Georgia’s Finance Minister: Ongoing Reforms Guarantee More Growth

Andrew Wrobel (AW): If we look at Georgia’s economy, a decade ago the growth was truly robust — over 12 per cent in 2007. In 2006, it grew again at 6.2 per cent in 2010 but since then the growth has slowed. In 2018, the forecast is over 4 per cent — better, but there is still a lot of room for improvement?

Mamuka Bakhtadze (MB): Well, the growth rate of real GDP is estimated to be at 4.8 per cent in 2017. This is decent, but longer term projections are much more impressive. Our estimate on potential growth is around 5 per cent. The International Monetary Fund (IMF) forecast is 5.5-6 per cent in the medium term, attributed to our very intensive economic reform programme. The IMF also says that Georgia will be the best performing economy in the region, unlike the years 2004-2012, when many of our neighbours were growing faster. At that time we had lowest growth rate in the south Caucasus region.

The most important achievement of our economy growth over last several years is its inclusiveness. Unemployment is on a downward trend and poverty is also falling, unlike in the past, especially between 2004 and 2007. I also want to underline that the quality of economic growth is much better. Economic growth is export driven and the current account deficit is shrinking.

AW: So tell me what has stopped the economy from going back to that robust growth in the last years?

MB: We have to bear in mind that the years between 2014 and 2016 were unfavourable globally, especially 2016 which was the slowest year of growth since the global financial crisis. So this slowdown is attributable to the external environment. Development in the region was very hard. Countries in the region were experiencing recession or were growing at close to zero rates. In these circumstances 2.8 per cent growth looks quite decent.

We became the leading country in south Caucasus region in GDP per capita terms and also in terms of GDP growth potential in the medium term. As I said earlier, our economic performance is determined significantly by the external sector. Slowdown in the global economy was the main cause of our growth. Besides this, ongoing and planned reforms guarantee less vulnerability and more inclusive growth.

AW: How would you like to leverage that going forward?

MB: Our response to these challenges is structural reform. The government has elaborated the Four Point Reform Programme plan aiming at promoting savings, productivity and export growth, diminishing vulnerabilities and guaranteeing more robust, healthy and inclusive economic growth.

The reform programme has been positively assessed by international organisations. The clearest evidence is the new programme with the IMF which was signed in 2017 and saw our credit rating upgraded by Moody’s to Ba2. Also, all the international financial organisations and credit rating agencies underline the importance of our reforms.

AW: We see the situation in Russia has improved, the free trade agreement with the EU is in place, another free trade agreement with China has just come into force. How much will these help?

MB: From 2017 we have been observing a global economic recovery. This pick-up in growth is expected to be trade driven. In these circumstances countries open to international trade will benefit more. Therefore, free trade agreements will be especially important in coming years. Improved access to new markets is important not only for export promotion, but also for attracting more foreign investment. We are a country with a business friendly tax policy and an attractive business climate: we are ranked ninth in the World Bank Ease of Doing Business report.

AW: How do you see the public finances, given that public debt has more than doubled since the financial crisis, close to 45 per cent of GDP in 2016?

MB: These statistics are not fully correct. Our debt is at an affordable level of 43 per cent. The major part of the debt is concessional, making the weighted average interest rate as low as 2 per cent. Our average —over the last 15 years — is around 32 per cent. So 43 per cent is not a very big deviation. We acknowledge, of course, that a big portion of government debt is in foreign currency and therefore we have initiated a comprehensive long-term plan to decrease it. We are planning to gradually switch on domestic debt, which has the double objective of diminishing exchange rate sensitivity, and developing the domestic capital market.

AW: What other challenges do you see on the horizon?

MB: The main challenges for the Georgian economy are the vulnerabilities in the external sector. We are running a high current account deficit, the country’s foreign debt is around 95 per cent and the rate of dollarisation is high.

We acknowledge this, and the aim of our reforms package is to address these vulnerabilities. Our reforms are targeted to promote productivity and savings, which will lead to a sustainable reduction of the account deficit. We have already seen significant results. The current account deficit came down to 2.9 per cent in the third quarter of 2017 from 12.8 per cent in 2016.

We have very tangible results in the de-dollarisation process, which began 2017. The dollarisation rate has decreased by about 7-8 percentage points. This is a very good start, however we know from international experience that de-dollarisation is a long term process.

AW: If we look at the World Investment Report 2017, between 2014 and 2016 the country attracted about 1.6 billion US dollars of FDI on average which is more than the pre-crisis annual average of 1.1 billion US dollars. How dependent on FDI is Georgian economy?

MB: FDI is an important driver of economic growth in emerging countries like Georgia. We have very positive developments in this respect. With a persistently improving business environment in the country we expect strong FDI performance for the coming years. With a decreasing current account deficit, however, our dependence on FDI is small. For us it is not quantity that matters but the quality of FDI. It is important that FDI is the source of innovation and technology and results in productivity growth and export expansion.

AW: When we look at the emerging Europe countries, Georgia is the leader when it comes to the ease of doing business. What reform would you see necessary to further strengthen the country’s position and attract FDI?

MB: Of course, the ninth place we have is very decent but hard to defend. However, with the reforms that we have in the pipeline we are optimistic and we expect to move even further ahead. An automatic VAT credit refund system, and insolvency reform are coming soon, as well as several important reforms that will ease tax administration.