The FINANCIAL — “Taking additional social liabilities by the state is not the way to proceed. Additional social liabilities will be justified only after the economic situation is improved and more or less sustainable growth is achieved”, authors of the latest report by Economic Policy Research Center believe.
The FINANCIAL — “Taking additional social liabilities by the state is not the way to proceed. Additional social liabilities will be justified only after the economic situation is improved and more or less sustainable growth is achieved”, authors of the latest report by Economic Policy Research Center believe. The report which was financed by Soros Foundation analyzed the current economic situation in Georgia and offered recommendations to new Georgian Government which is currently facing budget deficit.
Pensions have been increased in Georgia by 20 % since September 1st and it consisted 1,146 mln GEL, according to Ministry of Labor, Health and Social Affairs of Georgia told The FINANCIAL. Increase of pensions and other social benefits were the main promise of Ivanishvili's Government during the pre-election campaign.
Giorgi Kvirikashvili, Minister of Economy said difficulties are caused by deteriorated political situation in the country and destructive actions from the opposition. Meanwhile international and local experts claim problems are due to the decision of new government to freeze all major infrastructural projects, including construction of new railway.
Georgia still needs large basic infrastructural projects, which are rarely financed by private sector only, EPRC claim.
It has been almost a year that Georgian economy is facing deflation. As of September 2013, monthly inflation rate in Georgia is -0.1 percent.
Deflation can be further deepened by decreasing the size of government and investment spending, which was the case in 2013, when the government dramatically cut the infrastructural spending, according to EPRC.
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Re-opening of the Russian market not only resulted in an increase in exports but also in Imports – a 43% increase was observed as of 8 months in 2013, as compared to the same period last year.
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Economic growth in Georgia slowed down starting from the end of 2012 due to the decreased FDI and election related uncertainty. Three out of four indicators have decreased, according to EPRC. There has been a decrease in aggregate demand, investments, and the government spending. The only indicator improved is the net exports; however this improvement was not so drastic to overweigh a fall in all other categories.
As expected and presented in policy briefs on budget performance by EPRC, projected 6% Gross Domestic Product (GDP) growth could not be achieved, and even the adjusted estimate of 3-4% real annual growth is questionable. At the same time, 2013 budget performance also represents a challenge, in the given situation the government will have difficulties in collecting the projected revenues, thus resulting in expenditure cutting.
EBRD forecasts a 3% economic growth in 2013, IMF prognosis is even less – 2.5%.
According to the preliminary data of EPRC, based on the VAT taxpayer’s turnover average growth for the 8 month period equals 1.6%, which is 0.1% higher as compared to the second quarter average. It is noteworthy that since May 2013 change in VAT payer’s turnover as compared to the previous year’s indicator was outright negative, amounting to -3.5% in July 2013. Last time that the country’s economy has experienced a slowdown or even a negative growth was following the global crisis and the war.
The National Bank of Georgia (NBG) has reduced the monetary interest rate to a record low 3.75%; however in the conditions of deflation the real interest rate is higher than the nominal one. Therefore, a possibility of further reducing the interest rate might be cautiously considered if the potential for boosting aggregate demand and spending is obvious. The state has the possibility to stimulate economy through targeted fiscal policy.
Georgia still needs large basic infrastructural projects, which are rarely financed by private sector only.
It has been almost a year that Georgian economy is facing deflation. As of September 2013, monthly inflation rate in Georgia is -0.1 percent.
Main cause of deflationary processes in Georgia are claimed to be decrease in demand, according to EPRC. Decrease in demand on the other hand is usually the result of slow economic growth and rising unemployment. In case of Georgia this slump in demand was followed by the political uncertainty in the country due to the 2012 Parliamentary elections and has been ongoing all the way through 2013 presidential elections, report said.
Deflation can be further deepened by decreasing the size of government and investment spending, which was the case in 2013, when the government dramatically cut the infrastructural spending, according to EPRC.
Persistent deflation can lead to a number of negative outcomes such as falling profits for the enterprises, shrinking employment and income of the population, which in its turn increases the real value of loans for the companies and individuals.
Deflation is usually due to high unemployment, resulting in decreased demand. The issue of unemployment or more precisely low levels of formal employment is an ongoing issue in Georgian reality. Out of total workforce only 32% are formally employed, more than half of the labor force is self-employed, while unemployment indicator is as high as 15% with a projected growth to above 17% in 2014 according to the latest data by IMF.
In the education pillar Georgia ranks 74th among 122 countries and 102nd in the workforce and employment pillar. Education system modernization is a real problem to the country, EPRC believes. “Major problem lays in primary and secondary education, since these are primary drivers of the economy. In addition, given the very low level of salaries, the profession of a teacher remains to be rather non prestigious. Quality of public schooling in the country leaves better to desire. Recent results of teacher’s qualification exams show an alarming trend, majority of the teachers were unable to pass the required minimum in the tests”, report outlined.
Declining trend of FDI is further maintained in 2013; in 2012 a 20% decrease was observed as compared to 2011. “When observing foreign investments form sectorial perspective, we can conclude that most of the sectors saw a declining trend”, EPRC said.
Significant increase in investments was observed in the fields of energy, mining and transport and communications, while the largest decrease in the construction sector.
“Remittances, considered as a reliable source of foreign exchange and household income, have dropped in many Eastern European countries, where they are important contributors to countries’ GDP. The decline is especially evident in the remittances originating in the Eurozone that started its declining trend in the second half of 2012, thus weakening income and domestic demand. As a matter of fact the latter trend does not hold true for Georgia, where remittances are still the most reliable and less volatile sources of external monetary inflows and is almost twice as much as the FDI inflow. Remittances have increased by around 9% as compared to 9 months of the previous year. When observing remittance inflows by countries, we see that the flows are still stable from the EU zone countries, one exception is Spain, and money transfers from this country have decreased by 15% in the first 9 months of 2013, mainly due to high unemployment and economic crisis”, according to the report.
External trade tendencies have shown a positive trend in terms of an 11% increase in exports in the first 8 months of 2013 as compared to the same period last year. It should be noted that this is not a very notable growth;
Georgian exports have grown by 30% from 2010 to 2011, and another 8% from 2011 to 2012.
Increase in exports is mainly due to the re-opening of the Russian market for Georgian wines and mineral waters in summer of 2013. Since the given data only covers 8 month period, report authors were unable to entirely grasp the true effect that the Russian market had on Georgian export tendencies.
Moreover, starting from October 14th Russian market accepts some sorts of Georgian fruits after a 7 year embargo. Some of the produce includes – nuts, citrus, grape, apple, pear, and quince13.
On the other hand, imports have shown a declining trend (4% decrease) that has not been the case since 2009.
The most significant decrease up to 40% is observed in wheat imports (in monetary terms). This decrease is partially due to the decrease in international cereal prices by 15% from January 2013 to August 2013. Decrease in prices started from the end of 2012 and is still the case. A considerable 20% increase is detected in the medicine imports, the latter could be related to the government programs and increased public financing of the healthcare system. Imports of motor cars have been on the rise, which also represents one of the leading export products of Georgia (re-exported to the neighboring countries and Central Asia).
Re-opening of the Russian market not only resulted in an increase in exports but also in Imports – a 43% increase was observed as of 8 months in 2013, as compared to the same period last year. An increase in exports paired with a decrease in imports resulted in improved terms of trade for Georgia.
Negative trade balance for the 8 months of 2013 equals -3119 million USD. Current account balance as a percentage of GDP is projected to improve in 2013 to equal -6.5% a decrease from -11.5%, however is expected to further increase to -7.8% in 2014.
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