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Georgian Economy Minister Lambastes IMF

  • Liz Fuller

It is less than three months since Russian oligarch Kakha Bendukidze accepted the post of Georgia's economy minister, and he has already crossed swords with colleagues, including Finance Minister Zurab Nogaideli, and incurred the hostility of much of the population.

But in an interview with RFE/RL's Georgian Service recorded on 15 August and broadcast the following day, Bendukidze affirmed that he would rather resign than resort to "populist statements" in a bid to mollify and win the support of the population.

The period since Bendukidze's appointment in early June has been marked by several significant economic trends, including, as he admitted in his interview with RFE/RL, a slowdown in economic growth over the past month. He denied emphatically having described that slowdown at a recent government session as stagnation. Asked to enumerate the conditions he considers essential to sustain the economic revival that began during the first six months of the year, Bendukidze listed first continued "political stabilization, which we have," followed by government protection of property rights, lower taxes, and production costs, and ensuring uninterrupted energy supplies.
"I have strong nerves and I can tolerate a situation in which for various reasons, some of them artificially created, the majority of the population consider me an undesirable presence"

Bendukidze has already shown himself an enthusiastic supporter of the new draft tax code unveiled shortly after his appointment. According to "Vedomosti" on 18 August, Bendukidze plans to shift the tax burden from business to the population at large, cutting taxes for businesses by up to 25 percent. Value Added Tax is to be reduced from 20 to 18 percent, and businesses with an annual turnover of less than 100,000 laris ($55,556) will be exempt from it altogether.

Bendukidze praised the new draft tax code, noting that it differs in certain significant ways, which he did not explain, from those of other countries. He told RFE/RL that the new tax code will prove a major incentive to both Georgian and foreign investors, and categorically rejected as unfounded his interlocutor's fears that the government would succeed in amending it to render it less liberal.

Not Seeing Eye to Eye With IMF

But Bendukidze's enthusiasm for slashing taxes has already brought him into conflict with both the International Monetary Fund (IMF) and with his colleagues, Finance Minister Nogaideli and Roman Gotsiridze, chairman of the parliament Budget and Finance Committee. Speaking to journalists on 16 August, Bendukidze rejected categorically a recent IMF warning to the Georgian government not to lower taxes too soon or too fast. In a statement released following a visit to Tbilisi by a group of IMF experts in late July and summarized by Caucasus Press on 4 August, the IMF praised Georgia's rapid economic growth, low inflation, and the improvement in tax collection during the first six months of 2004. But at the same time, the IMF called on the Georgian government to perfect during the next few months its plans for structural reforms to be introduced by 2006. And, crucially, while giving an overall positive assessment to the new draft tax code, it advised that any reduction in taxes should be gradual.

It was this latter proposal that Bendukidze took issue with. He said the IMF advised against any reduction in taxes over the next two-three years on the grounds that doing so could jeopardize fulfilling budget revenue targets, an argument he reportedly dismissed as "nonsense." Branding the IMF a "bunch of idiots," he said the fund's verdict on the new tax code is "biased" and its overall approach "unacceptable." He said a special commission will be formed to evaluate what he termed the "destructive role" the IMF has played in Georgia to date, and suggested that "it would not be a bad thing" to suspend cooperation with the IMF altogether. "If my position is unacceptable to anyone in the government, I am ready to retire," he reportedly concluded. Gotsiridze branded Bendukidze's statement "dangerous and biased," Caucasus Press reported on 19 August. He added that he too disagrees with the IMF's "advice" concerning cutting taxes, but that this is not a reason to insult such an influential organization." The daily "Rezonansi" predicted on 18 August that Bendukidze's reluctance to bow to IMF pressure could indeed ultimately lead to his resignation.

Relations between Tbilisi and the IMF were strained for several years prior to President Eduard Shevardnadze's ouster in November 2003. Between July 2002 and August 2003, the fund repeatedly postponed disbursement of further loan tranches to Tbilisi because of the Georgian authorities' failure to implement structural reforms and improve tax collection (see "RFE/RL Caucasus Report," 22 August 2003). The IMF approved a new three-year Poverty Reduction and Growth Facility Program only in early June (see "RFE/RL Newsline," 7 June 2004). That program envisions loans totaling approximately $144 million, of which the first $21 million tranche has already been disbursed.

Financial Amnesty

RFE/RL also raised with Bendukidze the possibility of a financial amnesty that would legalize businesses currently operating as part of the "shadow economy," which according to State Statistical Department data quoted by Caucasus Press on 21 July accounts for up to 50 percent of GDP. Bendukidze told RFE/RL that such an amnesty is currently under discussion. (Originally that amnesty was to have been announced on 1 June; President Mikheil Saakashvili said on 31 May that the announcement would be postponed until 1 July, but as RFE/RL pointed out, it has still not been made.) Bendukidze argued that both businessmen and the state would benefit from such an amnesty, the former because they would be able to function openly without fear of prosecution, and the latter from the ensuing increase in tax revenues.

The Georgian currency has strengthened from 2.22 to the U.S. dollar at the time of the so-called Rose Revolution last November to 1.82 on 18 August, an increase of some 17-18 percent. Asked whether that trend is likely to continue and whether it might cause problems for the economy at large, Bendukidze responded that "there is no such thing as a 'natural' exchange rate." He explained that the Georgian National Bank intervenes to regulate the exchange rate. Caucasus Press on 18 August quoted National Bank President Irakli Managadze as enumerating several factors that have contributed to the rise of the lari, including the large increase in budget revenues during the first six months of the year, the process of legalizing the "shadow" economy, and what he termed "psychological factors," including strong popular trust in the country's new leadership.

Asked whether his views on the ideal relationship between government and business have changed since he switched from the latter to the former camp, Bendukidze replied, "Not at all. I think exactly the same way now as I did then." But he admitted to being skeptical when businessmen come to him saying that they are motivated by the interests of the state. As a rule, he said, "I tell them 'You must be mad.' A businessman should think about making money, if he says he's defending the interests of the state then either he's lying or he's crazy."

Bendukidze concurred with RFE/RL's observation that his reception in Georgia has not been overwhelmingly positive, but implied that negative sentiment towards him has been artificially induced. "I have strong nerves and I can tolerate a situation in which for various reasons, some of them artificially created, the majority of the population consider me an undesirable [presence]," he said. Among those who are most opposed to him, he listed the Communists, Socialists, and the entire left wing of the political spectrum. But although he did not say so, that hostility also extends to other areas. The Association of Young Financiers and Businessmen, for example, rejected Bendukidze's argument in favor of mass privatization, voiced shortly after his appointment, that "we should sell everything except our conscience." As for the population at large, over 50 percent of whom live below the poverty line, they are unlikely to have derived much hope from Bendukidze's prediction, cited by Caucasus Press on 20 June, that Georgia will "live well" -- in 10 years' time.