On Brink of Economic Crisis
31 January, 2013
On Brink of Economic Crisis
Georgia is on the brink of economic crisis due to the political uncertainty and unclear economic policy. The coming three months are expected to be decisive for the new government in averting the threatening economic crisis by means of effective remedies. Is Georgia facing budgetary crisis or not? This question has been ardently discussed during the last fortnight by National Movement, former ruling party, and Georgian Dream political coalition, the acting government that came to office on October 24, 2012
after winning Parliamentary Elections of October 1.
Vano Merabishvili, ex-Prime Minister and acting General Secretary of National Movement, declared two weeks ago that Georgia is facing budgetary crisis but did not back his statement by statistic data thus making it shallow and less trustful. Government played down the budgetary crisis threats assuring that the budget of December of 2012 was fulfilled by 102% and no planned state projects were suspended or supposed to be halted.
On December 22, 2012, Merabishvili reiterated his concerns over the impending serious budgetary crisis and this time backed the statement by statistics data, proving negative outlook of Georgian economy. However, the data were exaggerated compared to the official statistics, released by Geostat, an official statistics body of Georgia, as well as compared with the figures of the National Bank of Georgia (NBG). On the other hand, some figures disclosed by Merabishvili, still seem questionable as they are not available officially and are based on the information of economic experts of National Movement as Merabishvili informed.
According to him, real GDP of Georgia grew in all four quarters of 2011 while in the first three quarters of 2012 GDP grew by 6.7%, 8.2% and 7.5% but in the fourth quarter the figure dropped by 2.3%. Besides, Merabishvili disclosed economic growth statistics of December 2012 that fell by 1.5% instead of growth first ever since 2010. The Value Added Tax (VAT) incomes have been dropping since October of 2012 and fell by 5.2% under zero in December, that is catastrophic Merabishvili asserts. Loans and deposit portfolios of Georgian banking sector having increased by 4.2% and 10.3% in 2010 grew just by 1.7 and 2.1% respectively in 2012, he said. Meantime NBG has not released any official statistic data to this end. Neither did Geostat disclosed statistics data of economic growth of the last quarter of 2012 and December. Official information of the said VAT figures is not available at the moment.
Merabishvili also accentuated the dramatic constriction of export and import figures. Export dropped below zero in November and December of 2012 by 3.1% and 22.4% while import shrunk by minus 4.7% and 9.1% respectively in the similar two months. According to the latest official data of Geostat, export and import in November and December really fell but by 1-2 points less than Merabishvili assures.
Merabishvili believes the reason of economic slowdown is crackdown on business [however, he did not disclose names of victim businesses] and lack of clear economic priorities and plans. He assures that this kind of economic crisis has never been during last three years and there is the situation of emergency in fact. However, the ex-primer accentuated that ex-power left the state budget in such a good condition that the reserves allow new authority to go ahead with all planned projects but if due remedies are not undertaken projects of both old and new government would be under risk.
Economic analysts agree that economic growth is really suspended but it never bespeaks of dramatic outcome as of yet and the National’s rhetoric looks more alike of political manipulation with the statistic rather than of real threats inasmuch as the statistic of National’s is not in line with official statistics. They believe the real economic picture whether or not Georgia faces serious crisis will be clear by the end of the first half of the year.
According to Irakli Lekvinadze, an economic analyst and co-founder of Sales Management Company, the underway economic slowdown is a result of the elections-related political uncertainty on the one hand, and the inheritance of the bad economic management of the previous authority on the other hand.
“This election was so difficult and expectation of power shift was so high that many business projects were halted even during pre-election period. And the situation was so difficult that even if Nationals would have remained in power the similar drop in the economic development would be inevitable,” Lekvinadze said.
He thinks situation can only get better if dual power in the country is removed and President of Georgia Mikheil Saakashvili, having acting as an opposition leader, will stop criticizing the governmental policy.
“When Georgian President says situation in the country is very bad who will come to invest in such a country?” Lekvinadze asked.
Demur Giorkhelidze, an economic analyst with Georgian Dream, agrees that economic growth is really reduced; however, it could not be otherwise as Georgian economy was stagnated in fact [due to bad management of former power] and the situation will not improve unless the fundamental problems such as low economic activity, high import dependence, low level of labor force, and particularly the monopolized market are not removed. Such in-depth changes cannot be achieved within as small period as 2-3 months that passed since new government came in the office. He expects situation to be improved in 2-3 months once anti-trust law becomes operational this coming spring.
“If the trade dropped so catastrophically there would be a deficit of imported food and product and price hike as supply would lag behind demand, but nothing like that has happened as of yet that means there is no crisis,” Giorkhelidze said.
Some experts fear that in chase of ways to overcome economic problems Georgia may divert from the free economic market principles.
“To me both the acting power and ex-power share similar approaches to enhance state interference in private sector in order to help it get developed,” Paata Sheshelidze, President of Free Economic School, said.
He worries that the Funds that new government promises to set up based on private investments that are supposed to deliver cheap and preferential credits includes disguised risks that the state share will enhance in the private business.
“Preferential credits can be disbursed only if it is based on the state subsidies or the state promises the private investors of the said Funds to give certain tax preferences in exchange of lower credit prices that is indirect subsidizing in fact. This counters the free market principles and holds us back to Soviet economy,” Sheshelidze worries.
He reminds that Merabishvili during the pre-election period had been promising people in rural area to buy their product entirely and handle with their export through the state-based company.
“Both parties hold similar economic model to my mind and this here dispute is just a political rhetoric,” Sheshelidze said.
Lekvinadze believes the enhanced state interference is the only way-out at the moment as business alone cannot develop infrastructure and technologies that is essential for investment attraction.
“Therefore, the state should act as a guarantor to get cheaper credits at international market. Then the sector can get more commercialized again,” he said.
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