The slowdown in the Georgian economy is not because of the new government. It started before the elections in October last year.”

“The slowdown in the Georgian economy is not because of the new government. It started before the elections in October last year. People needed time to see what was going to happen. It took time and led to an economic slowdown. The political impact on investment decisions is very small. The new government should probably have a more strategic approach to business people.”

Q. How would you estimate the current investment climate in Georgia? What are the main difficulties and risks faced by investors?

“The messages that the current government is sending to the business sector are confusing.”

A. The business environment is good. The Labour Code is changing. The reality is that nothing is really wrong, but communication is not very good. The current government as well as the previous one is dedicated to having a nice business environment in the country. But the messages that the current government is sending to the business sector are confusing. The fact is that the Government should improve communications. Some of the messages from the Government are not very realistic to me, honestly. It would be much better to scale down the expectations.

The image of the country is nice - no corruption, where you can start your business very quickly and the state is encouraging you. That is all very positive. After the Rose Revolution, those people who came into force were not as experienced as those who are in power today. Let’s give them a chance.

Q. EBRD data shows that the number of EBRD projects and their volume in USD were greater in 2010. What is the EBRD investment plan for 2013?

A. 2010 was a very good year. At that time we had two main projects worth hundreds of millions of EUR. Each year EBRD invests about EUR 115 million in Georgia. Some projects are long-term projects that need time as well as money to be implemented. The implementation process is sometimes dispersed over the years. So the money is dispersed as well. If we look at the fact that there was more money invested in 2010 it means that it was spent on projects in 2011 as well.

As I am in charge of the plans for 2014, I can say that EBRD will have a very good year in Georgia then. We are probably going to invest more than a EUR 100 million. Our investments for this year will grow by 3 percent, I guarantee you. Last year was one of the worst years. Again because of a lot of things that happened in Georgia.

Q. IMF said recently that lowering the current account deficit, which stood at 11.8 percent of GDP in 2011 and reducing unemployment (16.3 percent) are the main challenges for the Georgian economy. From your point of view, how can Georgia achieve these goals?

A. My personal opinion is that working on a decent labour code is a very good initiative. That is one aspect. Another way is that, if the Prime Minister and the Government can find a way of locating investors that are interested in coming to Georgia, let them do it. Resuming trade with Russia is positive, but it will not create a lot of employment. The direction that the Government is taking is a very long one, but it will have results.

Q. You have been working in the region from 2009. What are the specifics of the Georgian banking sector?

A. 2009 was the year of recovery from the crisis. We, as EBRD, are very proud to have contributed to rescuing the banking system. The banks in Georgia have turned into very solid profitable institutions. The banking system in Georgia is very healthy today. Georgia has five reasonably large banks. Compared with other countries where you typically have either one or the largest banks dominating the sector, here you have several banks which are growing to very respectable sizes.

Q. If Russians decide to purchase the largest share of Georgian banks how will it influence the investment climate and economic development in the country from your point of view?

A. Of course it does make sense if Russian banks were to invest in Georgia. Maybe creating one larger bank, that gets about a 20 percent market share, why not? You cannot deny that Russia is the natural trading partner of Georgia. Artificially closing that link is as bad as it would be setting off all Georgian assets to any one single country. There were a lot of Russian investments under the previous government in Georgia. When the political relationship with Russia was very tense, economically the relationship was normal. I do not include the ban of Georgian mineral waters and wine in that. The previous administration did not prevent any significant investments from Russia. There is a point where probably a political decision would have to be made to decide whether the country is still concentrating too much on one single dominating partner.

Q. We frequently hear about the potential of agro business in Georgia. However, we have witnessed a lack of interest in it from both local and foreign investors. How would you estimate its potential?

A. The agriculture sector was left entirely without adequate attention for too many years. Creating a modern agricultural sector requires several things; very large investments are needed to make agriculture more productive. These investments make sense if the country economizes the scales. That means restructuring the lands, the landscape. It will take time and Georgia should do this very gradually, should provide the trainings for new opportunities for those people who are involved in it. Patience is important but it does not mean that the country should do nothing. Georgia should start today so as to have results in five years. I do think that the potential of agro business in Georgia is really huge. But it needs a great deal of work in this direction to get the results in the future.

The Government has to make up its mind on the development of the large HPPs. It is absolutely true that there are environmental constraints, but not all the potential projects have the same environmental issues. There is another issue which is tariffs. Tariffs for electricity have to start on a level which maybe socially will be acceptable, which is the Government’s main objective right now. The electricity tariff in Georgia is one of the lowest in Europe. Investors will not come in without compromising on the ecological aspects of developing HPPs.

“Georgia is a fabulous place. In terms of democracy and fighting against corruption Georgia is a champion. Leaving this job is emotional for me.”



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