World Bank ECA Regional Vice President: “Reforms to enhance the investment climate and expand access to infrastructure have improved the country’s competitiveness”

World Bank ECA Regional Vice President: “Reforms to enhance the investment climate and expand access to infrastructure have improved the country’s competitiveness”

World Bank ECA Regional Vice President: “Reforms to enhance the investment climate and expand access to infrastructure have improved the country’s competitiveness”

The FINANCIAL -- “In the area of private sector support and job creation - tourism development and the expansion of hospitality infrastructure demonstrated positive spillover effects on rural communities,” said Mr. Cyril E. Muller, World Bank Regional Vice-President for Europe and Central Asia, in an exclusive interview with The FINANCIAL.

“Investments in infrastructure have indeed been an important part of our engagement. Transport and roads sectors have been key. But we support local infrastructure linked to tourism and cultural heritage through a series of regional development projects as well. The Bank-financed regional development projects have contributed to an increase in tourism spending in the targeted regions by 230 percent between 2012 and 2015,” noted Mr. Muller.

The private sector is getting stronger because of market diversification. Reforms directed towards increasing market accessibility, customs management, strengthening budget and liberalizing internet and telecommunication boost the country’s competitiveness, according to the World Bank.

“For the future, we are currently undertaking a Systematic Country Diagnostic, which will help us to identify the sectors where the needs may be the greatest and we will work with the Government to identify the projects where our engagement may be most needed in the future,” Mr. Muller told The FINANCIAL.

Q. The Doing Business Index, which is one of the most important indicators for local businesses and investors, is particularly important in developing countries like Georgia. Could you please evaluate the progress of Georgia since last year and indicators, like resolving insolvency, which are still in need of improvement?

A. Georgia has been a very strong performer in the World Bank Group’s Doing Business Index. The country received a ranking of 16 out of 190 economies in 2017 Doing Business. Georgia is also among the top 10 global reformers for implementing reforms to their business regulations.

Over the course of last year, Georgia implemented five reforms in the areas of: getting electricity; registering property; protecting minority investors; trading across borders; and paying taxes. For instance, in the area of electricity, the focus was on improving the reliability of access to electricity for consumers.

There are still areas where more needs to be done. For example, resolving insolvency, where Georgia ranks only 106th. A forgiving insolvency framework that does not stigmatize or punish business failure is essential to promoting entrepreneurship. The average recovery rate, which means how many US cents on the US dollar claimants recover from an insolvent firm, is only about 40 US cents in Georgia while the OECD average is above 70 US cents. Higher recoveries lead to increased access to credit, reduced credit costs, and a higher financial participation, particularly for SMEs. The International Finance Corporation - the private sector arm of the World Bank Group - is working with the Government and stakeholders to address current weaknesses in this area.

Q. Lower oil and commodity prices have affected the economy of Georgia. How did the lower oil prices affect the partner countries of Georgia?

A. On balance, the direct impact of lower energy prices benefits Georgia’s economy. However, some of the indirect effects have been negative. Georgia has strong economic links with some oil exporting countries and their economic difficulties have led to lower trade, investment and remittances into Georgia. These countries have now adjusted to lower energy prices, and we expect their economies to rebound, which should create new opportunities for Georgia.

Q. The local currency has been experiencing a high rate of devaluation. What are the forecasts and expectations about the protracting crisis period and how can countries like Georgia cope with and react after the initial shock?

A. All countries in the region including Georgia have faced a difficult external economic environment. In these circumstances, letting the currency float and depreciate was the right policy decision. Most of the adjustment to this new external environment has now taken place. Going forward, it would be important to continue the policy of targeting inflation and using the exchange rate as a buffer to changing external factors. Furthermore, for the Georgian economy to improve its competitiveness, it would take continued deepening of the financial sector, expanding the export base by connecting Georgia to the world, and investing in institutional capacity and people’s skills.

Q. According to the World Bank and Georgia Partnership Strategy, the main objective is to achieve faster and sustainable growth while concentrating on poverty reduction and social outcomes as well. There are two main ways to reach these goals - strengthening public service delivery, and enabling private sector-led job creation to improve competitiveness. Where is Georgia now in this regard, and how can the process be boosted in order for it to move forward faster?

