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Nodar Chichinadze

2016 Year Proved that Politics is Important, However Economy is Even More Vital

The year of 2016 was very overloaded in terms of political and economic developments. We can emphasize two topics in both directions – elections and GEL exchange rate.

The year of 2016 has proved that politics is important, but economy is a fundamental field. Despite different facts have taken place in Georgian politics such as sudden appearance into politics from the concert stage and then sudden disappearance, establishment and suspension of political parties, parliamentary elections, constitutional majority and so on, economy field remains a key direction anyway.

When I decided to summarize the year of 2016 in terms of economic aspects, I had to use archives of various websites to recall important events, besides my own memory. And then I arranged facts due to the following principle – the most important facts were that I recalled myself and then facts from internet search engines come.

Let’s start with these topics: replacement of economic block management and national currency exchange rate.

Staff Reshuffles in Economic Block

It may be openly said that the year of 2016 was the period of staff reshuffles, especially in offices of economic profile. The country started the year of 2016 with  New Prime Minister, after Irakli Gharibashvili filed resignation and Giorgi Kvirikashvili took over the state governance.

In 2016 the National Bank president was replaced, as well as Minister of Economy, Minister of Agriculture and Minister of Infrastructure.

In practice, I cannot recall the case, when the management of economic direction would have been replaced entirely.

These changes could be divided in two parts. The year started with new Prime Minister and new president of NBG. It should be noted that these changes have brought considerable positive tendencies into the economy, including GEL exchange rate was strengthened to 2.10 point and the Business confidence Index increased after long-term contraction. ISET international school of economics called this event as the Kvirikashvili Effect.

However, we cannot name a wave of changes in the economic block as successful, that was recorded after elections. Extreme depreciation of GEL emerged as a main negative trend in this respect. Business Confidence Index also started declining.

Though, despite failed start, the economic team of the Government has to prove many things, but the new government was shaped only a month ago.

And now the key reason of failure – GEL exchange rate.

GEL again

The GEL exchange rate has become the most relevant issue over the past 2 years. It is so global topic that discussions over GEL and its condition may be applied as basis for appraising the whole economy and all economic developments.

At the beginning of 2016 the GEL exchange rate stood at 2.39 point. In late February the exchange rate fell to 2.49 point, but then GEL passed a long period of strengthening and grew to 2.12 point by mid June. But  After June GEL started depreciation in “stable” regime  and it has finally dropped below 2.80 point.

Why has this happened?

Let’s start with inflow of USD. In January to September 2016, 1.3 billion USD investments were made in the country, up 60 million USD compared to the same period of 2015. In January to November 2016 the  net inflow of money transfers made up 856 million USD, up 32 million USD compared to the same period of 2015. If we do not count imports of Hepatitis C medications that are transmitted free of charge, but are reflected in imports statistics, in January to November 2016, the negative trade balance was improved by 262 million USD. This signifies in January-November 2016 the difference between money paid for purchase of imports and revenues received from exports was 4.855 billion USD, while the figure marked 4.593 billion USD in January-November 2016.

According to indicators of the second quarter of 2016, Georgia’s net external debt declined by 70 million USD and this is a positive fact, but this factor does not foster GEL exchange rate strengthening, contrary to previous years, when the country was taking a great volume of debts and GEL was also stable. For example, in 2012, compared to 2011, Georgia’s net debt increased by 1.2 billion USD. According to recent indicators, revenues from tourism sector have grown. Currency outflow from the country may be related to withdrawal of Societe Generale from Bank Republic. This deal amounted to 140 million USD, however, in January-November 2016 the country attracted more USD compared to 2015. Though, GEL depreciated anyway.

It is logical that internal factors have driven depreciation and this factor derives from National Bank’s policy. NBG has violated correlation between USD and GEL as a result of alleviation of monetary policy, excessive crediting of commercial banks and growing minimum reserve requirement. As a result, GEL exchange rate has fallen.

Year of Merger of Businesses

The year of 2016 was exceptional in terms of major deals in business sector. Amid economic problems, similar tendencies should not be considered as Georgian specifics, because similar tendencies take place in other countries too.

Magticom has bought Caucasus, TBC Bank has acquired Progress Bank and Bank Republic and stole leadership of Bank of Georgia. TBC Bank has also bought Kopenbur insurance company. Meanwhile, Bank of Georgia bought ProCredit Bank’s loans portfolio (assets), pharmacy network GPC and Pharmadepot. Nikora has purchased almost all supermarkets and AltaOK has bought almost all medium and small stores of equipment.

In short, 2 or 3 similar new deals and Georgian economy will grow into one mega company.

Georgia in Ratings

Georgia has advanced to 59th position among 138 countries in the 2016-2017 Global Competitiveness Index, while the country occupied 66th position in the 2015-2015 index.

In 2016 Georgia improved positions in Global Innovations Index by 9 places and moved to 64th position.

In 2016 World Bank renewed the Doing Business rating and Georgia advanced to 16th place from 23rd position.

This year brought progress in terms of economic freedom indicators too. In the rating published by The Heritage Foundation, in 2016 Georgia ranks 23rd in the world and 12th in Europe. To put simply, Georgia has improved positions in all influential ratings.

Achievements of the Year

Amid various difficulties, several important projects were also inaugurated in 2016:

  • Free Trade Agreement with China;
  • Start of Anaklia Seaport construction works;
  • Introduction of Startups Financial Support Program;
  • Introduction of Estonian Model of Profits Tax;

The factors named for state economy development are very important and their reasonable and correct employment will take the country to a higher level of development.

And finally, when I was going to finish the article, I recalled one symbolic fact – in 2016 for the first time in history of independent Georgia, in the WB classification of low-income countries, Georgia moved to the category of countries with above the average  revenues.

Author of the article is Nodar Chichinadze