The FINANCIAL — Experts from the International School of Economics (Tbilisi State University), Georgian American University and ESM speak with The FINANCIAL about the things newly appointed PM Grigol Mgaloblishvili should focus on. The main gist of the advice is to keep his eyes and ears open to the global financial crisis and Russian aggression.
On October 27 Georgia’s President Saakasvhili, under pressure after the crushing military defeat, asked parliament to approve 35-year-old Grigol Mgaloblishvili, Georgia’s Oxford-educated ambassador to Turkey, to replace the reformist Lado Gurgenidze, former CEO of Bank of Georgia.
“My advice to the PM is to keep his eyes and ears open to a broad range of views on economic policy. Economics is not a religion. Policies should be based on common sense not dogma,” Eric Livny, Executive Director of ISET (International School of Economics at TSU), told The FINANCIAL.
“Budget discipline, further liberalization and regional reform (decentralization) of the tax system, the protection of private assets, property and foreign investments, lower unemployment, monetary stability (inflation and exchange rate) all belong to the important economic issues, at which the activities of each Government could be gauged,” says Archil Jacobashvili, Associated Professor, Georgian-American University (GAU).
“The Government should be focused on political stabilization. There is a flexible tax system, appropriate staff for foreigners but what we are overlooking now is stabilization. You can’t make an investor put money in your country by force. You must offer him a good environment,” Temur Kuprava, Master of Economic and Finance Programmes at ESM business school explains.
“For investors a huge problem is misunderstanding and uncertainty. It will last till we stop elucidating questions about MAP. After that, it will not matter if we receive it or not, because the rules of play will be changed and we will know how to act. I can’t predict if we will receive MAP or not but if it’ll happen before spring, this will mean that stabilization will be reached only after it,” Temur Kuprava says.
“Maintaining financial stability and putting out fires in the banking sector in the short term. The banking system is still quite fragile. The main question is what will the future of the real estate market and tourism be. Some of the banks have fuelled the real-estate bubble by financing construction and mortgages. I have not yet seen any new data on the real estate sector,” Eric Livny, ISET, says.
“But my impression is that the market is dormant. Many construction projects – including hotels and ambitious residential projects – are on hold or frozen. Sellers on the secondary market are holding on to their property, not yet willing to accept lower prices. Buyers are also waiting, expecting a drop in prices. The market is yet to adjust but the clock is ticking for many medium size developers and this will have an impact on the banking sector. The National Bank has to be ready to step in when necessary,” Livny added.
“Apart from the exigent happenings like the Russian war and the financial crisis, which require extraordinary reactions by the Government, Georgia faces several economic challenges, among them priorities can be named,” Jacobashvili, GAU says. “Most of all Georgia needs modern capital markets, an investment infrastructure and culture to win the confidence of foreign investors.”
“For example, with time regional imbalances can become a serious problem needing to be solved. Not everyone can be employed in Tbilisi and Batumi, whereas many regions are becoming emptied. The education system, especially a general school reform could also be named a priority. National education must prepare and produce young people who are competitive at least on the national labour market,” Jacobashvili says.
Kuprava, ESM, underlines small and medium business and agriculture, as priorities.
“Most important is the support of small and medium business and agriculture. The latter has big potential that is barely being realised. The ground in villages is almost exhausted. It will take a long time to restore it and to get profits. Even banks are not interested in getting loans for this sector.”
“Agriculture faces a huge problem which is connected to its long-term profits. Postponing long-term projects is not only our government’s problem. It’s characteristic of democracy. A democratic structure is characterized by short-term action. That’s why the gurus of economy sometimes say that autocracy is better than democracy regarding how it prevents making decisions for a long time. Some economists have correlated the steps of economical increase in democracy and autocracy and have found that an autocratic system ensures more stable increase,” Kuprava added.
