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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
High and Sustainable Growth Rates
• Average Growth Rate (last 3
years) – 11.1 percent*
GDP and GDP per capita Growth Rates, 2004-2010*
• GDP growth rate totaled 12 GDP growth rate, % GDP per capita, USD
percent in the first half of 2007 16 4000
and it is expected to reach 14.5
percent by the end of the year 14 3500
12 3000
• Contribution from exports 10 2500
nearly doubled over the last 5
USD
years
%
8 2000
6 1500
• Increasing Labor Productivity, 4 1000
as well as high inflows of FDI
were the major driving forces of 2 500
growth
0 0
2004 2005 2006 2007* 2008* 2009* 2010*
Foreign Direct Investments
• FDI sharply increased from 2004 and reached
$1,2 bln in 2006
FDI Inflows, 2000-2007*, mln.USD
• Denmark, Netherlands and Czech Republic
2500
became the top investors by investing $88
mln, $75mln and $74mln, respectively, in the
first six months of 2007 2000
• The largest investors in 2006 were: UK ($182
million), USA ($181.9 million), Kazakhstan 1500
($152 million), Turkey ($127 million), Norway
($76.6 million)
1000
• Proceeds from privatization in the first nine
months of 2007 totaled $253 million 500
• It is expected that FDI inflows will reach $2.5 0
billion, or 20% of GDP in 2007 2000 2001 2002 2003 2004 2005 2006 2007*
Financial Sector
•The banking sector is one of the
most dynamic sectors of the Total Assets and Loans to GDP, 1996-2006
economy (average growth in assets
Total Assets/GDP Total Loans/GDP
was 34% during the last decade)
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
15.0%
sector capital is owned by foreign
and international organizations 10.0%
•11 banks with foreign capital 5.0%
participation control 76% of total
0.0%
assets 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
Taxes for Ind.
Tax on Joint Profit tax for Tax on
Country Years Profit Tax entrepreneur
Dividends companies Wages
/Taxable Income
2007 20% 10% 28% 26.67% 29.6%
Georgia
2008 15% 10% 23.5% 25% 25.0%
Azerbaijan 2007
22% 10% 30% 28.3-45.8% 28.3-45.8%
Armenia 2007 20% 5% 24% 38.9% 38.9%
14.7-17.6-
Russia 2007 24% 9% 31% 20.9-23.7- 14.7-16-19.4-20.9%
27.5-30.9%
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%
Estonia 2008 0% 26.58% 26.5% 40.6% 40.6%
2009 0% 25.00% 25% 39.8% 39.8%
Trade Policy
• No protection of internal market
by import duties
One of the most liberal import 100% 4% 6%
duty systems in the world, with an 8%
average weighted import duty of 90%
15%
1.5%
80%
26%
90% of all imports have 0% duty 70% 30% USA
Russia
Equal VAT and excise tax on 60%
EU
imported and local goods 50% 32%
Rest of CIS
23% Turkey
No export duties 40%
Others
30%
13%
Trade is oriented to the markets of 20%
14%
developed countries and it has
become more diversified 10% 14% 16%
•Over the last decade exports grew 0%
Import Export
on average by 21%; Last 3 years -
by 27 %.
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, Labor Freedom
severance requirements,
and measurable regulatory 100
burdens on hiring, hours 90
etc. 80
70
percent, %
60
• Georgia simultaneously 50
offers: 40
30
Educated workforce 20
10
0
Very competitive Armenia
Moldova
Georgia
Bulgaria
Russia
Latvia
Estonia
Lithuania
Ukraine
prevailing wage rates
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 450 430
• large scale privatization in all fields 400
346
350
Energy sector
300
USD Million
• Result – guaranteed access to energy 228
(electricity, natural gas etc) 250
180
200
Deregulation &Liberalization (transport) 150
• Open Sky principle 100 38
• Easing licensing and permitting 50 12 6 7 14
requirements
0
• Regional integration 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 Bribe Frequency (% of firms saying unofficial payments are
frequent)
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
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%
