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Economic Reforms – Raising Regional
Competitiveness
Case of Georgia
By Aleksi Aleksishvili
Georgia in International Ratings
•
Georgia is among the top 10
reformers in the world during
three consecutive years
•
Georgia started with 110 rating in
2004 and achieved 18th rank in
2007
•
Georgia’s in TI’s Corruption
Perception index raised from 1.8 in
2003 to 3.4 in 2007.
•
No sovereign rating in 2004. in
2007: BB-/Stable - assigned by
Fitch, B+/Positive – S&P’s
•
Budget arrears reached 70% of the
state budget in 2003 and External
debt stood at 42% of GDP in 2003
•
No arrears in 2007 and external
debt reduced at 16% of GDP
18th in the
ranking of
World Bank’s
Doing
Business
survey, 2008
World’s N1
reformer –
World Bank’s
Doing
Business
survey, 2007
35th place
(out of 161
countries) –
Heritage
Foundation’s
Economic
Freedom
Index, 2007
BB-/Stable
Fitch
Ratings,
2007
B+/Positive –
S&P’s, 2007
High and Sustainable Growth Rates
•
•
GDP and GDP per capita Growth Rates, 2004-2010*
GDP growth rate totaled 12
percent in the first half of 2007
and it is expected to reach 14.5
percent by the end of the year
Contribution from exports
nearly doubled over the last 5
years
Increasing Labor Productivity,
as well as high inflows of FDI
were the major driving forces of
growth
GDP growth rate, %
GDP per capita, USD
16
4000
14
3500
12
3000
10
2500
8
2000
6
1500
4
1000
2
500
USD
•
Average Growth Rate (last 3
years) – 11.1 percent*
%
•
0
0
2004
2005
2006
2007*
2008*
2009*
2010*
Foreign Direct Investments
•
•
•
•
•
FDI sharply increased from 2004 and reached
$1,2 bln in 2006
Denmark, Netherlands and Czech Republic
became the top investors by investing $88
mln, $75mln and $74mln, respectively, in the
first six months of 2007
The largest investors in 2006 were: UK ($182
million), USA ($181.9 million), Kazakhstan
($152 million), Turkey ($127 million), Norway
($76.6 million)
Proceeds from privatization in the first nine
months of 2007 totaled $253 million
It is expected that FDI inflows will reach $2.5
billion, or 20% of GDP in 2007
FDI Inflows, 2000-2007*, mln.USD
2500
2000
1500
1000
500
0
2000 2001 2002 2003 2004 2005 2006 2007*
Financial Sector
•The banking sector is one of the
most dynamic sectors of the
economy (average growth in assets
was 34% during the last decade)
Total Assets and Loans to GDP, 1996-2006
Total Assets/GDP
Total Loans/GDP
35.0%
•The financial sector is dominated 30.0%
by banks (more than 95%). There are
25.0%
19 commercial banks in Georgia
20.0%
•More than 50% of total banking
sector capital is owned by foreign
and international organizations
•11 banks with foreign capital
participation control 76% of total
assets
15.0%
10.0%
5.0%
0.0%
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Foreign Entrants into the Georgian
Banking Market
VTB
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
AzDB
How Did We Get There - Building Free,
Competitive Economy
•
•
•
•
•
•
•
•
Property rights
Liberal Fiscal and Trade Regimes
Improved budget policy
Structural Reforms
Price liberalization
Privatization
Legal Framework
Fighting corruption
Taxation
 In spite of easing the tax burden, the ratio of tax rrevenues
to GDP increased from 13% in 2003 to 23% in 2006. This
ratio reaches 25% in 2007.
