EBRD expects Georgia to recover

The European Bank for Reconstruction and Development (EBRD) presented its annual Transition Report for 2009 at the Tbilisi Marriott Hotel on January 28. Anita Taci, the EBRD Senior Economist, discussed Georgia’s main economic developments in 2009 and presented the bank's projections for 2010.

“The transition report addresses how the crisis unfolded in the region, highlighting the new challenges which emerged. At the same time the report asks how the region's countries are responding to a crisis generated by the market economy and what a market economy should look like,” Anita Taci said. Making use of several unique data sources, the report looked at the restructuring of financial systems in Georgia, their impact on the economy and private sector development and the introduction of new financial services. The report highlighted that the crisis affected this transitional region most of all but the impact of the crisis definitely varied in each of its constituent countries.

The military conflict with Russia in August 2008 and the international financial crisis negatively affected the business environment in Georgia. The National Bank of Georgia (NGB) took a number of emergency measures to ease liquidity in the banking sector. A new law proposing the merger of the Financial Supervisory Authority, which was established in 2008, with the NBG is currently under discussion. It is hoped that this will give the NGB more influence in financial sector supervision and regulation to improve financial stability.

The report stressed that the economic crisis also influenced the functioning of state institutions and a large percentage of companies also identified transport and access to finance as obstacles to doing business. The Georgian economy suffered a deep contraction in annual terms, mainly due to lower investment and very limited bank lending.

“Georgia is likely to experience a modest recovery in 2010. Currency and banking system collapse were avoided in the region. This time the international support package was larger than in the Asian crisis. Public-private cooperation is very important for overcoming the crisis,” Anita Taci said while presenting the Central, Baltic and Southeast Europe growth model to the audience. “The region needs political-legal-regulatory integration with the European Union (EU) in a variety of ways. The growth model for commodity-rich transitional countries is to make investments in resource extraction, diversify their stimulus policies etc, but unfortunately the EBRD report has shown that Government institutions remain weak and [unhealthy] political systems remain in place. Recovery from the current crisis is expected to be slow in most countries. There is a great need of reforms for “growth with safety”. The main challenge is to undertake reforms with less fiscal space and in a slower growth environment,” the EBRD Senior Economist concluded.

The large fiscal stimulus, mainly provided by international financial support, will provide some counter-cyclical effect. Remittances are also expected to decline due to the recession in neighbouring countries, in particular Russia, which will further affect consumption. The report looked at the restructuring of financial systems in Georgia, their impact on the economy and private sector development and the introduction of new financial services. The role of private equity funds in the region was also discussed in the report.

The Messenger asked Paul-Henri Forestier, EBRD Director for the Caucasus, Moldova and Belarus, to summarise the situation in Georgia and give further recommendations. “2009 had a negative influence on Georgia," he told us. "The Government is generally speaking and acting very wisely by maintaining the liberal policies which in the end will probably attract foreign direct investment. In the meantime the main actors are in the financial sector. We invested a large amount of money in financial systems last fiscal year; we further plan to invest money in large infrastructural project as well as a large number of small corporate plans. The Government will need in the long run to re-focus on certain institutional aspects which are very important to foreign investments. The Government is actually taking its steps very seriously,” Paul-Henri Forestier said.