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									Government of Georgia




Basic Data and Directions for
    the Years 2007-2010




            Tbilisi


            2006
                                         Contents

Mid-term Action Strategy of Government of Georgia (2007-2010) …………….

Outcomes of Reforms for 2007-2010 ……………….

Guiding Principles for Reforms of Government of Georgia …………..

1. Macroeconomics …………………..

1.1 Macroeconomic Overview…………………..

1.2 Macroeconomic Overview and Forecasts……………

1.3 Fiscal Policy…………………

2. Budget Revenues……………..

2.1 Revenue Analysis………………….

2.2 Revenue Forecast ………………………..

3. Budget Expenditures………………………..

3.1. Brief Overview of 2005 Budget Fulfillment ………………………

3.2 Expenditures according to Core Economic Criteria …………………..

4. Deficit …………………..

5. Public Debt Strategy ……………………
.
5.1 Domestic Debt Sustainability and Strategy………………………

5.2 Foreign Debt Sustainability and Strategy…………………………

6. Core Sectoral Goals and Objectives ………………………..

6.1 Public Policy…………………..

6.2 Public Administration and Regulation ……………..

6.3 Economy and Development ………………

6.4 Social Sphere ………………

7.Priority Directions Developed by Ministries for Purpose of Implementing Main Goals
and Objectives of the Government of Georgia for the Years 2007-2010 ………………

Annex 1. Mid-term Expenditure Planning (MTEP)



                                                                                       2
Annex 2. Tables of Core Macroeconomic Indicators
Annex 3.Matrices of Mid-term Action Plans of Ministries


                   Mid-term Action Strategy of Government of Georgia
                                      (2007-2010)

Georgia is historically capable to build a liberal, unified, democratic, prosperous and equitable
state. The new state of Georgia – part of the modern developed mankind – will be the state for
a person, the state based on the freedom in human development and activity.

The new state of Georgia is:

   -   Free Georgia, with adequate defense facilities;
   -   Unified Georgia, for all its citizens;
   -   Democratic Georgia, with transparent public institutions, developed civil society and
       freedom of speech;
   -   Equitable Georgia, with independent and impartial judicial system;
   -   Prosperous Georgia, with protected private ownership and economic freedom;

To achieve these goals, the priorities of the Government of Georgia for the years 2007-2010
are the following:

   -   Restoration of territorial integrity with peaceful means and achievement of civil
       unification;
   -   Sustainable economic growth and facilitation of employment;
   -   Formation of flexible, accountable and capable governance;
   -   Rehabilitation and development of infrastructure;
   -   Achievement of consistence with NATO membership requirements.

The conditions to achieve the state goals are ensuring of public stability on the one hand, and
maintenance of dynamism of reforms and modernization of the state, on the other.

                     Likely Outcomes of Reforms for the Years 2007-2010

Following the implementation of the Government‟s priorities and relevant reforms, the
population of Georgia will have:

   -   Increased competence in state governance – high efficiency of management and
       spending;
   -   High degree of economic freedom – economic impartiality and minimum
       interference;
   -   Effective justice – high degree of confidence based on the sense of equality;
   -   Developed self-government – decentralized authority and responsibility;
   -   Adequate defense facilities – developed military infrastructure and real prospect of
       NATO membership;
   -   Capable law enforcement system – efficiency in actions and public control;
   -   Consumer-oriented sustainable energy sector – uninterrupted power supply,
       financial sustainability and encouraging investment climate;
   -   Reduced regional disparity – rehabilitated basic infrastructure (inter-regional roads
       and local water supply);



                                                                                                3
   -   Conditions for sustainable environmental development – coordination of private
       interests and sustainable nature consumption;
   -   Reduced extreme poverty and more jobs in private sector – visible economic
       growth and directed social assistance;
   -   Opportunities for quality and competitive education – affordable and quality
       system based on liberal values;
   -   Open and tolerant cultural environment – cultural pluralism and civil and cultural
       integration;
   -   Increased degree of economic and cultural integration with EU – reduction of
       barriers for movement of people, capital, goods and services;

                         Government’s Guiding Principles for Reforms

The core of all actions of the Government of Georgia shall be a person - increase of the degree
of person‟s principal rights, virtue and freedom, professional and industrial development,
facilitation of territorial integrity and civil integration.

All institutions shall ensure that all their small- or large-scale actions are consistent with the
guiding principles of the reform.

   -   Minor governance – if having alternatives for ownership forms, giving priority to
       private ownership; confinement of the competence of government institutions with
       those activities which the private sector cannot do better and only minimum necessary
       administrative interference in the economy; inadmissibility of protectionism and
       privileges;
   -   Good governance – results-oriented governance activities and measurability;
       transparency of activity, civil control, public accountability of institutions;
       decentralization of governance with the delegation of competences and responsibilities
       to possibly lower hierarchical steps;
   -   Targeted assistance – supply of public resources and services not to institutions but to
       beneficiary, following the principle – “assistance is related to beneficiary”; change of
       the state‟s principle of „equal assistance‟ (i.e. assistance to all including well-to-do)
       with that of „equitable assistance‟ (i.e. targeted assistance to helpless and poor);
   -   Targeted spending – distribution of the resources in accordance with the set priorities;
       focusing of financial resources on the set goals and inadmissibility of fragmenting;
       universality of the budget;
   -   Good practice – considering of the essence of international practice without
       mechanically copying it; international financial resources shall be used only in the case
       when domestic resources are insufficient.



                                      1. Macroeconomics

1.1 Macroeconomic Policy Directions

In the medium term, the country‟s macroeconomic policy will be directed towards ensuring
the macroeconomic stability:

   -   Sustainable and high rate of economic growth;
   -   Low inflation;
   -   Increase of local and foreign investments.


                                                                                                4
1.2 Macroeconomic Overview and Forecasts

In 2003-2005, average annual growth of real GDP was 8.8%, and average annual inflation –
6.2% (table 1).

Table 1. Core Macroeconomic Indicators


                                           2003     2004     2005      2006      2007      2008      2009      2010
                                           actual   actual   actual    likely    prog.     prog.     prog.     prog.
 Real GDP (growth rate)                    11.1     5.9      9.3       7.5       7.0       6.0       5.5       5.5
 Nominal GDP (mln lari)                    8564.7   9824.3   11591.9   13080.0   14614.5   16176.6   17821.1   19636.7
 CPI (medium term)
                                           4.7      5.7      8.2       5.0       5.0       5.0       5.0       5.0

 Current account (in percentage to GDP)    -9.9     -6.6     -10.7     -10.6     -10.5     -9.9      -9.6      -8.9
 Average annual exchange rate (lari/USD)
                                           2.15     1.92     1.81      1.82      1.82      1.82      1.82      1.82




a. Economic Growth
Overview
In 2005, as compared with the previous year, real GDP growth amounted to 9.3% and equaled
to 11.6 billion lari in nominal expression.

Agriculture, industry, construction and communications played significant role in GDP
growth. These industries conditioned a 5.9% growth of GDP, which is 63.4% of overall GDP
growth.

Industry has recently shown significant growth trend. The last year was a continuation of this
positive trend. In 2005, the added value created in industry increased by 10.4%. It is
noteworthy that during the last year, the separate spheres of industry developed unevenly.
Volume of production in manufacturing increased by 14.3%, energy, gas and water supply
grew by 5.0%, and mining reduced by 13.5%. The share of industry in the line structure of
GDP has not changed as compared with 2004, remaining at 12.1%.

Unlike 2004, agriculture showed significant growth in 2005. The real added value created in
this sphere increased by 12.0%. Despite such growth, the share of agriculture in GDP reduced
by 1.6 percentage points, equaling to 14.8%. Such difference between real growth and share
indicator was conditioned by the circumstance, that in 2005 a 5.1% deflation took place in
agriculture and thus, nominal added value increased only by 6.6%. Increase in agriculture was
mainly due to more crops in fruits, grapes and citrus. Fruit production in 2005 increased by
43.8%, that of citrus – 3.2 times, and grapes – by 38.9%. In livestock breeding, the number of
livestock kept increasing.

Together with industry and agriculture, construction, hotels and restaurants, communications
and financial spheres developed faster than GDP. The added value created in these spheres
increased as compared with 2004 by 22.3% in construction, by 16.4% in hotels and




                                                                                                                       5
restaurants, 29.5 in communications and 52.2 in financial intermediation respectively. In
addition, the share of these spheres in the line structure of GDP has increased.

