The FINANCIAL — The Country Partnership Strategy (CPS) for Fiscal Year (FY) 10-13 has been prepared by the World Bank Group against the backdrop of twin crises – the August armed conflict with Russia followed by the global economic downturn.
Together with the International Finance Corporation (IFC), IDA/IBRD Strategy focuses on addressing the short-term impacts of the crisis and strengthening medium term competitiveness for growth.
As an outcome of the abovementioned strategy we should see improvement in public resource management, strengthening of key financial institutions, increased employment through bank financed projects, improved quality of education and social services, upgrading of the transport corridor and increasing connectivity, which will finally lead to accelerated business growth.
The proposed IBRD and IDA operations for FY10 (July 1, 2009 – June 30, 2010) provided funding of 85 million USD for a Development Policy Operation (DPO) series plus financial support for building East-West highways and Kakheti roads amounting to 205 million.
As of the end of March 2010, total bank exposure to Georgia amounts to the equivalent of 1.4 billion USD with disbursements amounting to 1.2 billion USD. The active portfolio consists of 11 IDA credits, 3 IDA Grants, and 4 IBRD loans for a total commitment of 469 million USD, of which about 207 million USD is disbursed. The Bank is also administering about 7 trust funds in support of its programme.
As the World Bank Country Director for the South Caucasus Mr. Asad Alam stated, “There is huge untapped economic potential in Georgia. Georgia stands at the crossroads of East and West, which provide it with a unique locational advantage. At the same time, its openness to the world and potential for growth in key sectors, such as agriculture, tourism, hydropower, and education has a lot of promise.”
Q. Since the inception of its programme in Georgia in 1995, the World Bank has financed 46 projects with total commitments of up to 1.2 billion USD. What is the approximate sum of the credit line that WB will launch for Georgia in 2010?
A. We now have a Country Partnership Strategy that we came out with in September of last year. According to this strategy, total amount of financial support amounts to 750 to 900 million USD for FY09-13. Part of it is on a concessional basis. IFC, which is a part of the World Bank Group, provides different loans and equity investments. Over the past 9 months we have provided loans to Georgia of about 300 million USD, a lot of it has been allocated for building new roads. This has included the Development Policy Operation (DPO), which provided 85 million USD of concessional credit in July 2009. Later on in the fall we had 3 separate loans which were also spent on rehabilitation of roads like those in the Kakheti region and East-West Highway of about 210 million USD.
Q. Could you tell us how the World Bank financial support is being spent by the Government?
A. As you may know, we provide loans and other types of financial aid to the Government, but until the process of its spending starts, it takes time because the Government has to find a contractor, prepare all the necessary materials, equipment and then completing the work takes 2-3 years depending on the different types of projects. Duration differs, of course, but a very important thing is that we provide financing for them. For example, currently we are having very good infrastructure projects to improve the water supply in different regions and cities, and another project is to modernize tax administration so that we are going to modernize the customs units, equipment, so that they can provide better services to the citizens of Georgia.
The abovementioned two projects will be financed to the amount of 60 million USD. We are also working on a DPO-2 of 25 million dollars, which will support budget expenditure and overall, will lead to increased social spending for the poor. Actually, these amounts of money are still going to be confirmed by our Board of Directors and these are the tentative amounts that we are working on right now. For the 2010 calendar we have new lending of about 85 million USD. Apart from that, IFC will also finance other projects to take equity stakes in Georgian companies and provide some loan financing too.
Q. You are the Regional Director of the World Bank. Please describe the Georgian economy from a regional perspective: Which specific fields can Georgia develop?
A. Well, every country is different and unique, all of these three neighbouring countries have some similarities, they have a common legacy as being part of the former Soviet Union, they all have very high levels of education, technical skills are good, but they are also very different. As Azerbaijan is an oil rich country, and its economic structure is different, similarly Armenia and Georgia are very different. Even if you look at the growth in these three countries, figures are quite different, their economic regimes are different. They have all been affected by the economic crisis, but in different ways. What is important about them is that they are increasingly getting integrated in the global economy and they see their future as part of the global economy, which they consider to be the best way to grow, to expand their markets and to attract foreign investment.
Q. After the beginning of the global recession, the Georgian banking sector managed to accept a huge amount of financial support from different international financial institutions. But still, local banks limit giving out loans. What can be done to stimulate crediting?