Tax Policy
• Enacted in 2005 new Tax Code reduced the
number of taxes from 22 to 7
– Personal Income Tax – 20 12 % (25 % - from January
2008)
– Social Tax – 32 20 % (0 from January 2008)
– Profit Tax – 20 percent (15 from January 2008)
– VAT – 20 18 percent
– Customs Duty – 0 – 30% 0, 5 and 12 percent
– Excise Tax – varies depending on type of goods
– Property Tax – defined by local governments
Comparison of Major Taxes in the Region
Country
Tax on
Dividends
Taxes for Ind.
entrepreneur
/Taxable Income
Joint Profit tax for
companies
Tax on
Wages
26.67%
29.6%
25%
25.0%
Years
Profit Tax
2007
20%
10%
28%
2008
15%
10%
23.5%
22%
10%
30%
28.3-45.8%
28.3-45.8%
20%
5%
24%
38.9%
38.9%
14.7-16-19.4-20.9%
Georgia
Azerbaijan
2007
Armenia
2007
Russia
2007
24%
9%
31%
14.7-17.620.9-23.727.5-30.9%
Turkey
2007
20%
10%
28%
20-45%
Latvia
2007
15%
10%
23.5%
43.6%
31.2%
Lithuania
2007
15%
15%
28%
36.7%
36.7%
2007
0%
28.21%
28%
41.4%
41.4%
2008
0%
26.58%
26.5%
40.6%
40.6%
2009
0%
25.00%
25%
39.8%
39.8%
Estonia
Trade Policy
• No protection of internal market
by import duties
 One of the most liberal import
duty systems in the world, with an
average weighted import duty of
1.5%
100%
90%
4%
6%
15%
8%
80%
 90% of all imports have 0% duty
70%
26%
USA
30%
Russia
 Equal VAT and excise tax on
imported and local goods
60%
 No export duties
40%
EU
50%
32%
Turkey
23%
Others
30%
Trade is oriented to the markets of
developed countries and it has
become more diversified
•Over the last decade exports grew
on average by 21%; Last 3 years by 27 %.
14%
13%
14%
16%
20%
10%
Rest of CIS
0%
Import
Export
Simplified Licensing and Permitting Procedures
• New Law on Licenses and permits may be required only for:
– Safety and health protection
– Protection of state and public interests
• Total number of licenses and permits was reduced by 86%, in
reforms that eliminated 756 licenses and permits and
streamlined procedures
• 30 days are necessary for issuing licenses and 20 days for
issuing permits
• "Silence is consent"
World’s Leader in Labor Freedom
• The Labor Freedom factor
covers: minimum wages,
laws inhibiting layoffs,
severance requirements,
and measurable regulatory
burdens on hiring, hours
etc.
100
90
80
70
percent, %
• Georgia simultaneously
offers:
Labor Freedom
60
50
40
30
Estonia
Ukraine
Lithuania
Moldova
Latvia
Russia
0
Bulgaria
10
Armenia
 Very competitive
prevailing wage rates
20
Georgia
 Educated workforce
Budget Policy
• Introduction of the Medium Term Expenditure
Framework (MTEF)
– Better macroeconomic analysis
– Allocation of resources according to priorities
• Basic Data and Directions (BDD)
– Defines the balance between current and capital
expenditures in the medium term in order to
ensure sustainable growth
– Defines the size of government and allocations to
government (25% range)
Structural Reforms
Two pillars of Georgia’s economic policy:
•
•
Minimum state intervention
Promotion of private initiative
Proceeds from Privatization
Privatization
• large scale privatization in all fields
Deregulation &Liberalization (transport)
• Open Sky principle
• Easing licensing and permitting
requirements
• Regional integration
400
346
350
USD Million
Energy sector
• Result – guaranteed access to energy
(electricity, natural gas etc)
430
450
300
228
250
180
200
150
100
50
38
12
6
7
14
0
2000 2001 2002 2003 2004 2005 2006 2007* 2008*
Corruption-free Environment
Bribe Tax (bribes as a share of annual sales)
• As a result of a reform, public sector was
reduced by 40 percent. Political will of the
Georgian government is the driving force
in achieving the dramatic decline of
corruption
• Georgia now satisfies the Millennium
Challenge Corporation's indicator
regarding "Control of Corruption" and
scores above its peer group
• The percentage of firms that
identified corruption as a significant
obstacle fell from 60% to 25% from
2002 to 2006
Bribe Frequency (% of firms saying unofficial payments are
frequent)
Looking Ahead…
(2007-2011 horizon)
• Real GDP growth of 7-10% (14.5% expected in
2007
• GDP per capita from 2,325USD in 2007 to
4,400USD in 2011
• Competitive economy
• Low inflation (less than 6%)
• Reduction of unemployment to 11%