As the statistic data analysis shows, the increase of 2005 GDP was conditioned by both
domestic and foreign demand. Consumer expenditures and total investments increased GDP
by 4.8, and export – by 3.7%.

Forecast

By estimates, in 2006, as compared with the previous year, real GDP will grow by 7.5% and
in nominal expression will exceed 13 billion lari. (chart 1). In further medium-term future, this
indicator will presumably be around 6-7%. These figures of economic growth are in full
compliance with the directions set out under the Medium-term Action Strategy of the
Government of Georgia.

It will be possible to achieve the said growth rates of GDP by increase in investments and
more efficiency thereof. In 2006, as compared with 2005, real volume of total investments will
presumably increase by 24.5% and will equal to 31.0% of GDP. By estimates, during the next
four years, the ratio of investments to GDP will have growth trend. As to consumer
expenditures, in 2006-2010 its real volume will increase, and its share in GDP will reduce.

Chart 1. Nominal GDP Dynamics (mln lari)



    20000
    18000
    16000
    14000
    12000
    10000
     8000
     6000
     4000
     2000
         0
             2003    2004    2005    2006     2007    2008    2009     2010




B. Foreign Sector

Overview

According to preliminary data, in 2005 as compared with 2004, current account deficit
increased and amounted to USD -688.7 million. The ratio indicator of current account deficit
shows growth trend too. In 2005, its share in GDP amounted to 10.7% (table 1), while in 2004
the same indicator equaled to 6.6%. Increase of current account deficit was mainly
conditioned by significant growth of import.



                                                                                               6
In 2005 current account deficit was respectively financed by foreign investments and capital
inflows, which had its impact on exchange rate stabilization.

In 2005, Georgia‟s foreign trade turnover (excluding disorganized trade) amounted to USD
3357.6 which exceeds the 2004 indicator by 34.6%. Of this, export is USD 866.7 million,
which corresponds with its 34.0% growth, and import equaled to USD 2490.9 after having
grown by 34.8%. In 2005, Georgia‟s negative trade balance increased by 35.2% and amounted
to USD 1624.2 million.

In 2005, Georgia had negative trade balance with 101 partner countries, with which trade
deficit amounted to USD 1687.5 million, while 104 countries and USD 1321.4 million
respectively in 2004. Positive trade balance (USD 63.3 million) was fixed with 31 countries
(in 2004 there was a 120.5 million US dollar positive balance with 21 countries).

In 2005 share of foreign trade with CIS countries increased. Foreign trade turnover with CIS
countries amounted to USD 1406.1 million, which is by 42.8% more than in 2004, and
equaled to 41.9% of the total trade turnover.

Georgia‟s foreign trade turnover with EU countries amounted to USD 836.7 million, which is
by 14.8% more than in the previous year. These countries make up a share of 24.9% in the
trade turnover.

Russia occupies the first position among Georgia‟s largest partner countries. In 2005 trade
turnover with Russia increased by 48.6% and equaled to USD 538.3 million, which is 16.0%
of the total foreign trade turnover. After Russia come Turkey (12.1% of foreign trade
turnover), Azerbaijan (9.4%), Ukraine (7.7%), etc.

Last year no significant changes took place in export-import commodity structure. Out of
commodity groups, black metal scrap, natural grape wines, ferroalloys, hazelnuts and other
nuts and flying apparatus are leading in exports. Their shares in total export are 9.7, 9.4, 9.3,
8.1 and 8.0 per cent respectively. In import, oil and oil products occupy the first position
(13.5%), followed by light vehicles (7.2).

Forecast

Foreign trade turnover is likely to increase in the estimated time period in future.

By estimates, in 2006-2010 export growth rates will exceed import growth rates, which will
create basis for the reduction trend of both absolute and relative indicators of current account
deficit. The share of current account deficit to GDP by 2006 is likely to be -10.6%, and -
10.5% by 2007. (chart 2). If there are no external shocks, this trend will be maintained in the
future and by 2010 the relative ratio of current account deficit will presumably be around -
8.9%.

Chart 2. Current Account Deficit to GDP (in percentage)




                                                                                               7
  11.0
  10.5
  10.0
    9.5
    9.0
    8.5
    8.0
    7.5
    7.0
    6.5
           2003    2004     2005     2006     2007     2008     2009     2010




c. Monetary Sector

Like in previous years, in 2005 the policy of the National Bank of Georgia was aimed at
avoiding of inflation and significant fluctuations of the exchange rate and maintaining of
stability.

In December of 2005 compared with the December of the previous year, consumer prices
increased by 6.2%, and the average annual indicator of consumer prices increased by 8.2%.
During the previous year, price levels were influenced by both internal and external factors.
One of the significant factors causing the price rise is the oil price rise on the global market.

During 2005, the exchange rate of the lari against the US dollar was stable. In December of
2005, compared with December of 2004, the average monthly exchange rate of the lari
increased by 0.7% and by the end of December 2005 amounted to 1.786 lari/USD 1. During
the previous year, the average monthly value of the lari was 1.81 lari/USD 1.

According to the National Bank of Georgia, at the end of 2005, compared with the end of
2004, reserve money increased by 19.7% and equaled to GEL 1001.4 million. The average
annual growth of reserve money was 32.9%.

By the end of December 2005 the volume of M3 broad money was GEL 1911.2 million,
which by 26.4% exceeds the similar indicator of the previous year. During the same period,
M2 money supply increased by 26.5%. This ratio of the growth rates of the said money
aggregates is mainly conditioned by national currency deposits growing faster than those in
the foreign currency. Foreign currency deposits increased by 26.4%, and national currency
deposits – by 45.0%. Compared with the previous year, M3 money multiplier increased by 0.1
points and equaled to 1.91, and M2 multiplier rose by 0.06 points and amounted to 1.07.

In 2005, compared with the previous year, dollarization ratio reduced by 2.7 percentage points
and equaled to 71.6. Money circulation velocity also shows reduction trend. This indicator,
according to M3 aggregate, reduced by 0.5 points and amounted to 6.1. For M2, this indicator
equaled to 10.8, being by 1.0 point less than in 2004.
Interest rates have been reducing recently. In 2005, compared with 2004, interest rates on
loans in the national currency reduced by 3.9 percentage points and equaled to 20.7%. Interest



                                                                                               8
rates on loans in foreign currency amounted to 16.5%, being by 3.1 percentage points less than
in the previous year.

As to interest rates on deposits, this indicator in the national currency increased by 0.8
percentage points and amounted to 8.0%. In the foreign currency, it reduced by 1.0 percentage
point and equaled to 7.1%.

Forecast

To achieve stable economic development, it is one of the main preconditions to maintain low
inflation.

In 2006-2010 the forecasted indicator of the change of CPI (in medium term) is around 5.0%.

Recently, the national currency showed appreciation trend against the US dollar. By estimates,
in 2006-2010 the average annual exchange rate of the lari will presumably be around 1.82
lari/USD 1.

Monetary policy is the core of exchange rate stability and regulation of inflationary processes.
For this, the National Bank of Georgia has to continue consistent policy to ensure that money
supply corresponds with targeted inflation, real GDP growth and forecasted growth of demand
for money.

In the forecasted period of time in the future, money circulation velocity is likely to reduce,
both for M3 and M2. For money multiplier, a growth trend is expected. Interest rate reduction
is also likely in the forecasted period of time in the future.

d. Employment and Unemployment

Overview

According to statistical data, in 2005 (nine months) the number of the employed in the
economy amounted to 1737.7 thousand people. 34.0% of the employed were hired, and 66.0%
were self-employed.

In 2005, the number of unemployed increased by 6.9 according to the strict assessment
criterion, amounting to 277.8 thousand people. According to the liberal criterion, 334.4 people
were unemployed, which by 3.7% exceeds the previous year‟s indicator.

As to unemployment level, it was 13.8% by strict criterion, and 16.1 – by liberal.

Forecast

Unemployment level is likely to reduce in the forecasted time period in the future. In 2006-
2010, unemployment will reduce at the expense of economic growth (chart 3). By estimates,
by 2010, as compared with 2005, unemployment level will presumably reduce by 3.0
percentage points.


Chart 3. Change in Unemployment Level in 2003-2010 (the year 2002=100 per cent)




                                                                                              9
  180
  170
  160
  150
  140
  130
  120
  110
  100
   90
   80
   70
          2003      2004    2005     2006     2007     2008     2009     2010

                    GDP Growth Index
                    Unemployment growth index by strict criterion
                    Unemployment growth index by liberal criterion



1.3 Fiscal Policy

During 2005 fiscal stance improved significantly. Compared with 2004, the share of tax
revenues to GDP increased by 1.3 percentage points, and the volume of state investments
doubled. In 2005, as compared with the previous year, the share of government debt in GDP
decreased by 9.6 percentage points, equaling to 40.4%.