A. The banking sector is privately owned in Georgia, and the provision of credits is private sector activity and depends on the demand and supply of it. On the demand side we have the global economic recession, and Georgia has also been affected by that recession. As you know, GDP contracted by 4% in 2009, unemployment is higher and that has reduced the demand for credits also. At the same time, on the global scale, crisis has hit banks, but Georgian banks were less affected because they had a stronger capital base and they were able to manage their financing needs better than other banks did in other countries. I think it shows the strength of the banking system that it was able to withstand the crisis. But one implication of the global financial crisis is that non-performing loans all over the world have increased, so this puts pressure on the balance sheet of different banks, and if the profitability of banks is down then it limits the expansion of credit. Banks have also learned from this economic crisis and they have globally tried to tighten their procedures of crediting businesses making sure that lending has a positive rate of return. This is a cyclical thing that we are seeing and as the world recovers from the crisis, Georgia will also likely show positive growth of at least 2% in 2010.
Q. Banks are offering limited loans with high interest rates. Despite the recommendations and guarantees from the Government, banks did not manage to reduce their interest rates claiming high risks on the local market. How could such a position influence future development of the economy?
A. Actually, the level of interest rate that a bank charges for its loans depends on many different factors, one is the level of competition in the economy, but this is not the case in Georgia because there are many banks operating. Secondly, the rate that banks charge depends on whether it actually covers the cost of acquiring the funds for the risk that it is incurring. The costs of acquiring the funds increased during the crisis. It is not very high yet, but globally it is more difficult for the banks to secure additional financing. The best chance to have low interest rates is to have a dynamic economy where competition is very strong, cost of economic activity is low, that itself supports issuing low interest loans from the banks’ side, and also maintains profitability at the same time.
Q. What is your advice for Georgian banks, which types of businesses should be prioritized when giving out loans?
A. Actually this depends on the decision of the banks, because Georgia has a very dynamic economy. There is a lot of untapped potential in agriculture, there is a construction industry which has fallen recently but is going to rebound soon, development of consumer goods, financial services etc. But investment decisions for banks depend on market forces, and on cost-benefit analysis that banks conduct on different investment options.
Q. World Bank gives Georgia the highest rating in Doing Business. It is said that Georgia is leading in reforms, in combating corruption, easy to start up a business in the country, etc. But the reality is that FDI has fallen sharply and there are some problems with already existing foreign firms, and unemployment. How would you comment on the issue?
A. For the last few years Georgia’s economy has been liberalized, and is one of the leading reformers in the world – number 11 in Doing Business according to our assessment. Until the 2008 crises hit Georgia, growth had been strong, foreign investment high, and poverty falling. So, these factors show the strength of the policy regime. Also, proximity to both eastern and western markets facilitates Georgia’s strategic role as a transit country for energy and other goods. The country also has a strong skills base, as it has been strengthening higher education institutions and their curriculum, promoting computer skills and English language. These should be the main reasons why foreign investors should be attracted to Georgia.
The World Bank is a partner in helping Georgia improve prospects for higher investment. In 2007 the Georgian economy was booming with of FDI of 2.2 billion. Even last year, when there was a crisis in the world Georgia was able to attract FDI of around 760 million USD, which is quite remarkable for a small country because it is about 7 percent of the GDP. But obviously this is not enough, and the negative effects of the conflict and the global crisis have mainly accounted for a reduction in FDI. The way to overcome this is to improve the economic environment of the country even further by giving further assurance to the investors and ensuring a stable political and social environment.
Q. What are the main risks that foreign investors face in Georgia?
A. When talking about risks, we have to take a look first at the global perspective, and the regional, and then the country-specific. As you know, the global economic downturn has adversely affected the investment climate. But we also see regional risks as there are still unresolved conflicts in the South Caucasus, leading to some closed borders. Then you have to look at the risks within a country in terms of the stability of the economic environment, and the profitability of investing in any particular sector of the economy or a project.
Q. World Bank recently became involved in agriculture projects, offering trainings and seminars. What is the future of Agriculture and Tourism in Georgia? How would you evaluate these sectors?
A. Well I have been living in Georgia for the last year and I am absolutely amazed by the breathtaking beauty of the Caucasus mountain range. So it is quite obvious that Georgia has huge tourism potential, but promoting tourism is very challenging because there is huge competition in this sector globally. One thing I want to note is that upon the growth of the middle-class, their demand for more leisure and tourism activities increases. This provides an opportunity for Georgia to tap its natural resources for tourism. The prospects for tourism have been improving over the years with the building of a new airport, roads, hotels, tourist destinations, etc.
If we talk about Georgian agriculture, there is also huge potential with its fertile land, with many types of products grown and exported. But a very important thing to keep in mind is that currently trade in primary products has low return. But if the country transforms those raw materials into different types of products like juices, jams, etc., then it will definitely increase the profitability. The problem with agricultural products is that they lack proper standards to be exported to European markets, as well as to neighbouring countries. So the key point is to establish the standards and brand Georgian products, so that they become competitive in foreign markets.
Q. Could you tell us how the GEL’s decrease/increase in value could affect foreign trade?
A. The value of the Georgian Lari is determined by market forces. This is the policy of the National Bank and the Government, and the best strategy for a small, open economy.