The FINANCIAL — Minister of Finance, Kakha Baindurashvili, on behalf of the Government of Georgia, and the World Bank Regional Director for the South Caucasus, Asad Alam, have signed a Loan Agreement on a US$147 million IBRD loan for the Third East-West Highway Project (TEWHIP) for Georgia.
The loan was approved by the World Bank Board of Executive Directors on 10 September, and is the third in a series of investments aimed at improving the E60 Highway, Georgia’s key transport corridor. The project will upgrade the E60 highway between Sveneti and Ruisi to a four lane divided highway. It will also assist the government in implementing reforms in the transport sector, including strengthening of the Roads Department, improving private sector participation in road maintenance and operations, road safety, and engineering education.
Since joining the World Bank in 1992 and International Development Association (IDA) in 1993, the commitments to Georgia total approximately US$1.2 billion for 46 projects. The World Bank Board of Executive Directors approved a US$147 million IBRD loan for the Third East-West Highway Project (TEWHIP) for Georgia. This is the third in a series of investments aimed at improving the E60 Highway, Georgia’s key transport corridor. IBRD Flexible Loans with an interest rate equal to 6 months Libor carry a final maturity of 30 years, including a grace period of 5 years.
Since the inception of its program in Georgia in 1995, the World Bank has financed 46 projects with total commitments up to $1.2 billion. The current portfolio consists of 11 active projects with commitments of $295.3 million.
According to World Bank, as a result of the three year project, road transports costs will be reduced, and access, ease of transit, and road safety along the central part of Georgia’s East-West corridor improved. The capacity of the Roads Department and relevant Government entities to plan and manage the road network and to improve traffic safety will also be strengthened.
“This operation is a major element of the new Country Partnership Strategy for Georgia,” said Asad Alam, World Bank Regional Director for the South Caucasus. “It will not only strengthen Georgia’s competitiveness, economic growth, and job creation prospects over the medium-term, but will also help to stimulate economic recovery and create new employment in the immediate future.”
Christopher Bennett, Task Team Leader of the Project said the E60 highway carries over 60 percent of the foreign trade that uses Georgia’s roads. He also said that the government’s program to upgrade the E60 will help cement Georgia’s position as a key transport corridor. The government’s support for addressing road safety issues on the E60 as an integral part of upgrades to the corridor is particularly encouraging.
The Third East West Highway Program significantly scales up Bank support to Georgia in the roads sector. It builds upon the USD19 million First East-West Highway Improvement Project, the USD35 million Second East-West Highway Improvement Project (SEWHIP), and the USD20 million SEWHIP Additional Financing. These efforts are part of a larger roads program that also includes financing for ongoing investments in Local and Secondary Roads.
“The CPS envisages full use of the remaining IDA-15 envelope (projected at about USD130 million), an indicative IBRD lending amount of about USD266 million over this four fiscal year period, as well as projected IFC commitments of USD210 – 360 million. Combined with undisbursed amounts of about USD135 million as of end-FY09, total financing during this period from the World Bank Group is expected to total about USD 740- 900 million. Bank and IFC lending will be complemented by a focused program of advisory services,” World Bank notes.
World Bank reports that in January 2008, the Government laid out a medium term reform program entitled “United Georgia without Poverty”. The program established policy directions in a number of action areas, including macro-economic growth, lower taxes, creation of jobs, focusing the budget on social programs, extending health insurance for the poor, rehabilitating the road network, increasing hydropower generation, increasing agricultural exports, and strengthening higher education.
“Our strategy is trying to maintain key social services for the poor, For instance we are trying to help scale up the target of social assistance programs, which is very affective tool that the government has to try to address extreme poverty in the country. At the same time we are trying to help expand the insurance program, the medical insurance program for the poor so that they can have the basic services even in such time of crisis. We also try to help create some short term jobs like working on developing infrastructure or roads in different places of the country mostly in rural areas where most of the poor people leave,” Asad Alam says in the interview placed on World Bank website.
“Strategy for Georgia has been prepared against the backdrop of twin crises – the August 2008 conflict followed by the global economic downturn,” said Asad Alam. “As a result, the joint World Bank/International Finance Corporation strategy focuses on pressing post-conflict and vulnerability issues, and strengthening the foundations for competitiveness and growth in the future.”
“The financing envelope includes about $130 million through the International Development Association (IDA), the Bank’s highly concessional lending arm, International Bank for Reconstruction and Development (IBRD) lending of about $266 million, disbursements under ongoing IDA/IBRD projects of about $135 million, and International Finance Corporation (IFC) investments and lending of about $210-360 million,” World Bank says.
According to World Bank in Georgia there are 11 ongoing Bank supported projects in health, education, agriculture, roads, municipal development, and internally displaced persons (IDP) support that are aimed at helping Georgia’s poorest to weather the financial crisis and increase the country’s competitiveness in the future. In addition, new infrastructure investments will focus mostly on road improvements to help reduce transport costs, improve internal connectivity, and strengthen Georgia’s role as a transport corridor within the South Caucasus.
“These projects will build on the success of other roads initiatives, which have seen travel times reduced by as much as 30 percent on some highways. Roads investments will also help create much needed temporary jobs and, over time, will boost competitiveness, growth, and job creation prospects,” says World Bank .
According to World Bank, preparing research and analysis will be another critical aspect of the Bank’s work in Georgia, to aid the Government in making policy choices and in meeting the immediate needs of the most vulnerable in Georgia while strengthening competitiveness. Bank analytical work and dialogue will include analysis of public expenditure choices, poverty, post-conflict monitoring and reporting, strengthening health and education services, and the welfare and economic integration of those displaced by the conflict. It will also support improving the business and financial sector environment, and supporting greater trade integration and quality standards.
