Georgia strategy overview

Full strategy  (0.4Mb) Approved 9  Feb 2010

Summary of public comments  (0.2Mb)

Georgia is committed to the principles of multi-party democracy, pluralism and market economics in accordance with the conditions specified in Article 1 of the Agreement Establishing the Bank, although application of these principles has been uneven.

While the presidential election in January 2008 was generally in line with OSCE standards, subsequent parliamentary polls in May 2008, according to OSCE – ODIHR, did not fully conform to international standards for free and fair elections. Further development of democratic institutions, reinforcement of checks and balances between the branches of power, the strengthening of the rule of law, independence of the judiciary and protection of human rights are essential to overcome multiple challenges faced by Georgia today.

Georgia’s macroeconomic performance and general progress with reforms in the past five years have been strong. Georgia achieved significant economic growth mainly driven by the large foreign capital inflows. Foreign investments across different sectors of the economy have contributed to broadening the economic base. Domestic credit grew rapidly, supported by increased confidence in the banking sector and access to international financial market, and the level of dollarisation in the sector gradually decreased. Progress with structural reforms has also been significant. The main achievements include significant improvements in the legal and regulatory framework for business creation and operations including liberalisation of the customs regime, reducing corruption, simplifying the tax system and completion of large-scale privatisation across different sectors of the economy.

However, the Georgian economy has been significantly affected both by the conflict with Russia in August 2008 and the international financial crisis. The August conflict undermined investor and consumer confidence, put stress on public finances, damaged physical and other infrastructure and put pressure on the banking system because of large deposits withdrawal. The intensification of the international financial crisis has put further pressure on the currency and foreign investments, affected the quality of the loan portfolio and the recovery of bank deposits while the international financial markets remain closed. Bank lending has decreased significantly and remains very limited. Remittances from workers living abroad have declined since the beginning of 2009 due to the economic slowdown, in particular in Russia which still accounts for two-thirds of the source of remittances. This negative impact is partly offset by large-scale international financial support, amounting to about USD 4.55 billion over three years, pledged in October 2008. The IMF emergency 18-month stand-by programme of USD 750 million that started in mid-September 2008 (augmented by additional USD 424 million and extended by 14 months in August 2009) also helped with the stabilisation process after the conflict. The ongoing internal political uncertainty has further lowered investor confidence.

Challenges

While progress in structural and institutional reform has been robust in recent years, Georgia continues to face significant transition challenges:

• The international financial crisis revealed important weaknesses in the financial sector. Strengthening of banking sector, improvements in risk and portfolio management including through increase in local currency lending, as well as improvements in supervision and confidence in the banking sector, are important for financial sector stability.
• The rehabilitation of decaying physical infrastructure is a major challenge in Georgia and part of the government’s own anti-crisis stimulus plan. Further investments, regulatory reforms and private sector participation in infrastructure and municipal utilities are important for improving efficiency, quality of services, and long-term financial sustainability.
• The crisis has also highlighted the need to further diversify and widen the economic base. Although the economic base has broadened significantly in recent years, growth is mainly driven by financial services and the construction sector. Developing the tradable sector, by supporting exports and improving competitiveness, especially in manufacturing, and developing import substitution, in particular in agribusiness, are important for long-term sustainable growth. In the context of ongoing discussions with the EU on setting up a Deep and Comprehensive Free Trade Area (DCFTA), further progress is needed with establishing a sound regulatory framework in trade-related areas that is aligned with international and EU laws and standards.
• Further improvements of the business climate are necessary to boost confidence and attract more foreign investments. These include improvement in property rights, independence of the judiciary, and a further reduction in corruption.

Strategic directions

In response to the transition challenges amid the ongoing economic crisis, the strategic direction of the Bank’s activities will focus in the short term on supporting the economy to minimise the effects of the crisis, and later to support recovery and progress with reforms. The Bank will concentrate on the following priority areas:

• Financial sector: A key priority is to support the stability of the financial sector in general and banking sector in particular. The Bank’s focus will be on ensuring adequate levels of capital and supporting resumption of lending by existing clients in the financial sector. The Bank will support restructuring, strengthening of risk, liquidity, and portfolio management, increase in the share of local currency lending, and adjustment of funding models, which are essential for the banks’ long-term sustainability.
  
  
• Infrastructure sector: Infrastructure rehabilitation and modernisation, and improvement of regional transit infrastructure are important for the economic recovery.
  • Power & Energy Security & Efficiency: The Bank will support rehabilitation, construction and expansion investments in the power sector that will help Georgia achieve security of energy supply while facilitating trading of electricity in the region. There will be an increased focus on industrial and residential energy efficiency, at the same time special emphasis will be made to promote and assist the Bank’s industrial clients to take advantage of the Clean Development Mechanism (CDM).
  • MEI: Rehabilitation and support of long-term financial sustainability of the key municipal infrastructure sector will remain a strategic priority. The Bank will continue to strengthen its involvement in the municipal sector by capitalizing on its expertise and strong portfolio of projects, such as municipal water supply, waste water and solid waste management as well as the rehabilitation of urban transport.
  • Transport: The Bank will continue to give priority to infrastructure investments linked to the enhancement of the main East-West corridor. This is important to enable the country to take advantage of its geographic position as a major transit link between the South Caucasus, Central Asia and Europe. The Bank will focus on commercial financing to private operators.
    
    
• Enterprise Sector: As an integral part of the crisis response, a strong emphasis will be given to supporting the enterprise sector. Support to enterprises in general, and micro, small and medium-sized enterprises (MSMEs) in particular, will address their financing needs, support competition through innovation, and development of the tradable sector, in particular manufacturing and agribusiness. The Early Transition Countries Initiative (ETCI) will remain the principal driver for the Bank’s activities in the enterprise sector, allowing the Bank to invest in equity and provide debt through the available range of instruments.

Investment climate

During the past Strategy period, Georgia has made significant progress towards improving the business climate, introducing reforms and further promoting privatisation. The Bank had a very good co-operation with donors and IFIs in supporting the authorities in the aftermath of the August conflict. It actively participated in the Joint Needs Assessment (JNA) effort sponsored by the World Bank as an immediate post August 2008 conflict crisis response with particular focus on ensuring stability of the banking sector. The Bank will continue its fruitful and regular policy dialogue with the authorities with a special focus on energy and agriculture, in close coordination with the local business community, other IFIs and international donors. It will aim at addressing critical bottlenecks to local private sector investments and help to boost the return of confidence among foreign investors. The Bank will continue to promote active policy dialogue between the government and the business community.