For the long run, it is the Government‟s core fiscal strategy to further improve fiscal stance to
ensure:

       Macroeconomic stability;
       Further increase of revenue mobilization;
       Increase of priority spending;
       Strengthening of financial order;




                                                                                              10
Chart 4. Fiscal Aggregates in 2003-2010 (in percentage to GDP)



   2.5
     2
   1.5
     1
   0.5
     0
  -0.5     2003    2004    2005    2006     2007     2008    2009    2010
    -1
  -1.5
    -2
  -2.5
    -3
  -3.5

                    Overall balance cash)        Basic balance (cash)



Chart 5. Government debt in 2003-2010 (in percentage to GDP)


  52.0
  50.0
  48.0
  46.0
  44.0
  42.0
  40.0
  38.0
  36.0
  34.0
  32.0
  30.0
  28.0
  26.0
  24.0
  22.0
  20.0
           2003     2004    2005    2006     2007     2008    2009      2010



For 2007-2010 the objectives of fiscal policy are:

        Increase of spending on priority directions such as investments for infrastructure
         development, social sphere, defense and legal order;
        By 2010 reduction of government debt to no more than 25% of GDP;
        Sustainability of tax revenues in relation to GDP, which is likely to be around 21% by
         2010.




                                                                                            11
Table 2. Core Fiscal Indicators in 2005-2010 (in percentage to GDP)

                                         2003     2004     2005     2006     2007   2008   2009   2010
                                         actual   actual   actual   likely   prog   prog   prog   prog


 Total revenues and grants               16.5     22.7     23.3     24       22.9   23.2   23.4   23.9
   Tax revenues                          14.1     18.4     19.7     19.9     20.1   20.4   20.6   21
   Non-tax revenues                      1.8      3.0      2.7      2.8      1.7    1.8    1.9    2
   Grants                                0.6      1.3      0.9      1.3      1.1    1      0.9    0.9


 Expenditures and net lending            18.3     19.7     25.1     26.6     23.8   24.0   23.9   24.3
 Current expenditures                    16.5     15.6     18.9     20.9     19.3   19.4   19.3   19.6
 Payment of interest                     1.6      1.4      1.0      1.0      1.1    0.7    0.6    0.6
 Other remaining current expenditures    14.9     14.2     17.9     19.9     18.2   18.7   18.7   19
 Capital expenditures and lending
                                         1.8      4.1      6.2      5.7      4.5    4.6    4.6    4.7
   Excluding repayments


 Overall balance (liabilities)           -1.8     3.0      -1.8     -2.6     -0.9   -0.8   -0.5   -0.4


 Net change in arrears by expenditures
                                         1.1      -2.6     -0.8     -0.4     0.0    0.0    0.0    0.0
 (-reduction)


 Overall balance (cash)                  -0.8     0.4      -2.6     -3.0     -0.9   -0.8   -0.5   -0.4
 Basic balance (cash)                    0.8      1.8      -1.6     -2.0     0.2    -0.1   0.1    0.2


 Financing                               0.8      -0.4     2.6      3.0      0.9    0.8    0.5    0.4
 Privatization                           0.3      0.7      3.6      2.7      0.7    0.1    0.1    0.1
   Domestic (net)                        0.6      -0.7     -0.9     0.8      -0.1   -0.2   -0.2   -0.2



To achieve these goals, it is necessary to:
           Reform tax and customs administration;
           Improve public expenditure management;
           Create favorable entrepreneurial environment.




                                                                                                         12
                                                                   2. Budget Revenues

         2.1 Revenue Analysis

         Revenues and grants of consolidated budget of Georgia amounted to GEL 2 706.3 million in
         2005, exceeding the previous year‟s indicator by 24.2% (table 1). Total volume of revenues
         and grants amounted to 23.3% of GDP.

         Table 3. Revenues of Consolidated Budget

         Million lari

                                                                                      Consolidated Budget
                                                                             2005                                           %
             Title                                                                                                          Share of taxes in tax revenues
                                                                                                                            in tax revenues
                                                     Plan       Actual         +/-         %           GDP
                                                                                                               2005/2004

Revenues and Grants                                 2,574.7     2,706.3      131.6       105.1        23.3          124.2
Total revenues (excluding capital revenues) )
                                                    2,453.3     2,601.7      148.4       106.0        22.4          126.7

Tax revenues
                                                    2,166.8     2,288.9      122.1       105.6        19.7          126.4       100.0
(excluding social tax from budget sector)

 Income tax                                          273.9      290.7         16.8       106.1         2.5          108.2       12.7
 Profit tax                                          208.9      210.3          1.4       100.7         1.8          130.1       9.2
 VAT                                                 938.5      987.4         48.9       105.2         8.5          157.2       43.1
 Excise                                              280.5      286.4          5.9       102.1         2.5          140.0       12.5
 Customs tax                                         123.0      123.4          0.4       100.3         1.1          123.2       5.4
 Social tax
 Other tax                                            66.9       84.4         17.5       126.2         0.7          50.5        3.7
                                                     275.2      306.3         31.1       111.3         2.6          109.0       13.4

Non-tax revenue (excluding repayments of issued creditcredit)
                                                    286.5       312.8         26.3       109.2         2.7          128.9

Grants                                               121.4      104.6        -16.8        86.2         0.9          83.7

         In 2005, the consolidated budget mobilized GEL 2 601.7 million as own revenue, which is by
         26.7% more than in 2004. Its share in GDP rose to 22.4%, being by 1.6 percentage point more
         than the previous year‟s indicator.

         In 2005, 2 288.9 million lari was mobilized as tax revenues which is by 5.6% more than the
         forecasted indicator. Compared with 2004, the volume of tax revenues increased by 26.4%,
         with its share in GDP rising by 1.5% and thus amounting to 19.7%.

         Table 4. Consolidated Budget Revenues in 2003-2005

         Million lari

                                                                                     2003                    2004               2005
          Revenues and Grants                                                        1348.6                  2178.6             2706.3
           Total         revenues                 (excluding            capital
                                                                                     1300.8                  2053.9             2601.7
          revenues)
            Tax           revenues              (excluding                social
                                                                                     1207.8                  1811.2             2288.9
          contributions of budget organizations)




                                                                                                                                                             13
    Income tax                                    152.9          268.6          290.7
    Profit tax                                    101.5          161.6          210.3
    VAT                                           415.2          628.2          987.4
    Excise                                        106.3          204.6          286.4
   Customs tax                                    70.3           100.1          123.4
    Other taxes                                   128.9          167.1          84.4
    State Special Funds                           238.9          280.9          428.8
   Non-tax revenues (excluding repayments
                                                  93.0           242.7          312.8
 of issued credit)
 Grants                                           47.8           124.7          104.6

In 2005, GEL 290.7 million was mobilized as income tax of individuals in all levels of budget,
being 106.1% of the forecasted indicator. Compared with the previous year the collected
amounts increased by 8.2%, with their share in GDP being 2.5%. Share of income tax in tax
revenues amounted to 12.7%.

In 2005 compared with 2004, the volume of profit tax collected in the consolidated budget
increased by 30.1%, amounting to GEL 210.3 million. This exceeds the forecasted indicator
by 0.7%. The share of profit tax to GDP is 1.8%, and its share in tax revenues equaled to 9.2%.

As VAT, bringing 43.1% in tax revenues, the consolidated budget collected 987.4 million lari,
amounting to 105.2 % of forecasted indicator. The income derived from this tax increased by
57.2% compared with the previous year. Its share in GDP was 8.5%.

As excise, with the share in tax revenues being 12.5%, 286.4 million lari was collected.
Compared with the actual indicator of the last year, it is by 40.0% more and makes 102.1% of
the forecasted indicator. The share of excise in GDP equals to 2.5%.

As customs tax, with its share in tax revenues being 5.4%, 123.4 million lari was collected. It
exceeds forecasted indicator by 0.3% and means 23.2% growth as compared with the previous
year. Its share in GDP is 1.1%.

Non-tax revenues, being 11.6% of total revenues and grants, amounted to GEL 312.8 million.
Actual volume of non-tax revenues is by 9.2% more than the forecasted indicator, having
grown by 28.9% since last year. Its share in GDP is 2.7%. Non-tax revenues in tables 3 and 4
are expressed in cash method, and in annex 3 the consolidated budget includes Turkmenistan
debt operations by accrual method, which is expressed in the items of non-tax revenues and
foreign debt amortization of the same annex. These operations in 2003 amounted to 62.3
million lari, in 2004 – 69.1 million lari, 2005 – 19.9 million lari and in 2006 -32.1 million lari.

