Azim Sadikov: Despite of the political uncertainty, Georgia saved belief of investors


Forecasts of International Monetary Fund (IMF), economic policy of the state and foreign investments, external debt and fall of the rate of a national currency – these and other issued are narrated in an exclusive interview given to by a permanent representative of an International Monetary Fund Azim Sadikov.

— How do you assess the state budget of 2014? How do you think, — can Georgia fulfill the social obligations (expenditures on social projects), reflected in the state budget of 2014?

— The 2014 budget continues socially-oriented policies undertaken in 2013. Social spending is projected to increase by 20 percent next year, reflecting the full-year effect of programs introduced or expanded in 2013, such as the universal healthcare and higher pensions, even though there are no new major commitments taken in 2014. We support the government’s focus on social issues, but, as signaled in our earlier reports, we think that these social programs should be implemented in a more targeted manner, going to the most poor and the vulnerable. We also note a sharp increase in the government’s wage bill. In 2013-14, it is projected to increase by almost 25 percent, and this is in the environment of zero inflation. We are studying whether the increase can be explained by more government hiring, but for many ministries it appears to reflect higher salaries.

Revenue is based on GDP growth of 5 percent and GDP deflator of 3.5 percent, which is broadly consistent with our macroeconomic projections.

The budget targets an overall deficit of 3.8 percent of GDP, but we are continuing discussions with the MoF on the appropriate level of the deficit. Therefore, if revenues prove to be stronger than budgeted or if there is underspending, the government should direct these savings to reduce the deficit and some part to increase pro-growth capital spending.

Finally, let me emphasize that it is important to develop a credible medium-term fiscal strategy. Such a plan should elaborate how the government plans to reduce the budget deficit over the medium term while preserving and strengthening the social net without further cutting capital spending.

— Draft law on competition will be considered in the Parliament of Georgia very soon. In what extent you are aware with this draft law and what is your opinion about it? Don’t you think that on separate Georgian markets mono and oligopoly associations are dominating on separate Georgian markets and in this way they restrict the competition?

— I have not had a chance to study the draft law, so I cannot comment. I will say that ensuring free competition, starting from market entrance to having a level-playing field, is key to improving productivity and ultimately to Georgia’s growth. We have indeed heard stories that in certain markets, dominant companied at times play unfairly to restrict competition. Here, the anti-monopoly authorities can play a positive by stepping in to ensure a level-playing field.

— The volume of international investments has been decreased in 2013, but this was estimated as a result of political transformations. What do you think about it?

— Let me correct you a bit. The volume of FDI in fact increased, although very slightly, in 2013. In January-September, FDI reached about $700 million, which is $20 million higher than during the same period of 2012. What does this tell us? First, the real decline in FDI took place in 2012 (when it fell from $1.1 billion in 2011 to 910 million in 2012), as investors adopted a wait-and-see attitude ahead of the 2012 parliamentary elections. Second, the fact that FDI did not fall further in 2013 despite political and policy uncertainty speaks about investors’ trust in Georgia and its medium-term potential.

We estimate that FDI this year will likely reach 6.0-6.5 percent of GDP. This is not too bad by international standards, but to grow rapidly the economy needs more and, in fact, Georgia in the past showed that it can do more. To achieve that, the government needs to unveil a private-sector led growth-oriented development strategy, which aims to further strengthen the business environment and create better conditions for both domestic and foreign investors.

— What are forecasts for GDP in Georgia in 2014?

— This year, we like many others, proved wrong, as our earlier projections of high growth did not materialize. I think this was because, the period of uncertainty proved to be longer than we anticipated.

I do not want to jump ahead and preliminary data can still be revised, but there are signs that growth might have already bottomed out. Based on this, and assuming that business confidence is restored, we project GDP growth to reach 5 percent next year. Key here would be steps the government takes to continue making Georgia attractive to investors.

— As for the rate of a national currency (lari) how do you estimate the fall of the rate towards USD dollars and what is a reason of this fall? How do you assess the work of the National Bank?

— Let me start saying that the NBG has a highly professional staff. We cooperate very closely and productively. I should also give credit here to the government’s support of the NBG and respecting its independence.

When it comes to the exchange rate, we need to keep in mind that it is a floating rate. The main objective of the monetary policy of the NBG, as enshrined in the organic NBG law, is to maintain price stability. The exchange rate is determined by market forces. If supply of foreign currency exceeds demand, Lari will appreciate. If otherwise, it will depreciate. The NBG can use its reserves to prevent excessive volatility, but cannot and should not resist structural market pressures.

The Lari has depreciated to the US$ by about 2-2.5 percent since late October. Since the beginning of the year, the difference between the most appreciated and the most depreciated Lari/US$ rates was about 5 percent. Compare this to other floating currencies. Over the same period, the difference for Euro was 8 percent, Hungarian Forint 12 percent, Polish Zloty 12 percent, Ruble 11 percent. So there is nothing out of ordinary in the recent movements in the Lari exchange rate.

— What is a role of the IMF in the support of economic processes of Georgia? How much is a debt of Georgia towards the IMF?

— Georgia and the IMF have long history of close cooperation. The IMF remains committed to supporting Georgia to pursue sound economic policies to improve the well-being of every Georgian through a private sector-led growth. We provide the Georgian authorities with advice on economic and financial policies and technical assistance in many areas. Finally, Georgia has a precautionary program with the IMF. The program expires next April, but very soon we will discuss with the government modalities of our future cooperation.

We look forward to studying the government’s development strategy which is being prepared currently. We expect that this strategy will outline policies to support private-sector led growth that is inclusive, i.e. helps generate jobs. Also, the strategy should be consistent with ensuring sustainable fiscal and external policies, i.e. to continue fiscal consolidation and reduce the current account deficit over the medium term.

In 2013, Georgia made significant principal repayments to the IMF of about US$325 million. As a result, the outstanding liabilities of Georgia to the IMF declined to $420 million.

— Which trends of development of an economic rise in the regions and forecasts exist?

— Central Asia and Caucasus region has been one of the fastest growing regions over the past decade, growing by more than 6 percent annually during this period. This trend should continue, and we expect growth to remain reasonably strong over the near term, reflecting strong commodity prices and stable inflows of remittances.

Among Georgia’s neighbors, in 2014, the Armenian economy is projected to grow at close to 5 percent. Growth in Azerbaijan could reach 5.5 percent. Turkish economy is projected to grow by 3.5 percent, while growth in Russia is expected to pick up to 3 percent.

— Is the volume of the external debt of Georgia is adoptable taking into account recent economic indexes?

— According to the NBG estimates, total external debt of Georgia is about $13.5 billion or almost 85 percent of GDP. Of this amount, 4.5 billion of owed by the government and the NBG. So, most of the external debt, the remaining 9 billion is the private sector debt, banks and corporations, of which $3 billion is intercompany debt.

Georgia’s external debt is high, broadly at comparable levels with external debt in Central European Countries. For example, the external debt in Bulgaria is about 93 percent of GDP, in Estonia 89 percent, but in Czech Republic is 51 percent and in Poland 70 percent. Armenia’s external debt is slightly lower than Georgia’s at 76 percent.

Georgia’s external debt reflects years of high sustained current account deficits. To finance these deficits, Georgia had to rely on foreign funding, investment but also loans. Year after year, Georgia has to attract external funding to cover the current account deficit plus repay maturing old external debt. This exposes Georgia to risks that if foreign financing dries up it could face problems to cover its external financing needs. This is why it is important that Georgia reduced its current account deficit over the medium term.


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