The Messenger, Georgia
Dec 31 2004

Problems and prospects of the Georgian economy
By M. Alkhazashvili

In spite of certain positive changes in the Georgian economy, 2004
did not witness a major breakthrough in the economic fortunes of
Georgians. This year, hopefully, will emerge as a prelude to economic
progress. Only after a new tax code is adopted, financial amnesty is
put in place and large-scale privatization enacted can we judge the
new administration's economic policy. But this will happen only in
2005.

The first achievement of 2004 is the better administration of
budgetary revenues and the fulfillment of budget parameters. The
state budget was not cut for the first time in years and extra
revenues were even brought in. This allowed the government to pay
pensions and salaries and even increase pensions by a few laris. In
addition, old salary and pension debts from past years were paid off.


There were also certain achievements in combating smuggling into the
country.

However, there were also negative aspects, including the fact that
budget fulfillment was not the result of new enterprises starting up
or the development of business and trade, but rather due to better
administration of revenues and the confiscation of money from former
high-ranking officials in the fight against corruption.

The Rose Revolution authorities unfortunately did not possess a well
thought out economic program upon coming to power. They did not know
what to do or how. The preparation and adoption of the new tax code
and law on financial amnesty took almost one year and this
uncertainty created a feeling of instability for business in the
country and led businessmen to act very conservatively. Shootings in
South Ossetia did not help to attract investors either.

However the tax code and amnesty law are now ready and both will come
into effect in the near future. Although both have their critics, it
is hoped that they will have a positive impact on the economy. The
Georgian authorities proudly declare that the new tax code will be
the best among former Soviet Union countries. It will be the most
liberal, and the lower tax rates should encourage local business to
become more active.

Expectations are high, then, that 2005 will bring the economic growth
and greater prosperity that largely failed to materialize in 2004, a
year in which the population's socio-economical conditions actually
worsened due to the increase of consumer prices.

On top of price hikes, the strong showing of the Georgian lari
inhibited the purchasing capacity of many Georgians who receive
assistance from relatives abroad or save money in dollars. Prices
also went up on goods coming in from neighboring countries due to
stricter control at Georgian border points and shutting down of many
smuggling routes.

Unemployment also increased dramatically, as the state discharged
tens of thousands of people from government jobs. For instance, about
20,000 people were dismissed from law-enforcement structures (such as
the police, traffic police and so on) alone.

Altogether the number of unemployed persons in the country increased
by around one hundred thousand people. Among them were many who
welcomed and even supported the Rose Revolution. Today, these people
are not only skeptical, but actively oppose the current
administration.

Furthermore, the increased value of the lari made it more difficult
for Georgia to export its goods, while the tense situation with
Russia also had a negative impact on the nation's export capacity, as
the former Soviet Union still remains the biggest export market for
Georgia.

In 2005, however, the first stage of the privatization process
declared by former minister of economy Kakha Bendukidze will go
forward and the money acquired will be spent to fill the budgetary
gaps. It is also envisaged that foreign investments should finally
start flowing into Georgia.

The biggest event of the year, though, will be the start of operation
of the Baku-Tbilisi-Ceyhan oil pipeline, to be followed by the
beginning of construction of the Baku-Tbilisi-Erzrum natural gas
pipeline. Direct economic results from these two pipelines will be
seen in the coming years, when the natural gas pipeline in particular
should secure Georgia's energy security.

President Saakashvili has promised to pay more attention to the
development of transport infrastructure, which will undoubtedly
contribute to the significance of Georgia as a transit country as
well as the development of the economy more generally.

Specifically, a 90-kilometer road in the West Georgian region of
Samegrelo will be built, while the government intends to start in the
near future construction of a highway traversing the country from the
Red bridge (on the Georgia-Azerbaijani border) to Poti (on the Black
Sea coast). The first stage of this project will go from Tbilisi to
Khashuri.

Also being planned is the rehabilitation of the Tbilisi-Akhalkalaki
railway, which will make it easier for the Samtskhe-Javakheti region
to transport its goods into Tbilisi and further integrate this
primarily ethnic Armenian region into the Georgian state. A new
Tbilisi-Akhalkalaki highway is to be built as well.

2005 should be a decisive year from the standpoint of economic
development. This is the promise of the current administration and
Georgian society hopes that their dreams will be realized: on the
achievements of the next twelve months, or lack of them, hang the
success of the current administration and the future development of
the country.