2.2 Revenue Forecast

In medium-term budget revenue forecasts, consideration was given to changes in fiscal sphere
and likely outcomes.

In 2006, the increase in the volume of consolidated budget revenues and grants is expected to
be around 15.4%. Its share in GDP is likely to be 23.9%. Own revenues are likely to increase


                                                                                                14
by 13.4%, with the ratio to GDP reaching 22.6%. According to forecasts, growth trend will
take place in 2007-2010.

Tax revenues of consolidated budget (excluding social contributions from budget sector) will
likely increase by around 13.6%, with its share in GDP to equal to 19.9%, including:

    - Income tax is likely to increase by 8.3% and to GDP - by around 2.4%.
    - Profit tax is likely to increase by 26.6%, and to GDP – by around 2.0%.
    - VAT is likely to increase by 16.0%, and to GDP – by around 8.8%.
    - Excise is likely to increase by 18.1%, and to GDP – by around 2.6%.
    - Customs tax is likely to increase by 11.4%, and to GDP – by around 1.1%.
    - Local taxes are likely to increase by 26.6%, and to GDP – by around 2.0%.
    - Social tax from non-budget sector (excluding one-time transfers) is likely to increase
      by 19.4%, and to GDP – by around 2.3%.

Tax revenues in 2007-2010 are likely to increase significantly, with their share in GDP to
increase to 21.0% in 2010.

In 2006 non-tax revenues of consolidated budget (excluding repayments of issued credit) are
likely to increase by around 17.3%, with their share in GDP to reach about 2.8%. Capital
revenues to GDP will reach 2.7%.

                                     Budget Expenditures

3.1. Brief Overview of 2005 Budget Fulfillment

The planned indicator of 2005 state budget exceeds the 2004 indicator 1.5 times, ad that of
2003 – 2 times. The executive authorities fully implemented the liabilities assumed as part of
the annual state budget.

In the expenditure part of the 2005 state budget significant attention was devoted to financing
of strategic directions of the country. The following measures taken in this period are worth
mentioning:

       Last year, in parallel with the increase of minimum pensions (from 14 to 28 lari)
        previous years‟ pension liabilities were cleared. The current year‟s budget has the
        increase of pensions to 38 lari.
       Executive authorities underwent reforms. Staff was optimized in ministries and
        relevant institutions. During 2005 salary reform was initiated, and it is being
        implemented gradually. At the first stage of the reform the reimbursement of the staff
        of the executive authorities was reviewed (minimum salary in this sphere was
        established at 115 lari).
       The clearance of the previous years‟ liabilities continued. The allocations were directed
        from the fund of 2005 state budget as well as the economy amounts of ministries and
        relevant institutions. Significant amounts for this purpose are allocated in 2006 state
        budget, allowing for full clearance of the previous years‟ salary and pension liabilities.
       Significant measures were taken to ensure stability of energy sector and energetic
        safety. Allocations in the energy sphere were mainly directed towards rehabilitation of
        hydro-, fuel-electric stations and power transmission lines, as well as purchase of
        power and ensuring proper registration.
       Allocations for highway department were mainly spent on rehabilitation of transport
        communications and construction process. Last year, the first stage of the construction


                                                                                               15
       of the tunnel on the section of Chakvi-Makhinjauri road was completed in a short time,
       the Kobuleti-Makhinjauri section of Senaki-Poti-Sarpi highway was rehabilitated,
       separate sections of Tbilisi-Senaki-Leselidze were reconstructed, three bridges were
       restored…
      In the expenditures part of the 2005 state budget significant amounts were set aside for
       financing the damage inflicted as a result of natural disasters last year and assisting the
       damaged population.
      Considerable amounts were directed towards improving defense facilities. The
       allocations for this purpose, being in full compliance with the NATO membership
       requirements, amounted to 3,2% of GDP.
      More amounts were considered for ensuring the observance of public order.
      Considerable work was done to improve judiciary system.
      Technical facilities of penitentiary system were improved significantly.
      Per Budget Systems Law requirements, budgeting principles were altered and
       improved, providing a basis for introducing a mid-term spending policy.

3.2 Expenditures according to Core Economic Criteria

Consolidated Budget

Calculation of the volume of budget expenditures was based on macroeconomic parameter
forecasts consistent with IAS.

According to macroeconomic calculations, the forecasted expenditures of consolidated budget
to GDP amounted to 23.7% by 2007, 23.9% - by 2008, 23.9% - by 2009 and 24.2% by 2010.

Expenditures to be incurred from consolidated budget on goods and services for 2007 amount
to 10.2% of GDP. This item also includes expenditures to pay salaries as well as coverage of
all expenditures that are not included in other items under economic classification. By 2008,
this indicator will rise to 10.4 of GDP, and by 2009-2010 – to 10.3%.

The volume of the expenditures to be incurred under subsidies and transfers will be 8.0% of
GDP in 2007, 8.1% - by 2008 and 8.3% by 2009 and 8.6 – by 2010. This item includes
financing of both social and educational measures.

The share of capital expenditures to GDP will be 4.1% in 2007, and 4.2, 4.3 and 4.4%
respectively in 2008-2010.

Expenditures incurred to repay interest will be 1.1% of GDP in 2007. These will reduce in
2008 to 0.7%. Expenditures under this item will continue reducing in the future years and will
be 0.6% in 2009-2010. This item includes servicing of both domestic and foreign liabilities.

Under net lending item, the expenditure will be 0.4% of GDP in 2007, will remain at 0.4% in
2008 and will reduce to 0.3% in 2009-2010. This item however does not include the
expenditures related to the repayment of principal portion of the foreign liabilities. Under the
Budget Systems Law, these expenditures should be covered under „net lending‟ item.

In order to avoid double entries in the expenditures part of the consolidated budget, the social
tax to be paid by budget organizations is not considered.




                                                                                               16
State Budget

      State Budget Expenditures for 2007 amount to 21.2% of GDP of the reporting
       period. This indicator will increase in 2008 to reach 21.4% of GDP. The growth trend
       will continue in 2009 and these expenditures will increase 21.3% of GDP, and to
       21.6% in 2010. According to economic criteria, expenditures and expenses are
       distributed in the following way for the years 2007-2010:
      The expenditures under salaries item will increase, implying that the salaries will
       continue to increase gradually. The amount of expenditures under this item in 2007-
       2010 will amount to 2.8% of GDP.
      Expenditures under subsidies and transfers will be 8.6% of GDP in 2007, 8.9% in
       2008 and 9.0 and 9.3% respectively in 2009-2010.
      Capital expenditures will be 3.5% of GDP in 2007, 3.6% in 2008 and 3.7 and 3.8%
       respectively in 2009-2010.

Local Budget
    Local budget expenditures have a growing trend for 2007-2010. in 2007 local
       budget‟s total expenditures will be 4.3% of GDP, in 2008-2010 – 4.4%.
    Expenditures under salaries in the local budget will be 0.6% of GDP in 2007-2010.
    Expenditures under other goods and services in the local budget will be 2.56% of GDP
       in 2007, 2.65% in 2008 and 2.7% in 2009-2010.
    Expenditures under subsidies and transfers will be 0.19 % of GDP in 2007, 0.18% in
       2008, 0.17% in 2009 and 0.17% again in 2010. Notably, about 80% 0f the
       expenditures to be incurred under this item belong to subsidies.
    Capital expenditures from the local budgets will be 0.58% of GDP in 2007, 0.6% in
       2009 and 0.61 and 0.62% respectively in 2009-2010.


4. Deficit

According to the international statistics of public finance, the composition of deficit financing
sources is considerably different from the budget classifications active in Georgia. According
to the international standards, the revenues from privatization belong to deficit financing
sources, and according to the active recording system in Georgia, they are recorded in budget
revenues under capital revenues item. The methodology is also different in external sources of
deficit financing. In particular, under international standards, deficit financing sources only
include the difference between the money transferred into the country to implement
international investment projects and repayment of the principal of foreign debts. Considering
this, there will be a considerable difference between the volume of deficit envisaged under the
draft budget and that calculated by international standards.