“In the meantime, priority should be given to investment and job creation. Something must be done to encourage firm entry and competition in key markets and eliminating monopolistic bottlenecks in sectors like utilities, telecom, food processing (e.g. dairy) and import of pharmaceuticals to name just a few. (Some of these “bottlenecks” smack of corruption). Building a strong relationship with the new U.S. administration, while at the same time making a serious effort to mend fences with Russia. In the long run, Georgia cannot escape its geography and can benefit enormously from access to the Russian market,” Livny, ISET, says.
The financial aid promised by foreign governments has already been determined for rebuilding measures after the Russo-Georgian war. They include the reconstruction of damaged villages and cities, the throwback of refugees and their support.
“A part of the aid should help the Government to ensure monetary and fiscal stability, especially the stand-by-facilities of the IMF. Among international donors helping Georgia are also some international corporations, who are planning direct investments in Georgia. With structural reforms the Georgian Government could promote their engagements in financial business, in the industrial sectors and tourism,” Jacobashvili, GAU, said.
In Livny’s words international financial aid should be focused at “Infrastructure and investment, not current consumption”.
“We can’t plan something stretched in time. The main focus of financial aid must be at the banking system, as our country is not large and the banking system was the main motto of our economy. If every small subject attracts some kind of investment in the end it will help the whole economy. Not just banks but even all commercial structures should be looking for investments,” says Kuprava, ESM.
“The guaranty of inside political stabilization will be a step from foreigners, if they create a group who will control the spending of humanitarian aid,” Kuprava added.
Next to the whole world Georgia is facing the world economy crisis.
“Georgia has been partially insulated from the global economy. Its growth has not been export-driven and hence a ‘global recession’ will not have an immediate impact via the trade channel. A global financial crisis on the other hand will certainly restrict Georgia’s access to capital. Those organizations that relied on international financial markets will have a hard time surviving in the new environment. The Bank of Georgia, until recently the rock of Georgia’s financial sector, has seen its stock plunging from USD 29 per share in June to less than USD 6 in November 2008,” Livny says.
“We are seeing that industrial nations are getting bailouts from their governments. They are trying to avert the economic recession. As opposed to them, the capabilities of our Government are limited. So: “Be Risky, Be Liberal, Be Happy” – the continuation of the reforms towards more liberalizations is the best answer to the crisis,” says Jacobashvili.
“The world crisis first of all influenced countries which we borrow money from. Georgia’s three leading Banks (TBC, Bank of Georgia, People’s Bank) must cover foreign loans to the amount of USD 500 billion. This aid will be a way to survive in this situation. Fear of the future can’t prevent them from taking big risks,” Kuprava, ESM says.
“The Georgian Government should continue the direction of social projects, but perhaps more emphasis should be given to job creation through national projects in such spheres as, for instance, renewable energy, community-based tourism infrastructure. Such projects have the potential to increase employment and wealth creation in relatively poor and remote regions of Georgia” says Livny, ISET.
In Jacobashvili’s words social systems are needing fundamental reforms.
“We have about 2 million citizens without medical insurance. State organized medical insurance is not necessary, but it should be obligatory for all employers and employees. The pension system could be more flexible. Regarding what the national age pyramid, which seems to be having a downward turn, and the experience of the Eastern European countries with transitional economies shows, the “Generation Agreement” led the pension models into the crash. Besides the minimal state pensions we need more private organized pension funds, contributed by the future pensioners themselves during their youth,” Jacobashvili added.
“There was a new tendency of making additional pensioners’ funds. The Government must reduce investments in the defence sector,” Kuprava, ESM advises. “That’s why an alliance like NATO is important and profitable for us. It will help to reduce expenses. According to my information around USD 10 billion was spent on defence recently.”
According to Livny, ISET, “Georgia does not have the resources to engage in populist measures. The PM should do what is right subject to the existing budget constraint.”
“Mgaloblishvili can be marketable on the political arena by using his diplomatic skills, trying to listen, and being ready to compromise. It is essential for the PM and Government to demonstrate more openness and improve in the public relations department.”
Written By Madona Gasanova