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Georgia: Georgia Finance Profile 2012

2012/03/12

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Georgia Finance Profile 2O12

Market-based competition Since the Rose Revolution, the Georgian authorities generally succeeded in creating a solid legal and institutional framework for a competitive market economy. This was mainly achieved by lifting dense regulations, easing business registration, reducing the number of licenses, simplifying the tax code and removing labor protection regulations. This policy was informed by two motives. First, the government aimed at encouraging private economic activity and attracting urgently needed foreign investments. Secondly, the political elite intended to enhance the regulatory capacity of the state and thus to provide all economic actors with the same degree of predictability by enacting only those regulations the state is actually capable of enforcing. Significant progress on both levels is beyond doubt. Remarkable improvements are reflected in the rank Georgia achieved in the World Bank’s Ease of Doing Business Index. It moved from 112th place in 2006 to 18th place in 2008. In addition, the fact that the share of the informal economy was significantly reduced points to the efficiency of state-led efforts to ensure market-based competition. One convincing indicator illustrates how successful the project of expanding the formal economy actually was. Despite a sharp decline in the number of taxes and in the rates charged, tax revenues increased by 172% between 2003 and 2007. At the same time, two major weaknesses persist. On the one hand, Georgia still suffers from a certain gap between legal norm and every-day practice. As was explicitly mentioned in the Human Development Report published by UNDP in 2008, Georgia’s positive ranking mainly refers to legislative reforms. When it comes to assessing the implementation of legal norms in practice, the picture is different. For example, some reports point to the fact that getting taxes paid may turn out to be quite time consuming. On the other hand, agriculture, which is by far the largest employer, is still very much underdeveloped. With very few exceptions, the agricultural sector is not integrated in the market economy. In 2007, it attracted only 1% of FDI.

Anti-monopoly policy Solid anti-monopoly legislation is in place. Whereas in former times implementation was hampered by the widespread practice of granting all sorts of privileges to politically influential entrepreneurs, the emergence of monopolies is nowadays no longer a real problem for the Georgian economy with its high degree of openness to international trade and business. Some concerns remain with regard to equal access to export opportunities.

Liberalization of foreign trade Consistent reforms aimed at reducing the number of custom control institutions, lowering import duties and simplifying procedures for custom clearance have created a very liberal foreign trade regime. In 2007, the government made further progress by uniting the institutions of tax and customs in a single State Revenue Service. By actively seeking involvement in international trade regimes and by concluding bilateral agreements with the United States, Japan, Norway, Canada, Switzerland and the European Union, which offered Georgia a Generalized System of Preferences (GSP), the Georgian government has significantly contributed to facilitating greater access of Georgian goods to external markets. It was precisely this policy that helped Georgia survive the exogenous shock caused by the imposition of the Russian trade embargo.

Banking system In the last years, Georgia has experienced a significant expansion of its financial sector with assets growing by 60% and deposits by 55% on annual average between 2005 and 2007. Having laid the legal and institutional foundations for the development of a properly managed and prudently controlled banking system already years ago, the country has thus taken important steps to expanding its formerly very much underdeveloped credit market. Starting from a low base, credit growth accelerated rapidly until 2008. At the same time, the National Bank of Georgia has successfully assumed a supervisory role and is – to name just one example – applying prudential limits for foreign currency borrowing by commercial banks. Despite impressive progress so far, however, access to credit is sometimes still quite limited. Whereas credit is mainly concentrated in the retail trade and construction sector, agriculture is still underserved. Fairly high credit rates, which started to rise again under the double burden of the global financial crisis and the consequences of the war with Russia in 2008, limits the availability of needed capital injections to small and medium sized enterprises (SMEs). Part of the problem is rooted in the lack of collaterals and time-consuming procedures of risk assessment. Moreover, since 2008 the deterioration of the investment climate has led to a significant increase in banking risks.