The consolidated budget deficit by 2007 is 0.9% of GDP. In 2008-2010 it will have a
reduction trend and will be 0.8, 0.5 and 0.4% respectively. Deficit financing sources include
collection of funds from both internal and external sources. Deficit financing sources also
include privatization revenues. Its share in GDP for 2007-2010 will be 0.7, 0.1, 0.1 and 0.1%
respectively. Therefore, based on the above, privatization process will have completed in
Georgia by 2008, and thus the privatization revenues in the following years will be minor.

Revenues from external sources also have a reduction trend. In 2007-2010 their volume in
GDP will be 0.3, 0.9, 0.6, and 0.5% respectively.




                                                                                              17
In 2007-2010 deficit financing sources of the state budget will reduce. This will be due to the
increased state budget revenues and lessened privatization revenues. By 2007, the total volume
of deficit in GDP will be 0.85%, by 2008, the state budget deficit will decrease and will
amount to 0.8% of GDP, with continued reduction in 2009-2010 to get down to 0.4% of GDP.

5. Public Debt Strategy

By 2007-2010 the public debt is expected to reduce. The Government of Georgia has
commenced to gradually repay the domestic debt. The repayment of debt liabilities against the
National Bank of Georgia has commenced. Apart from the previous years, the repayment of
debt liabilities against the National Bank of Georgia has commenced. At the same time,
Georgia will continue its policy not to take non-privilege loans (grant-element less than 35%)
during this medium term and not to issue guarantees on taking such loans. Only investment-
type loans will be taken, instead of financing current measures.

The said main directions of public debt management will influence on maintaining the debt
status. Today, the debt status is maintained and debt servicing policy in medium and long run
will be pursued in a way to maintain debt status indicators.


5.1 Domestic Debt Sustainability and Strategy

a. Action Plan

      Prohibition of the use of the National Bank loan to finance state budget deficit;
      Transformation of the National Bank debt liability into government securities;
      Transformation of the portion of the existing National Bank debt liability into mid-
       term coupon bonds to be circulated on the securities market;
      Based on the analysis of the results of the inventory of so-called „historic debts‟
       development of their reimbursement mechanism and establishment of repayment dates.


                      Budget Expenditures of Ministries Relative to GDP


                           2006w.          2006w.
                          Approved        Expected        2007       2008       2009       2010

GDP
                          13,080.0         13,080.0     14,600.0 16,200.0 17,800.0 19,500.0
Domestic Debt,
principal                   0.0              0.0           20.0       30.0       35.0       35.0
As percentage to
GDP                         0.0              0.0           0.1        0.2        0.2        0.2
Domestic Debt,
interest                    70.0             70.0          50.0       50.0       50.0       49.0
As percentage to
GDP                         0.5              0.5           0.3        0.3        0.3        0.3




                                                                                            18
b. Anticipated Results

      Fill-up of the state budget deficit in a non-inflationary way;
      Facilitation of the development of the government securities market;
      Gradual reduction of the liability against the National Bank of Georgia.


5.2 Foreign Debt Sustainability and Strategy

Servicing of public debt in 2007-2010 is shown in the table below. It includes the terms of
debt restructuring as a result of both Paris Club agreements as well as accelerated repayment
of EU debt in 2006-2007.

The goods and services repayment of Turkmenistan debt will continue. Presumably, the
repayment of the Turkmen debt may be completed by the end of 2006. The work is in progress
to apply the same practice to the repayment of foreign debts against other countries as well.

The work is in progress with the Austrian counterparts in order for the Austrian debt to be
fully repaid with the terms suitable for Georgia.

Georgia will continue its policy not to take non-privilege (grant-element less than 35%) loans
and not to issue guarantees on such loans.

Debt sustainability analysis has shown that as of today the status of foreign debt is mainly
satisfactory.

Table 5. Foreign Debt Servicing Indicators for 2007-2010


                    Budget Expenditures of Ministries Relative to GDP


                           2006           2006
                         Approved       Expected       2007       2008       2009      2010

GDP
                          13,080.0       13,080.0    14,600.0 16,200.0 17,800.0 19,500.0
Foreign Debt,
Principal                   208.7          208.7      163.8       80.4      118.0     122.4
As percentage to
GDP                          1.6            1.6        1.1         0.5        0.7       0.6
Foreign Debt,
Interest                     52.4          52.4        92.0       49.3       46.7      43.4
As percentage to
GDP                          0.4            0.4        0.6         0.3        0.3       0.2




                                                                                              19
                           6. Core Sectoral Goals and Objectives

                 Action Priorities of Government of Georgia for 2007-2010

         Action Priorities of the Government of Georgia for the Years 2006-2009

Based on the planned outcome of the reforms and their governing principles, the action
priorities of the Government of Georgia for the years 2007-2010 are the following:

6.1 Public Policy

6.1 National Security and Foreign Policy

   Consistent implementation of National Security Concept;
   Based on the successful implementation of IPAP and involvement of Membership Action
    Plan (MAP), consistent integration in the NATO;
   Optimization of army management and improvement of resistance; reformation of the
    army in consistence with the NATO standards; improvement of the civil control system
    over the army;
   Successful implementation of ENP Action Plan and enhancement of economic and cultural
    cooperation with the EU;
   Creation of preconditions for implementing Georgia‟s strategic interests in the
    neighborhood area, the Black Sea and South Caucasus region;

6.1.1 Institutional Arrangement of the State

       Directed implementation of „Peace-making Action Plans‟ for peaceful resolution of
        conflicts and restoration of territorial integrity;
       Establishment of independent, reliable, impartial and optimized judicial system;
       Reforming of the sphere of criminal, civil and administrative law;
       Establishment of capable self-government; distinction of powers and property;
       Formation of duly equipped public safety system through technical modernization of
        police and state security system; development of patrol service; decentralization of the
        management of public safety system; improvement of extraordinary situation
        management system;
       Establishment of modern and reliable border protection system;
       Establishment of special anti-corruption supervision system for high-rank officials;

6.2 Public Administration and Regulation

6.2.1 Legal Regulation

       Reform of execution system with the purpose of timely and effective execution of
        court decisions;
       Formation of infrastructure and database for the Common Civil Register; increase of
        reliability and quality of service of the Public Register;
       Rehabilitation and development of the infrastructure of penitentiary system with the
        purpose of improving the conditions of prisoners, through the introduction of new
        management model; development of effective mechanisms for protection of prisoners‟
        rights and their re-socialization;




                                                                                             20
      Critical revision of the legislative framework; elimination of obsolete and inconsistent
       statutory acts;
      Formation of affordable and qualified institute of treasury attorney;

6.2.2 Public Governance Sphere

      Implementation of Anti-corruption Action Plan;
      Reformation of public administration and public service; improvement of decision-
       making system; rationalization of managerial expenditures; introduction of a
       competitive system for staff selection; creation of environment for due motivation of
       the hired personnel;
      Introduction of mechanisms for regular public reporting, accountability and civil
       control for public governance agencies;
      Improvement of mid-term, results-oriented expenditure policy and mechanisms for the
       state budget;
      Development of the centralized treasury system; ensuring of sustainability of revenue
       collection and creation of the common information system of public finance
       management;
      Enhancement of diplomatic and consulate network; improvement and liberalization of
       visa regime;
      Creation and stage-by-stage implementation of the uniform system of non-harmfulness
       of food; increase of the country‟s epizootic reliability;

6.3 Economy and Development

6.3.1 Institutional De-regulation of Economy

      Reduction of licensing and permissions regulation and introduction of principles of
       „one window‟ and „silence presumption‟;
      Consummation of divestiture of state-owned economic units and property;
       privatization of agricultural land; increase of transparency and commercialization of
       state property management;
      Minimization of state regulation of entrepreneurship;
      Introduction of flexible labor legislation oriented towards legalization of employment;
      Optimization and liberalization of general and technical safety system;
      Creation of competitive system of utilizing natural (including forestry) resources and
       facilitation of formation of secondary market; diversification of the forms of ownership
       and utilization of natural resources;
      Reformation of agricultural sector by reducing regulation and intervention and by
       creating conditions for efficiency and competitiveness.

6.3.2 Infrastructural Arrangement of Economy

      Elimination of the reasons for energy deficit; restructuring and rehabilitation of energy
       sector; attraction of private capital by privatizing; 24-hour energy supply; encouraging
       of rationality of energy with market mechanisms;
      Rehabilitation and construction of regional and inter-district roads, including: to ensure
       the economic integration of Southern Georgia (Samtskhe-Javakheti);
      Optimization of management for all kinds of transport and pursue of „open policy‟ to
       ensure integration of mobility and transit attractiveness;



                                                                                              21
      Restructuring and rehabilitation of water supply for settlements; attraction of private
       capital;
      Rehabilitation of agricultural infrastructure, including melioration system, via
       increasing the role of private sector.