“Georgia is seeing substantial progress in its development efforts. Labeled a fragile state just a few years ago, it now boasts a dramatic increase in foreign investment in Georgian business, from 8.3 percent of GDP in 2004 to 16.4 percent in 2007 before the 2008 conflict. In fact, the business environment has improved so much that a recent survey showed a sharp drop in bribe frequency from 38 percent in 2002 to 4 percent in 2008,” World Bank reports.
According to World Bank Group starting a business in Georgia is easier as well, and Georgia is now ranked eleventh in the world for the ease of Doing Business according to the most recent report. In 2005, it took 21 days and cost 46.8 percent of the average Georgian’s annual income to start a business, making it time consuming and costly for small business owners to stimulate growth. Now, an entrepreneur can start a business in just 3 days, with only 3.7 percent of their income. The time it takes to export products has been reduced by 44 days to just 10 days, and the time it takes to import has been reduced by 39 days to 13 days.
The recovery in emerging markets is likely to be weak and growth will remain limited, a senior World Bank official said on Thursday. "So far there have not been any major policy reversals in emerging markets…recovery is going to be weak, growth slow for the medium term," World Bank managing director Ngozi Okonjo-Iweala told an emerging markets conference, according to Reuters. "Vulnerability to global confidence crises will continue to define emerging markets as an asset class."
World Bank Group Directs US$12.5 Billion in Fiscal 2009 to Mitigate Impact of Global Economic Crisis in Europe and Central Asia.
According to World Bank during Fiscal Year 2009, a period marked by the sudden onset of the global financial crisis, the World Bank Group committed US$12.5 billion in support to its members and to private business in the Europe and Central Asia (ECA) Region. The World Bank Group commitments in ECA grew in fiscal year 2009 by 58 percent, as financing was rapidly approved to help cushion the impact of the global economic crisis on the poor and to position countries for post-crisis recovery.
Recent Economic Developments
Strong reforms generated rapid growth from 2004 through mid-2008. Georgia implemented far-reaching reforms over this period in the areas of strengthening public finances, improving the business environment, upgrading infrastructure services, and improving social services. These structural reforms generated strong growth in excess of 9 percent per year and improvements in the quality of life for many Georgians.
The double shocks resulting from the August 2008 conflict and the global economic crisis have resulted in a number of significant shocks to growth and stability, including a deterioration in investor and consumer confidence, contraction of liquidity in the banking system, some infrastructure damage, and increased numbers of internally displaced persons (IDPs). The impact of these shocks has been a significant decline in investment and economic development, stress on balance of payments due to a slowdown in FDI and other private capital inflows, and stress on public finances from revenue shortfalls and increased expenditure needs. Economic growth, estimated at 2.1 percent in 2008, represents a sharp slowdown from rapid growth in excess of 9 percent during the preceding four years. The economy contracted by 3.2 percent during the second half of 2008. Inflation (end-of-period) has significantly declined to 2.1 percent as of end February due to drop of world prices on oil, food and other essential products. Slow down in domestic demand also contributed to the price downward adjustment on the local market. Despite significant shock to the gross international reserves and depreciation pressure on the foreign exchange rate the government managed to maintain stable exchange rate with one-time adjustment and increase reserves to the level comparable to before-crisis one.
Net foreign direct investment (FDI) inflows fell from $1.65 billion (16.3 percent of GDP) in 2007 to $1.2 billion (9.1 percent of GDP) in 2008. In the aftermath of the August conflict, an IMF mission prepared a Standby Arrangement (SBA) for $750 million over 18 months to bolster investor confidence and support international reserves, which was approved by its Board on September 15. The First Review of the SBA was completed on December 15 and the Second Review – on March 23. The IMF identified risks of farther downturn, though endorsed the fiscal stimulus package for 2009 as well as other macro-policies carried over last months and recommended higher degree of flexibility of foreign exchange policy.
The World Bank last week announced approval of a $400 million loan to boost Ukraine's banking sector, which has been shaken by a confidence crisis and a run on banks amid a severe recession. The loan was part of a $750-million credit package meant to stabilize Ukraine's financial sector. The second installment, of $350 million, is due to be allocated next year, according to the bank.
Ukraine's financial crisis has been one of the worst in Europe. The economy is expected to shrink by 15 per cent this year after nearly a decade of robust growth due to a fall in global demand for steel and chemicals, the country's top exports, according to the World Bank. Inflation is forecast to reach 13 per cent.
Improving external competitiveness of the private sector is of particular importance in generating sustained growth going forward. Rapid economic growth during 2004-07 has not been associated with rapid growth of exports. In fact, the export share of GDP has remained relatively stable at about 31-34 percent during this period, with GDP growth driven primarily by construction, telecommunications, finance, and other services. The impact of recent double crisis has been negative in terms of trade intensity. Both, imports and exports flows have decline over last six month after August more than by 30 percent. However, imports value has been affected in nominal terms with greater extent, contributing to the improvement of trade as well as current account deficit. The gap after slowdown in the private financing has been filled out and compensated by the outstanding international support and official financial inflows, accounting to over 10 percent of GDP by the end of 2008.
Although Georgia is likely to require significant external financing during 2008-2011, its external debt is expected to remain sustainable in the medium term. As a result of appropriate debt management and effective macroeconomic policies, Georgia had a low level of indebtedness prior to the economic downturn, with external public debt declining from 44.9 percent in 2003 to 34.5 percent in 2004, to 26.6 percent in 2005, 22 percent in 2006, and a record low of 17.6 percent in 2007. Following the August 2008 conflict, as Georgia has been receiving significant foreign financing for post conflict rehabilitation and economic recovery, with much of the assistance is in the form of grants and concessional loans, its debt ratios are projected to rise, though should remain significantly below relevant performance thresholds.
Written By Tako Khelaia
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