The most important events in Georgian economy in 2016" />

Lari – the anti-hero of the year

The most important events in Georgian economy in 2016

photo :Sergo Martirosov

Statistics taken into account, it can be stated, that 2016 was not a successful year for Georgian economy. Despite certain achievements the country is still facing substantial challenges. Here are the important processes, that have influenced Georgian economy in 2016.

Rate of lari

Lari has been experiencing devaluation for 2 years. Despite official optimistic expectations, the national currency is losing ground day by day. The first anti-record of the current year was established in February – 2.50 lari for a dollar. Devaluation stopped in spring with lari gaining strength. In early summer the with the beginning of the tourist season and inflow of dollars lari rose to 2.13.

September saw the beginning of the second phase of the current crisis.

In order to slow down devaluation the National Bank sold $180 mln ahead of the October elections, but with little effect.

On November 9 the rate was 2.45. lari reached a new historic level – 2.55 – on December 1.

Since 2013 devaluation of lari has reached 25%.

Another anti-record was established on December 16, 2016 – 2.80.

Economists see several reasons for the national currency devaluation.

1 Growth of money supply.The National Bank monetary policy has been eased, in particular, the base rate has dropped from 8% to 6.5%, which led to 1 billion (18%) growth in lari supply. The measure had negative effect on the exchange rate, but on the other hand helped the economic growth.

2.Insufficient foreign investments. 

Direct foreign investments in the first 9 months of 2016 have reached $1.2 bln. Which means little growth year by year with $1.54 bln direct foreign investments in 2015.

3.Lesser foreign credits and grants. Credits and grants are another source of hard currency. From January to September the government has received by $150 mln less, than was planned, which also had a negative effect on the exchange rate.

4.External factors.The officials often explain the lari devaluation by external factors, which is partly true. Various regional and global events are having negative effect on Georgian economy (sanctions against Russia, war in Ukraine, etc.). Dollar rise in other countries should be noted among them.

 The government plan

At the end of 2016 the government presented the 10 Points Larization Plan, meant to boost economic growth and halt devaluation.

1. To ban on-line credits. The final version of the proposal remains undisclosed..initially the prime-minister announced full ban on on-line credits in order to safeguard consumers. Later though, some leaders of the parliamentary majority claimed, the idea was to introduce new regulations, not to have the market banned. The proposal will have a negative effect anyway, and it smells of populism.

2. Raising tobacco excisesstarting January 1, 2017 is likely to affect consumers though higher prices. Filtered cigarettes will cost by 60 tetri more, unfiltered – by 30. Higher excise is meant to boost budgetary receipts.

3.Restricting smoking in public space. Which has little to do with economy, but meant to introduce “the European standard”.

4. Subsidising mortgage loans. The most populist and unfair measure. From 2017 the government plans to support those, who took mortgage loans in dollars prior to 2015. Which means, that part of the population, including the needy ones, wll “help” to serve the loans with their money. Besides being unfair the measure will have negative effect on the economy.

5. Higher excise on imported second-hand vehicles is also meant to raise the budgetary receipts (like point 2) by additional L45 mln in 2017.It will make customs clearance 1.5-3 times more expensive.

6. Raising the excise on oil products will raise the budgetary receipts by L250 mln. Simultaneously the fuel prices are to grow substantially. In 2017 a liter of petrol will cost by 19 tetri more, diesel – by 23 tetri, natural gas used as fuel – by 12 tetri. The negative effect may be worse because of the world trends, in particular the OPEC decision to limit production, causing price rise.

7. Higher taxes for the gambling business  is also meant to defend the consumers. The measure will curb development, but keep access to gambling free.

8. Cutting the administrative expenditures by 10% is definitely to benefit economy, in contrast to other proposed measures, and is highly desirable for fast economic growth. For example, the public sector in Poland and Georgia employs now the same number of people, with population of Georgia being ten times less, than in Poland.

9. Income tax cancellation was calculated to cut the budget receipts by L500 mln (L300 mln in the updatedl version). This is definitely the positive step, allowing to keep money in the private sector. It would be a success, be it not for the plans to compensate the budget through higher taxes and excises.

10. Prices for goods and services are to be established in lari. The measure is a part of the proposed “larization” plan, meant to support he national currency. From 2017 on the credits less than L100 000 can be issued in lari only. The goal is to make peoplemore dependent  onlari and minimize the risks of the dollar strengthening.

Most experts consider the proposals populist, not to affect the economy fundamentally and seek short term solutions. The question remains – why the government does not let business make the free choice it desires?

Export and import

Export growth is crucial in bringing more dollars into the country, stabilizing lari and helping faster economic growth. Unfortunately Georgia was not a success here in 2016. First 9 months statistics shows 6% decline to 2015 and 2% to 2011 in Georgian export. The major reason is the decline in second hand vehicles export and declining export to strategic trading partners (Azerbaijan, Kazakhstan, Turkey).

Import in first 9 months of 2016 has been declining too, with foreign trade deficit reaching $6.9 bln – less dollars come into the country than go out.

International ratings

2016 saw Georgia progressing in international ratings and studies. Itisimportantprimarilyforattractingnewforeigninvestments.

In Doing business rating, based on the World Bank study, Georgia has move from 23 position to 16. 5 reforms have been carried out in Georgia to achieve the result. In Europe and Asia only Kazakhstan is ahead of Georgia in number of reforms  (8).

Georgia has also moved 7 positions up in Global Competiveness Index, based on the 2015 study by Swiss World Economic Forum.

Two 2016 World Bank studies demonstrate Georgia progress. Extreme poverty has been declining year by year. In 2000 46% of the population were spending less than $2.5 a day with only 32% in 2014. The decline to 25% is forecasted by the study.

According to the second WB study 2016 saw Georgia moving from the group of nations with incomes below average to the above average income group. The last time Georgia progressed in this rating was back in 2004.

Various statistics

Number of tourists visiting Georgia has reached record high in 2016 – 5.9 million, 7.9% (400 000) up as compared to 2015.

Growing tourism helped to increase the number of passengers in Georgian airports by 24.6% as compared to 2015 and 108% to 2012.

Inflation for nine months is 2.4%, 0.2% up as compared to 2015. Prices rose mainly on alcohol, tobacco and food.

Money inflow from abroad grew by 47%, reaching $934 mln in 10 monthsMoney transfers also grewto $159 inninemonths.

The most important economic project of 2016 is the Anaklia port. In February 2016 the final decision to go on with its construction was made. The Georgian government and the Anaklia Development Fund have agreed to construct the deep-water port worth $2.5 bln. The economy is to benefit largely from the success of the project.

What to expect from 2017

2016 provedtobehardandpainfulfortheGeorgianeconomy, despite statistics demonstrate improvement.

The basic problems and challenges from 2016 remain in place.

Lari devaluation is the major problem for the people, and with all likelihood it is to exceed the level of 3 to a dollar soon.

The measures proposed by the government are obviously insufficient, and some experts believe, they are to undermine economic growth of 2.3% in the third quarter. Low level of foreign investment adds to the problem, as well as other external and internal factors.

The government plan foresees the economy to grow by 4% in 2017. The rate that means, decades will pass, before Georgia catches up with the poorest European countries.

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