6.4 Social Sphere

6.4.1 Social Protection Sphere

      Formation of a residual system of social assistance; movement to monetized, targeted
       and household assistance system; creation of reliable mechanisms for identification of
       beneficiaries, including internally displaced people (IDP‟s) and those suffering from
       natural disasters;
      Formation of targeted protection system from poverty in old age; introduction of
       pension system based upon age and social status, and stimulation of private pension
       savings initiatives;
      Introduction of the fact-based management system for defining degree of disability and
       establishment of necessity (ICF);
      Affordability of emergency medical assistance;
      Improvement of the conditions for development of basic healthcare; international
       compatibility of the healthcare system and introduction of insurance principles;

6.4.2 Social Development Sphere

      Institutional reforming of the education system, with the purpose of creating the
       system consistent with international standards; formation of self-government bodies in
       general and higher educational institutions;
      Establishment of the network of professional education centers oriented towards the
       requirements of economic development;
      organization of territorial resource centers to facilitate school reform;
       Software (?) modernization;
      Introduction of national curriculum, which would give consideration to individual
       capabilities and interests of a student, also give space to a teacher‟s creative potential
       and be oriented to results and not to process;
      Creation of a system to ensure the quality of education;
      Preparation of qualification system, as well as educational and professional standards
       and programs;
      Creation of the continuous system for teachers‟ professional development;
       implementation of educational programs oriented towards civil integration, including
       studying of the state language;
      Creation of bases for organizing the science directed towards facilitating state
       development priorities;
      Application of competition mechanisms of financing based on international review;
      Systemic consolidation of scientific institutions with higher educational institutions;
      Stimulation of interest of the Georgian entrepreneurs in the innovative scientific
       research and systemic integration in the international scientific research community;
      Implementation of the program for rehabilitation of sports and cultural infrastructure
       with the purpose of improving the institutional management of culture, cultural
       heritage and sports spheres, and increasing the role of private sector;
      Implementation of sports and culture infrastructure rehabilitation program;
       Implementation of monument restoration and preventive conservation program.


                                                                                              22
7. Priority Directions Developed by Ministries for Purpose of Implementing Main Goals
         And Objectives of the Government of Georgia for the Years 2007-2010

   a. Ministry of Finance of Georgia

Mission of the Ministry of Finance of Georgia:

Creation of foundation for stable economic growth and reduction of poverty

Ministry‟s Strategy to implement the Mission:

      To ensure financial sustainability guarantees and to provide the state budget with
       relevant financial resources.

Anticipated outcome in the medium term:

      Improvement of macroeconomic and fiscal governance through the development of
       spending policy with pre-established financing in place;
      Against the background of limited resources, distribution of financing according to
       strategic priorities;

Ministry‟s priorities in the medium term:

      Improvement of tax and customs policies and refinement of the quality of tax
       administration;
      Improvement of budgeting process and complete integration of mid-term expenditure
       planning into the budgeting process;
      Gradual movement to GFS classification principles;
       Further improvement of the coordination of international assistance (donors) as part of
       the main IPAP requirement;


                 Budget Expenditures of the Ministry of Finance Relative to GDP

                             2006              2006w.
                                                                2007       2008       2009        2010
                          (approved)         (expected)

GDP                         13,080.0             13,080.0     14,600.0 16,200.0 17,800.0 19,500.0

Office of Ministry
of Finance of                 59.5                 59.5         64.0       66.8       64.7        66.8
Georgia
In percentage to
                              0.5                  0.5           0.4         0.4       0.4        0.3
GDP
Including:
                              2.5                  2.5           5.5         5.5       2.1        1.4
investments
In percentage to
                              0.02                 0.02         0.04       0.03       0.01        0.01
GDP




                                                                                             23
b) Ministry of Foreign Affairs of Georgia

Mission of the Ministry of Foreign Affairs of Georgia:

Implementation of the national interests of Georgia abroad, protection of the rights and
interests of the citizens of Georgia and achievement of the deserved position in the
international community.

Ministry‟s Strategy to implement the Mission:

Implementation of the effective diplomacy, strengthening of bilateral and multilateral foreign
relations, active cooperation with international institutions.

Anticipated outcome in the medium term:

Successful and more effective foreign policy, being consistent, foreseeable and sustainable.

Ministry‟s priorities in the medium term:

      Ministry‟s competences to participate in creating an independent, safe and protected
       country;
      Facilitation of economic development and welfare of the country within its
       competence;
      Activation of diplomatic work in order to promote Georgia‟s position on the
       international community;
      Protection of the Georgian citizens abroad;
      Diplomatic and organizational activeness.


          Budget Expenditures of the Ministry of Foreign Affairs Relative to GDP


                     2006w.            2006w.
                                                         2007w.   2008w.      2009w.     2010w.
                  (damtkicebuli)     (mosalodneli)

 GDP                 13,080.0            13,080.0        14,600.0 16,200.0 17,800.0 19,500.0

 Ministry of
 Foreign
                       40.4                 40.4          47.5      50.1       52.6       55.2
 Affairs of
 Georgia
 In
 percentage             0.3                 0.3            0.3       0.3        0.3        0.3
 to GDP

c. Ministry of Refugees and Settlement

Mission of the Ministry of Refugees and Settlement:

      Creation of new vision for IDP‟s, inventory of real estate in Abkhazia and Tskhinvali
       region and assurance of guarantees for protection of ownership rights thereon;
      Regulation of migration processes;


                                                                                               24
      Protection of the Georgian IDP‟s rights under international law;
      Settlement and integration of repatriates and those suffering from natural disasters;
      Facilitation of maintenance of national consciousness within the Georgian
       communities.

Ministry‟s Strategy to implement the Mission:

      Improvement of the existing database of IDP‟s and organization of registration;
       registration of property rights on the real estate in Abkhazia and Tskhinvali region;
      Protection of IDP rights and bringing them in harmony with international standards;
      Development and implementation of state and regional programs with the purpose of
       regulating migration processes, conduct of urban survey necessary for settlement;
      Making of contacts with communities and facilitation in obtaining double citizenship,
       establishment of Georgian cultural centers.

Anticipated outcome in the medium term:

      Clarification of the number of the IDP‟s, improvement of social and economic
       conditions, settlement and integration;
      Creation of guarantees for the protection of property rights on the real estate in
       Abkhazia and Tskhinvali region;
      Assurance of the protection of the rights of IDP‟s recognized under international law;
      Creation of social and economic conditions and infrastructure favorable for settlement
       of migrants;
      Strengthening and maintenance of national consciousness within the Georgian
       communities, assurance of their participation in restoration of Georgia, attraction of
       foreign investments.


Ministry‟s priorities in the medium term:

      Registration of property rights on the real estate in Abkhazia and Tskhinvali region;
      Development of public policy for IDP‟s, with the purpose of improving their
       integration and social-economic conditions;
      Regulation of migration processes caused by natural disasters, assurance of settlement,
       integration and employment of those damaged by natural disasters;
      Facilitation of settlement and integration of repatriates;
      Strengthening of relations with the communities.




                                                                                           25
        Budget Expenditures of the Ministry of Refugees and Settlement Relative to GDP


                    2006            2006
                                                  2007        2008          2009         2010
                 (Approved)      (expected)
GDP              13,080.0        13,080.0       14,600.0    16,200.0    17,800.0   19,500.0
Ministry of
Refugees
and                 29.1            29.1          13.3        14.0          14.7         15.4
Settlement
of Georgia
In percentage
to GDP              0.2             0.2           0.1         0.1           0.1          0.1

Including:
investments         2.1             2.1           2.1         2.2           2.3          2.4

In percentage
to GDP              0.02            0.02          0.01        0.01          0.01         0.01


d. Ministry of Defense of Georgia

Mission of the Ministry of Defense of Georgia:

Implementation of public policy in the sphere of defense.

