Minister’s hour at Parliament

Finance Minister Ivane Machavariani visited parliament in the format of “Minister’s Hour” yesterday. Machavariani spoke about the tendency to spend capital expenditures and noted that, unlike previous years, both the central and local budgets have significantly improved project execution rates.

“According to the 10 months of the current year, more than 1.1 billion GEL was spent on infrastructure projects compared to last year,” the Finance Minister said at a plenary session. As he explained, as a result of the improved monthly capital expenditure dynamics, the volume of the budget deficit in 2019 will also increase gradually and be within 2.5% of GDP by the end of the year.

He said that according to the 10-month performance of tax indicators, up to 84% of the planned rate has already been fulfilled.

“Taking into account this figure and the declarations presented in November, compared to the forecast, we will exceed the tax revenue plan by 130 million GEL and the tax revenues of 2019 will exceed 11 billion 410 million GEL, which is a result of systemic reforms implemented in the Revenue Service,” said Machavariani.

Finance minister also noted, that regarding the fiscal framework, rules, transparency and risk management, Georgia is on a high level – all components needed to strengthen fiscal institutions have been successfully implemented by the government, therefore allowing government and parliament to jointly discuss the creation of a fiscal council: “Creating a fiscal council will bring us closer to EU standards. The Council is an independent institution that observes the fiscal policy of the government and is an impartial watchdog. It also ensures the sustainability and stability of fiscal policy.”

Machavariani said the government plans changes in the direction of state-owned enterprises. As finance minister mentioned, in accordance with the International Monetary Fund (IMF) recommendation, state-owned LLCs will be divided into 2 categories - profitable and loss-making enterprises. Under the new methodology operations of the 2nd category, are accounted for as government debt.

“As you know, we have prepared with the IMF and you have approved an updated fiscal framework. As in most developed countries, Georgia needs to have a revised government debt rule. Under the revised rule, GDP remained unchanged at 60% of government debt and at 3% of budget deficit, although both central and municipal budget operations and budget deficits of public law entities were fully covered under this option,” announced the minister, adding that the obligations of the private and public partnership project were also included in the definition of government debt.

The total loss of state-owned enterprises is increasing year by year. In 2018, compared to the previous year, state-owned companies suffered more than GEL 160 million.

Machavariani also announced that according to the government's forecast inflation should start returning to the target (3%) by the second half of 2020. The minister also said that the National Bank had taken appropriate steps in response to inflation.

Since September, the NBG has increased its monetary policy rate by 2 %. Currently the refinancing rate is 8.5%. IMF mission head Mercedes Vera-Martin predicts inflation will rise to 7.2% in Georgia by the end of 2019. In October 2019, inflation in Georgia rose to 6.9%, which is a record level of inflation since 2017.

“I do not welcome any retreat in the matter of larization,” said Machavariani about the possible reduction of USD lending limit from GEL 200 000 to GEL 100 000, explaining that lowering the margin may boost the market for the dollar in the short term, but leaves risks for mortgage borrowers.

Machavariani believes that the 200,000 GEL margin is not a major problem for the construction business.

“We can think about the general revenue and confirmation of responsible lending in the future but in my opinion, Larization should not be sacrificed to this topic. Although this may, on the one hand, stimulate the construction sector and alleviate the pressure on GEL, but we are putting pressure on GEL in the future,” noted Machavariani.

As for the question regarding the Lari rate, the finance minister said that it’s a combination of internal and external factors, claiming that that there are all the prerequisites and considerations for the rate to start coming down.

“If you see that the GEL is impaired with trading partners, it does allow us to say it will start to move, but of course we need political stability, economic predictability and business comfort… We've done a lot for the business - the tax burden has not increased. All this is preserved and we will definitely see positive dynamics regarding the course,” - the Minister said.

Finance minister was also asked about large-scale VAT fraud case. According to him 62 persons are detained, 102 persons are charged with criminal activity, 11 persons are under investigation and property worth 123 million USD has been seized. Minister asserts that according to his information, neither the Revenue Service nor the staff of the Investigation Service have been involved in the "false VAT case". He assured MPs that detainees are not just business people and quite a big number of them are former employees of state agencies, including the Revenue Service, the Investigation Service, and even the Prosecutor's Office.