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Georgia: EBRD Sees Stability And Economic Growth

  • Stuart Parrott

London, 16 April 1997 (RFE/RL) -- A report published by the European Bank for Reconstruction and Development (EBRD) says the economy in Georgia has now virtually stabilized and the dramatic decline over the past five years has bottomed out. The report says: "After five years of civil war and economic collapse, stability has now returned."

The report says growth of the informal economy, now estimated to account for more than half of overall economic activity, is outpacing the slowing contraction of the formal Soviet-era economy.

It says real GDP growth of over 10 percent is projected for 1997. In 1996, GDP grew by 14 percent, a rapid rise on the 1995 growth figure of 2.4 percent, and above government expectations. The way is now open for government plans for much better living standards by 2000.

The report -- prepared on behalf of Georgian authorities by the EBRD's country promotion team and bank staff -- was released at the EBRD's sixth annual meeting in London this week.

The report says most of the state sector is idle and the rest is working at only a fraction of capacity. But growth is being driven by private small and medium enterprises who are active in such areas as services, transportation, construction and food production and processing.

The report says Georgia's adherence to an IMF and World Bank-supported program of tight monetary policy and stringent fiscal reform brought about end-year inflation of 14.5 percent in 1996 -- less than a quarter of the 1995 figure and better than government expectations. A further reduction of inflation to 8.5 percent is projected for 1997.

Massive state enterprise credits and bread, utility and transportation subsidies have been cut, as has state employment. The budget deficit was held down in 1996 to 3-4 percent and in October last year President Shevardnadze predicted a 1997 budget deficit of 2.9 percent of GDP. Government expenditure is under tight rein at about 13 percent of GDP.

The new currency, the Lari, introduced in 1995, has steadily appreciated in value. In 1996, it was about 1.28 to the dollar.

Registered unemployment remains very low although most of the workforce no longer participates in formal employment. The private sector may now account for more than 50 percent of GDP. More than 30,000 new business were registered in 1996. Georgians have a tradition for entrepreneurship -- a trait which explains the fact that there are now more than 65,000 registered small businesses.

A major downsizing of state institutions has already taken place. Privatisation of medium and large-scale enterprises is now well-advanced and may be completed by the end of 1997.

Despite "excellent progress," the report says the economic situation remains "fragile," owing to a number of severe structural problems. These include difficulties with collection of tax and energy payments. Georgia also suffers from an inability to meet its external debt repayments. Its foreign debt had climbed by mid-1996 to over $1.5 billion, and the country has to rely on humanitarian support.

The development of new businesses is hampered by a lack of sources of credit, utility breakdowns, poor transport and trade infrastructure, outdated energy-intensive technology and limited management skills.

Georgia still faces formidable political challenges. In the breakaway region of Abkhazia, a ceasefire has held since May, 1994. However the return of 300,000 refugees (ethnic Georgians expelled by the Abkhazians) is still unresolved. Nor does there seem to be any immediate prospect of reintegrating the other secessionist province of South Ossetia into the Georgian economy. However, the report says: "This stalemate, however, appears to be having a much less severe impact on trade and the economy than previously."

For the future, the report says Georgia has very great possibilities -- including extensive gas and oil reserves and vast hydro power potential. It also has substantial mineral resources. It could double its diverse farm output, and also has major tourist potential. And the report says:"Georgia remains strongly commited to democratic order and the establishment of a market economy."