Ministry‟s Strategy to implement the Mission:

      To create armed forces of Georgia; to prepare the military budget;
      To train military personnel; improvement of resistance;

Anticipated outcome in the medium term:

      Creation of favorable background in the international community for integration in the
       NATO;

Ministry‟s priorities in the medium term:

      Improvement of social conditions;
      Increase of capacities of armed forces;
      Improvement of inventories and logistics systems;
      Modernization of military infrastructure;
      Participation in international programs




                                                                                               26
                 Budget Expenditures of the Ministry of Defense Relative to GDP


                            2006          2006
                          approved      expected       2007        2008       2009       2010

 GDP
                          13,080.0       13,080.0     14,600.0 16,200.0 17,800.0 19,500.0
 Ministry of Defense
 of Georgia                392.6            392.6      392.6      392.6      300.0      315.0

 In percentage to GDP
                             3.0             3.0        2.7        2.4         1.7        1.6

 Including: investments
                           136.2            136.2       16.5       16.5       16.5       17.3

 In percentage to GDP
                            1.04            1.04        0.11       0.10       0.09       0.09

e. Ministry of Justice of Georgia

Mission of the Ministry of Justice of Georgia:

Assurance of establishment of just state through right and effective enforcement and execution
of law.

Ministry‟s Strategy to implement the Mission:

       Creation of new types of institutions through implementing modern management
        methods;
       Development of legislative framework oriented towards making the Ministry of
        Defense the main legal advisor of the state and protecting the interest of each citizen.

Anticipated outcome in the medium term:

       Necessary preconditions for creating a just state will be assured, oriented towards
        supremacy of law and protection of human rights;

Ministry‟s priorities in the medium term:

       Free legal advise for the poor part of population;
       Assurance of state representations in the European Court for Human Rights and
        international arbitrates;
       Improvement of court execution system;
       Development of penitentiary and probation systems in consistence with international
        standards;
       Organization and implementation of expertise service in Georgia;
       Assurance of proper functioning of state archive and records management department;
       Formation of uniform civil register.




                                                                                                27
                   Budget Expenditures of the Ministry of Justice Relative to GDP


                          2006w.        2006w.
                                                      2007        2008        2009     2010
                        (approved)     (expected)

GDP                     13,080.0       13,080.0     14,600.0 16,200.0 17,800.0 19,500.0

Ministry of
Justice of Georgia
                           48.1          73.1         64.0        53.9        40.8     42.8

In percentage to
GDP                        0.4            0.6          0.4         0.3        0.2       0.2

Including:
investments                11.1          36.1         27.0        15.0        0.0       0.0

In percentage to
GDP                        0.1            0.3          0.2         0.1        0.0       0.0



f. Ministry of Economic Development of Georgia

Mission of the Ministry of Economic Development of Georgia:

      Development and implementation of effective economic policy to assure stable and
       fast economic growth;

Ministry‟s Strategy to implement the Mission:

      Development of infrastructure to improve investment climate;
      Liberalization of trade and reduction of technical barriers;
      Institutional regulation of the economy;
      Attraction of investments through privatizing state property and assurance of efficiency
       and transparency of the property remaining in the state‟s possession.

Anticipated outcome in the medium term:

      Creation of favorable industrial environment and considerable increase of the volume
       of investments in the economy;
      Creation of new jobs in private sector;
      Assurance of stable and fast growth of GDP and drastic reduction of poverty;

Ministry‟s priorities in the medium term:

      Development of economic policy and coordination of implementation;
      Liberalization of trade, reduction of technical barriers in the trade;
      Reform of standardization, metrology, accreditation and market supervision system;
      Participation in the reform of licensing and permissions system (within the scope of the
       Ministry‟s competence);
      Privatization of state economic units and property;


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      Optimization of transport management system, liberalization and development of road
       infrastructure.


         Budget Expenditures of the Ministry of Economic Development Relative to GDP


                    2006
                                2006 expected        2007     2008         2009        2010
                  approved

GDP               13,080.0        13,080.0      14,600.0     16,200.0     17,800.0   19,500.0

Ministry of
Economic           179.4            197.0            191.9    204.5        214.6       225.4
Development
In percentage
                    1.4              1.5              1.3      1.3             1.2      1.2
to GDP
Including:
road               168.6            185.9            182.0    191.0        200.6       210.7
department
In percentage
                    1.3              1.4              1.2      1.2             1.1      1.1
to GDP

Including:
                   125.5            142.9            138.0    144.9        152.1       159.7
investments

In percentage
                    1.0              1.1              0.9      0.9             0.9      0.8
to GDP


g. Ministry of Agriculture of Georgia

Mission of the Ministry of Agriculture of Georgia:

      Existence of competitive products against the background of efficient agriculture;
      Assurance of epizootic and phyto-sanitary safety of Georgia and recognition of the
       country as a reliable trade partner;
      Assurance of non-harmfulness of food.

Ministry‟s Strategy to implement the Mission:

      Elimination of factors preventing the agricultural development through developing a
       uniform public policy and legislation;
      Assurance of epizootic and phyto-sanitary safety of Georgia and of non-harmfulness of
       food through exercising state supervision.

Anticipated outcome in the medium term:

      Favorable environment for development of agribusiness;
      Non-harmfulness of food;
      Epizootic and phyto-sanitary safety of Georgia;
      Competitiveness of the Georgian products in the international market.




                                                                                          29
Ministry‟s priorities in the medium term:

      Assurance safety and quality of food;
      Development of agricultural infrastructure and reform of irrigation systems
       management;
      Development of vinery and fighting against falsification.




              Budget Expenditures of the Ministry of Agriculture Relative to GDP


                             2006w.            2006w.
                                                           2007       2008       2009       2010
                           (approved)        (expected)

GDP                         13,080.0          13,080.0    14,600.0   16,200.0   17,800.0   19,500.0

Ministry of
                              23.5              30.8        21.5       22.6       23.7       24.9
Agriculture

In percentage to GDP          0.2               0.2         0.1        0.1        0.1        0.1


Including: investments        3.6               3.8         1.6        1.7        1.8        1.9


In percentage to GDP          0.03              0.03        0.01       0.01       0.01       0.01


h. Ministry of Energy of Georgia

Mission of the Ministry of Energy of Georgia:

      Preparation of the policy of energy sector;
      Future development of energy sector.

Ministry‟s Strategy to implement the Mission:

      Private investments+co-financing from the state budget

Anticipated outcome in the medium term:

      Accommodation of energy resources of the country;
      Balancing of energy consumption;
      Increase of transit potential.

Ministry‟s priorities in the medium term:

      Construction and rehabilitation of hydro- and fuel-power stations;
      Construction and rehabilitation of high-voltage power transmission lines;
      Construction and rehabilitation work in natural gas sector;
      Construction of renewable energy power stations



                                                                                                30
                     Budget Expenditures of the Ministry of Energy Relative to GDP


                         2006             2006
                                                           2007             2008             2009            2010
                      (approved)        (expected)
GDP                   13,080.0         13,080.0         14,600.0         16,200.0         17,800.0        19,500.0

Ministry of
Energy
                        179.1            225.3             61.5             47.4            56.1             29.2

In percentage to
GDP                      1.4               1.7              0.4              0.3             0.3              0.1

Including:
investments *           60.9              60.9             55.2             41.0            51.0             25.0

In percentage to
GDP                      0.5               0.5              0.4              0.3             0.3              0.1
Note: *The ceilings of the Ministry of Energy do not include co-financing amounts - 2007 - - 76.2 mln. lari
(including 68.2 for capital investments), 2008 - 186.9 mln. lari (including. 178.6 for capital investments), 2009 -
207.5 mln. lari (including 199.2 for capital investments), 2010 - 192.3 mln. lari (incuding 184 capital investments)

i. Ministry of Environment Protection and Natural Resources of Georgia

Mission of the Ministry of Environment Protection and Natural Resources of Georgia:

    Facilitation of introduction and development of sustainable natural resource utilization
    principles.

Ministry‟s Strategy to implement the Mission:

        Optimization of the Ministry‟s Regulating and controlling functions;
        Replacement of unnecessary (unachievable) environmental norms with adequate
         (achievable) ones;
        Stimulation of private interests in terms of rational natural resource consumption.

Anticipated outcome in the medium term:

        Increased activity of private sector in resource consumption;
        Effective functioning of the sector with minimum state resources;
        Maximally maintained qualitative status of environmental components.

Ministry‟s priorities in the medium term:

        Introduction of resource consumption system/forestry sector management public private
         partnership (PPP) model;
        Movement to resource consumption system/water resource basin management system;
        Environmental care system/protected areas system and environmental tourism
         development;
         Environmental system reform/remnant management policy development;


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        low level of private sector interest in resolving problems such as irrational utilization of
         resources;
        Unused environmental tourism potential;
        High risk of contamination and intoxication with hazardous remnants;
        Improvement of resource consumption system/forestry sector management system reform,
         water resource management system reform;
        Improvement of environmental care system/creation of protected area system and
         development of environmental tourism;
        Reform of remnant management system;
        Completion of the reform of license and permission system.