A. Let me first say that our programme will continue to focus on reducing poverty and supporting shared prosperity. We know that improving living standards on a sustainable basis means creating jobs and equal opportunities for all. Georgia’s progress towards improving the coverage and targeting of social benefits is moving in the right direction. Implementation of universal healthcare reform has resulted in over 90 percent coverage of the population to access healthcare services. Targeted Social Assistance (TSA) coverage of the poorest decile was estimated to be on average at 58 percent in 2015. Pension and deposit insurance system reforms are underway for completion in 2017. Targets were achieved on teacher effectiveness evaluation tools, while the school-based quality assurance reforms still have a long way to go. Support through the Inclusive Growth Development Policy Operation (DPO) series led to improvements in the budgeting and financial management.

In the area of private sector support and job creation - tourism development and the expansion of hospitality infrastructure demonstrated positive spillover effects on rural communities. The Bank-financed regional development projects have contributed to increase in tourism spending in the targeted regions by 230 percent between 2012 and 2015. Tourism employment in the Kakheti region, for example, increased by 92 percent during 2012-14. Access, quality, and sustainability of key infrastructure have improved overall. Travel time from Tbilisi to the regions and within the regions significantly reduced through infrastructure investments. Reforms to enhance the investment climate and expand access to infrastructure have improved the country’s competitiveness. Our programmatic Private Sector Competitiveness Development Policy Operations reinforced the Government’s efforts to increase private sector competitiveness through business diversification and innovation. Various interventions from the World Bank helped the Government to improve market access, strengthen budget and customs management, and liberalize telecommunication and internet services.

Q. The World Bank supports various infrastructure projects in Georgia, where these are the main priority. Except for the transport and roads sector, which sectors or fields could draw the interest of the Bank in the future?

A. Investments in infrastructure have indeed been an important part of our engagement. As you mentioned, transport and roads sectors have been key, and we are proud to have supported the rehabilitation of about 1,200km of secondary roads as well as continued investments in the East-West Highway. Georgia has also been working on improving the road safety agenda in recent years and the World Bank is pleased to be part of this effort. With respect to other sectors, we support local infrastructure linked to tourism and cultural heritage through a series of the regional development projects. Under these projects a wide range of investments have been made in many areas starting from water treatment and sanitation, local roads, parks and public spaces, to  the rehabilitation of historic sites, museums and monuments. These projects are currently active in Kakheti, Imereti, Samstkhe-Javakheti and Mtskheta-Mtianeti regions. Other infrastructure sectors in which we are engaged include: the energy sector, where the Bank works with the Government to improve power transmission to the south-western part of the grid and upgrade electricity exchange systems. In the irrigation sector, the Bank finances a programme which supports rehabilitation and construction of irrigation systems in Tetri Tskaro, Sagarejo and Gori. 

For the future, we are currently undertaking a Systematic Country Diagnostic, which will help us to identify the sectors where the needs may be greatest, and we will work with the Government to identify the projects where our engagement may be most needed in the future.

Q. The difference between wealthy members of society and citizens below the poverty line still remains one of the biggest problems in the country. How can we narrow the gap between rich and poor?

A. Inequality remains a big challenge in many countries in the region and in Georgia, where large gaps between urban and rural areas persist. Learning from other countries that have reduced inequality is important. Key interventions that stand out are vigorous investment in early childhood development, universal healthcare, quality education, conditional cash transfers, and investment in rural infrastructure. Strengthening equal opportunities for all and targeting social assistance to the poorest will be key to reducing inequality and improving living standards across the various segments of Georgian society.

Q. You worked on Georgia in the past and know the country. How do you see the future of the economy in Georgia and what are the fields you believe young people should pursue to support their country in the future?

A. Georgia has come a long way and its future is full of opportunities. The country can build on its achievements, and I really hope the World Bank can help inspire young people to invest in their country. I met with young entrepreneurs and I saw their energy, creativity, and dedication. Georgian people want to make a difference. In this world of rapid technological change where new jobs keep being invented while others become obsolete, investing in skills has become key. Looking to the future, I see a path for Georgians to form a cohesive society with a skilled workforce flexibly adapting to new markets and connected to the regions and the world, where the creativity and passion of Georgians is rewarded.

Author: Nikoloz Charkviani