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Sketch by Ilia Chrelashvili/Caucasus Business Week

Economic Growth Slows Down: Government Stakes Its All to Boost Economic Growth Pace

According to the early report, in January 2016 the real gross domestic product upturn pace marked 0.8% as compared to January 2015, while the 2015 real growth marked 2.8%. As reported, the 2016 forecast growth accounts for 3%.

The year of 2016 started with heavy tendencies in the Georgian economy. In the last year  Georgia’s GDP growth made up 2.8% and it was foreseeable that the new year would start with complications. The month of January recorded an only 0.8% upturn and this is  very low indicator. However, the figure marked 0.3% in January 2015.

The last year recorded not only share depreciation of the national currency, but slowdown in economic growth. In the last year, the economic growth constituted only 2.8%. Consequently, the economic growth contraction tendency was maintained in 2016 too, but the situation is better than in 2015.

In January 2016 Georgia’s foreign trade turnover (excluding unorganized trade) made up 528 million USD, down 24% compared to January 2015, including the exports marked 122 million USD, down 22% and the imports amounted to 405 million USD, down 25%. Georgia’s negative trade balance made up 283 million USD in January 2016, i.e. 54% in foreign trade turnover, while the ratio accounted for 56% in 2015.

Additional factor pointing to the economic activity slowdown is related to recently-established business companies. A total of 2 725 entities were registered in January 2016, down 17.8% compared to January 2015.

At the same time, in January 2016 the turnover of VAT-payer companies rose by 7.2% compared to January 2015. It should be also noted that in January 2015 this indicator marked 2.6% and 8.1% in 2014.

These trends prove how heavy situation arose in the Georgian economy in 2015. We should also emphasize that the January 2016 indicators are far better compared to January 2015.

At the beginning of 2016 the inflation indicator represents one of the main problems in the Georgian economy. In January and February the inflation rate made up 5.6%. It should be also noted that the National Bank’s target rate is 5% and the mentioned trends unveil the NBG’s unprofessional money-credit policy.

The economic growth contraction has affected the part of the budget revenues too. In January and February the budget expenditures extremely exceeded the budget revenues.

According to the February 26 report, fulfillment of the state budget revenues part made up only 51% in the first quarter plan, while the expenditures part constituted 58%. In the reporting period, the state budget has collected 1.116 billion GEL and spent 1.380 billion GEL. The difference made up 264 million GEL.

The Finance Ministry has explained that in the first quarter the internal debts will not grow and the deficit will be financed from the treasury balance. The treasury balance from January 1 to February 26 has decreased by 265 million GEL to 357 million GEL from 622 million GEL.

The state budget is not facing any problems and all three parameters of the budget (revenues, expenditures and balance) satisfy the requirements, according to the January-February indicators. There are no problems with the budget fulfillment and the first quarter plan indicators, the Finance Ministry assures.

“As to the fulfillment of the state budget part of tax revenues, according to the January-February early report, tax revenues exceeded the January-February 2015 indicators by 7.1%. The year on year growth in January-February 2015 made up 6.5% compared to the same period of 2014. Consequently, we have higher upturn in the part of tax revenues. In January-February we have collected 58% of the first quarter plan (the figure was 57.1% in the same period of 2015)”, the Finance Ministry noted.

The Finance Ministry refuses that the state budget is facing problems, but Finance Minister Nodar Khaduri has announced 5% budget cuttings in 2016. The Government plans to cut the state budget expenditures by 5% because of the coming taxation system reforms and the economic slowdown in the neighboring countries, Nodar Khaduri said.

The budget cutting will concern administrative costs of only Ministries and other state structures, not social allowances and infrastructural projects. Despite uneasy economic and financial situation in Georgia, the country expects higher FDI inflows in 2016 compared to 2015, the Finance Minister said.

The 2016 state budget accounts for 10.145 billion GEL and its 5% contraction will cut the part of expenditures by 400-500 million GEL. It is very difficult to cut the state budget by about 0.5 billion GEL during the year, but this is not impossible, even more so at the expense of cutting administrative costs.

The Authorities have decided to carry out the taxation system reformation in response to economic challenges. This decision is expected to lower budget revenues, but will additionally stimulate the economy. We mean the initiative that Prime Minister Giorgi Kvirikashvili has recently proposed for abolishing profits tax on reinvested funds.

Seeing the economic growth slowdown, the government stakes its all by cutting the budget expenditures by 5% as a result of the mentioned taxation system reformation.

The parliament of Georgia has already started discussing the bill that calls for simplifying the tax administration and removing the 15% profits tax on reinvested funds. If the parliament adopts the bill, the amendments will be enacted on July 1.

Meanwhile, new Prime Minister Giorgi Kvirikashvili puts forward new initiatives almost every week with the aim to promote the business sector and improve the economic growth indicators.

Abolition of profits tax on reinvested funds, decriminalization of economic crime, abolition of a value added tax on the fixed assets, introduction of Host in Georgia component as part of the Produce in Georgia state program, simplification of regulations for tax administration, introduction of the startups financing system for small and medium enterprises, one-window principle for the business sector – this is an incomplete list of all new initiatives that Giorgi Kvirikashvili has proposed for the last 2 months.

At this stage, the economic growth paces are low, but the quantity and importance of announced reforms suggest that the GDP will increase faster in the next months.

We will see in the near future whether the planned economic growth pace will suffice for the state budget fulfillment. Anyway, we welcome efforts to promote the business sector by cutting administrative costs. The current year will show whether the Government copes with the determined tasks.

By Merab Janiashvili
Economic Analyst
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