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Factors That Narrow Investment Inflows to Georgia After DCFTA Enforcement

Factors That Narrow Investment Inflows to Georgia After DCFTA Enforcement

The enforcement of the deep and comprehensive free trade agreement (DCFTA) between Georgia and EU was expected to bring many positive results, including growth in foreign direct investments (FDI).

A total of 2195 companies were registered in Georgia with a co-participation of foreign parties YTD, but it is difficult to say whether this process is related to the fact Georgian products and goods have got opportunity to enter the EU market under zero customs tariffs, in case of satisfying certain requirements. Are foreign investors interested in Georgia’s new opportunities under the DCFTA and what are the main factors that hinder Georgia to become a potential regional center for trading

with EU? There are many answers and unanswered questions around these issues.

Georgia-produced goods and services, that meet certain standards and requirements,  have got a direct access to the world’s major market with 28 countries and more than 500 million consumers after the Georgia-EU DCFTA came into force on September 1, 2014. Georgia should become an attractive country for making investments in and draw more investments, create new job places, arrange new enterprises and manufacture more exports products; Moreover, Georgian products and services meeting the EU standards will be exported to the EU market under the zero customs tariffs.

After the enforcement of the deep and comprehensive free trade agreement, starting January 1, 2015 through September 2015, a total of 2195 companies were registered in Georgia with co-participation of foreign parties (3 053 since September 2014, 4 830 in 2013, 4 335 in 2012). A major number of these companies was established in Tbilisi and the Ajara Region in 2012 to 2015.

A short period has passed since the DCFTA enforcement and it is difficult to determine whether the latest foreign investments are related to the DCFTA factors, Mariam Gabunia, a deputy head of the Economy Ministry Department for Foreign Trade and International Economic Relations, said.

The DCFTA will bring benefits in the long-term period and the country should carry out certain reforms to make a full use of this agreement, Mariam Gabunia noted. This agreement will bring much benefit in terms of trade-commerce development and investment inflows, she added.

The Georgia-EU DCFTA enforcement was to raise the interest of investors and stimulate their motivation, but there are many global and domestic factors that shrink investment-making flows worldwide, economic expert Akaki Tsomaia noted.

“Naturally, there are problems with drawing capital, but it may be found somehow; We generally lack for knowledge, competence. We do not know how to get established in the EU market. Consequently, we cannot efficiently apply this opportunity. We mostly depend on foreign investments”, Akaki Tsomaia said.

One year has passed since the DCFTA enforcement, but the country has not received a desirable effect, because the Authorities have made accent on return to the Russian market and the time, power and money were mainly spent on this direction, Zurab Japaridze, one of the founders of the new political center of Girchi (Pinecone), asserts.

„Regretfully, there are many problems in terms of economic environment. For the last three years the state policy strives for not deeper liberalization of the economic environment, but for opposite direction. This trend has created very instable environment in the country. First, the existing taxes should further decrease to create more competitive environment and increase our attractiveness. Regretfully, the Authorities just follow the current and avoid making decisive changes in the policy”, Zurab Japaridze said.

FDI inflows grow in Georgia, but at low paces, while the DCFTA enforcement is to boost not only FDI inflows, but also production and exports potential, especially, in the private sector. As a result, the country can increase inflows of stable currencies, improve the tax balance and strengthen the national currency. Nevertheless, no progress is noticeable in this direction, Kakha Gogolashvili, the European Research Center director, noted.

We will definitely receive benefits from the DCFTA, but not in one year or two. This is a long-term perspective that is determined by many factors. When you make investments in the country, this country should be stable in terms of political and security issues, while our region embraces high risks today. All these factors influence investors’ motivation”.

The Eugeorgia.info has asked Mariam Gabunia, a deputy head of the Economy Ministry Department for Foreign Trade and International Economic Relations, about the standards and requirements Georgia should satisfy so as the products manufactured by imported raw materials in Georgia be considered Georgia-manufactured products and enjoy zero customs taxes in the EU market. Mariam Gabunia answered that products of each indication must satisfy the production regulations that are described in about 300 annex to the DCFTA.

“For example, in the production sector, domestically manufactured value must be over 40% or, let’s say, over 30%, in some cases, over 90%. The ratio depends on specific product. In some cases, the product must be entirely produced in Georgia, for example, cattle. All products must satisfy different regulations of origin”, Mariam Gabunia noted.

The state expenditures should be considerably cut, the state bureaucracy should be narrowed and the economy should be let breathe freely. At the same time, taxes should be further lowered”, Zurab Japaridze noted.

“This decision requires bold political will and I do not believe this government will take similar risks. Cutting expenditures signifies that the sum should be extracted from the economy. Consequently, taxes should be lowered. Reduction of taxes is always a correct step in any time. Naturally, investors will find more interesting the economic environment, where higher profits may be earned. Let’s say an investor has to choose between Georgia and Czech Republic. Georgia may offer lower taxes compared to Czech Republic, but Czech Republic offers other preferences, for example, the workforce is cheaper, the market is more solvent and several other factors. If the investor sees that Georgia balances various restrictions through lower taxes, not all investors, but a certain part of the investors may take a risky decision and make investments in Georgia”, Zurab Japaridze said.