Tbilisi Scrambles As Foreign Investment Shrivels

TBILISI (EurasiaNet)–According to the most recent projections, Georgia’s economy will contract by 1.5 percent this year. This estimate establishes a trend of declining economic expectations.

Calculations released in April by the Georgian government projected 2.5 percent growth for 2009, based largely on $4.5 billion in pledged foreign aid that began trickling into the economy late last year. Within a month, however, projections began sliding: lower estimates were released in May and still lower projections on June 1, when the government forecast a 1.5-percent decline. Official data on the economy’s first quarter performance in 2009 will be released later this month.

Finance Minister Kakha Baindurashvili states that the initial projections were based on the assumption that the economy would attract new investment as of the second quarter of 2009. In early 2009, the government hoped to draw roughly $1.1 billion in foreign investment for the year. The Georgian economy depends on high levels of foreign direct investment (FDI) to spur economic growth and to cover the country’s trade deficit

While first-quarter FDI figures for 2009 will not be released until later this month, the government is already taking action to lower expectations. “The projection did not really have the factor of the street unrest. It was the X factor,” Baindurashvili said in reference to opposition-led street protests and picketing that started in Tbilisi on April 9. The minister was speaking after a June 8 presentation on economic data to local and foreign entrepreneurs.

“The mood of the investors became too gloomy and they postponed final [investment] decisions and we suffered in Q2 as well,” he continued. “Donor finances are not enough” to compensate for “the full decline in the economy.”

According to the Ministry of Finance, as of April 30, $1.7 billion out of the pledged $4.5 billion in assistance had been committed to Georgia. Out of that total, $768 million has already been disbursed.

But estimated tax revenue and trade figures show there have been no investments and no growth in the economy, economists say. The government expects to lose 500 million lari (about $300.35 million) in tax revenues this year, including over 300 million lari (about $180.2 million) in Value Added Tax (VAT) payments, the Georgian equivalent to sales tax, Georgian Ministry of Finance data shows.

Aleksi Aleksishvili, who served in the cabinet from 2004-2007, believes that the loss in tax revenues indicates that the crisis is hitting the local economy even harder than the slowing growth rates alone may indicate. “The main issue, the main indicator [of economic growth] was foreign direct investments,” he said. “There weren’t any foreign direct investments.”

The figures, according to Aleksishvili, suggest it is likely that a significant number of small and medium enterprises will be closing in the coming months. They also suggest that unemployment could spike and key local economic sectors, including real estate and banking, will remain stagnant.

Projected trade data underlines that trend. Despite a dip in both exports and imports, Georgia’s trade deficit is expected to make up over 16 percent of the country’s 2009 gross domestic product (GDP). Georgia’s nominal GDP for 2008 was $12.8 billion. That gap, according to the IMF’s May 2009 Regional Outlook Report, is worrying since there are few options to finance it.

Aleksishvili stressed, however, that there was never any real hope among Georgian economists that foreign aid could ease the shock to the economy if FDI flows stopped.

“When we are talking about FDI, we are not talking about foreign aid. This is completely different,” he said. “It cannot really substitute . . . the nature of this investment inflow is really different.”

While the banking sector, for instance, has received more than $1 billion from international financial institutions, there is little evidence that the banks have started to increase loans, in turn, to their own customers, Aleksishvili added.

Paata Sheshelidze, one of the founders of Tbilisi’s libertarian New Economic School, noted that one indicator that foreign aid is having a lopsided effect on Georgia’s economy is the level of savings. Data from the National Bank of Georgia shows that both individual and business deposit levels at local banks fell consistently in February, March and April.

Authors
Tags

Related posts

Discussion Policy

Comments are welcomed and encouraged. Though you are fully responsible for the content you post, comments that include profanity, personal attacks or other inappropriate material will not be permitted. Asbarez reserves the right to block users who violate any of our posting standards and policies.

*

Top