       Budget Expenditures of the Ministry of Environment Protection and Natural Resources
                                           Relative to GDP

                                     2006w.         2006w.
                                                                2007       2008       2009       2010
                                   (approved)     (expected)

   GDP                              13,080.0       13,080.0    14,600.0   16,200.0   17,800.0   19,500.0

   Ministry of Environment
   Protection and Natural             17.4           17.4        18.6      18.0        17.1       15.9
   Resources

   In percentage to GDP                0.1           0.1         0.1        0.1        0.1        0.1


j. Ministry of Labor, Healthcare and Social Protection of Georgia

Mission of the Ministry of Labor, Healthcare and Social Protection of Georgia:

   Sustainable development of human capital through development and implementation of
   the public policy in labor, healthcare and social protection spheres.

Ministry‟s Strategy to implement the Mission:

       Improvement of the health condition of the population of Georgia through assuring
        equitable geographic and financial access to high-quality medical service;
       Reduction of poverty and insecurity of the population through implementing efficient
        mechanisms for social assistance and creating an environment facilitating social
        integration;
       Creation of conditions for effective functioning of labor market;
       Institutional development of healthcare and social protection spheres and improvement
        of efficiency of public administration.

Anticipated outcome in the medium term:

       Improvement of health state of the Georgian population;
       Reduction of poverty and insecurity;
       Proper functioning of labor, healthcare and social protection institutions;
       Healthcare system being responsive to the requirements of the sustainable development
        of the country and millennium challenge;


                                                                                                  32
Ministry‟s priorities in the medium term:

        Improvement of the health condition of the population of Georgia through assuring
         equitable geographic and financial access to high-quality medical service;
        Improvement of quality of medical service and economic efficiency;
        Reduction of poverty and insecurity of population.

       Budget Expenditures of the Ministry of Labor, Healthcare and Social Protection of
                                        Georgia Relative toGDP

                             2006            2006
                                                         2007      2008       2009       2010
                           (approved)      (expected)
GDP                        13,080.0       13,080.0      14,600.0 16,200.0 17,800.0 19,500.0
Ministry of Labor,
Healthcare and Social
Protection of Georgia       717.3           737.3        888.0    940.0     1,000.0     1,056.0


In percentage to GDP          5.5             5.6         6.1      5.8        5.6         5.4
Including:
administrative expenses      23.4            23.4        23.4      24.6       25.8       27.1
In percentage to GDP          0.2             0.2         0.2       0.2        0.1         0.1
Pensions                    453.4           453.4        496.8    515.4      535.0       562.8
In percentage to GDP          3.5             3.5         3.4       3.2        3.0         2.9
Social allowances            52.0            52.0        89.2      89.2       89.2        89.2
In percentage to GDP          0.4             0.4         0.6       0.6        0.5         0.5
Medical programs            125.9           125.9        151.0    182.2      220.1       255.6
 In percentage to GDP         1.0             1.0         1.0       1.1        1.2         1.3
Other defense and other
social programs              44.0            44.0        37.6      38.8       39.9       41.3
In percentage to GDP          0.3             0.3         0.3       0.2        0.2        0.2
Investments                  18.6            38.6        90.0      90.0       90.0       80.0
 In percentage to GDP         0.1             0.3         0.6       0.6        0.5        0.4


k. Ministry of Culture, Monument Protection and Sports of Georgia

Mission of the Ministry of Culture, Monument Protection and Sports of Georgia:

        Realization of the constitutional right of the citizens of Georgia to have unlimited
         access to cultural life as well as of the state constitutional obligation related to the
         development of culture;
        Promotion and development of the original Georgian culture as well as of the image of
         Georgia in the diverse family of world nations and cultures;


                                                                                                33
Ministry‟s Strategy to implement the Mission:

      Protection of the cultural heritage of Georgia (both material and immaterial),
       popularization and application;
      Support of nationwide cultural centers and organizations;
      Development of culture and sports infrastructure;
      Assurance of equal access to cultural life in the regions of Georgia;
      Sustainable and uninterrupted arts, sports and education system;
      Maximization of the contribution of culture and sports in the economy of Georgia;
      Establishment of free, protected and competitive environment in the spheres of culture
       and sports.

Ministry‟s priorities in the medium term:

      Institutional reform program;
      Museum reform program;
      Program of rehabilitation of cultural heritage monuments,                   systemization,
       documentation, popularization and western integration;
      Sports and culture infrastructure rehabilitation program;
      Arts and sports education system reform.

   Budget Expenditures of the Ministry of Culture, Monument Protection and Sports of
                                     Georgia Relative to GDP

                          2006            2006
                                                      2007       2008       2009          2010
                        (approved)      (expected)
GDP                     13,080.0       13,080.0      14,600.0 16,200.0 17,800.0 19,500.0

Culture, Monument
Protection and Sports     42.0            45.8        45.8      48.1        50.5          53.0

In percentage to GDP       0.3             0.3         0.3       0.3         0.3          0.3

Including:
investments                0.4             0.5         0.5       0.5         0.6          0.6

In percentage to GDP     0.003           0.004        0.004     0.003       0.003        0.003

l. Ministry of Education and Science of Georgia

Mission of the Ministry of Education and Science of Georgia:

      Creation of the education and science system which will allow each citizen irrespective
       of age, ethnic origin and social status, to develop and fully realize him/herself and use
       opportunities.

Ministry‟s Strategy to implement the Mission:



                                                                                                34
      Involvement of wide range of communities and democratization of management
       process;
      Decentralization of the management process and autonomy of educational institutions;
      Results-oriented management of the education system by use of quality assurance
       scheme and resource distribution mechanisms;
      Increase of financing of education sector and development of technical facilities;
      Integration of education and scientific activity in the international community,
       development of scientific and educational centers in higher educational institutions.

Anticipated outcome in the medium term:

      Sustainability – homogenous education system will be established, the components of
       which, assisted by legislative obligations of transparency and accountability, will make
       education and science systems acceptable for European and world education and
       science systems.
      Social inclusion – the system will be established which will assure maximum
       involvement of the citizens of Georgia in the education system.
      Competitiveness – the education and science systems will be established which will
       evenly get involved on the one hand, and will act as competitor on the other, in/to
       European and world education and science systems.

Ministry‟s priorities in the medium term:

      Completion of the institutional arrangement and assurance of quality of education;
      Integration into the uniform European and Euro-Atlantic space and assurance of
       national self-determination;
      Orientation towards the sustainable development of the country and establishment of
       knowledge-based environment.

   Budget Expenditures of the Ministry of Education and Science of Georgia Relative to
                                             GDP

                                   2006         2006w.
                                                            2007       2008       2009       2010
                                (approved)    (expected)

GDP                              13,080.0      13,080.0    14,600.0   16,200.0   17,800.0   19,500.0

Ministry of Education and
                                   329.6        331.1       394.6      452.9      498.2      589.9
Science of Georgia

In percentage to GDP                2.5          2.5         2.7        2.8        2.8        3.0


Including: investments             80.5          80.5        90.8      108.3      118.8      124.1


In percentage to GDP               0.62          0.62        0.6        0.7        0.7        0.6


Office of Ministry                  2.8          2.8         2.9        2.9        3.0        3.1




                                                                                                 35
Secondary School Financing
                                  180.0   180.0   210.1   231.0   261.8   311.9
Program


Education resource centers         1.5     1.5     2.0     2.5     2.7     2.9


Childcare program                  7.9     8.8     8.1     9.0    10.0    11.0


Elementary vocational-
                                   1.5     1.5     1.8     2.1     2.3     2.5
educational institutions

Secondary vocational-
                                   2.1     2.1     2.6     2.9     3.2     3.5
educational institutions


Higher Educational institutions   30.4    30.6    38.5    46.6    54.7    62.8


Ministry’s Targeted Programs       4.4     4.0     3.5     4.0     5.0     6.0


President’s National Program
“Rehabilitation of Educational    71.0    71.0    79.6    91.0    101.7   119.1
Institutions”

President’s National Program
                                   8.0     8.0     9.9    16.0    15.1     2.0
“Milky Way”


Ministry’s Measures                0.6     0.6     0.7     0.9     1.0     1.5



Olympiads and international
                                   0.2     0.2     0.3     0.3     0.4     0.4
educational programs



Education Facilitation Program    19.1    19.9    21.0    29.0    39.2    45.2


System Transformation and
                                  10.9    10.9    13.6    14.7    16.8    18.0
Strengthening Program




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