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International Monetary Fund Warning Against Monopolies in Pharmaceutical and Banking Sectors

Georgia should show caution to prevent anti-competition practices as a result of high concentration in distinct economic sectors (including banking and medical services), the report by International Monetary Fund (IMF) “Caucasus and Central Asia: Employment of Region’s Growth Potential” reads.

According to the document, competition is of crucial importance in all economic sectors for improving resource distribution process and upgrading efficiency.

“The state control should not be replaced by private monopolies. The example of Armenia is exceptional in this respect – namely, its amendments to the law on Protection of Economic Competition”, the report reads.

Professor of European University and banking sector expert Gocha Tutberidze agrees with the IMF report and says that consolidation process continues in the banking sector over the past 5 years, whilst the National Bank of Georgia (NBG) cannot ensure efficient implementation of antitrust regulations. As a result, we have the situation, when two commercial banks hold more than 80% of the total banking assets. This is an alarming fact, because any problems before either of them will ruin the whole system”, Tutberidze noted.

The financial market has been monopolized by commercial banks, in practice, and access to money resources is determined by commercial banks, Tutberidze said.

Banking sector expert Gogita Tsutskiridze explains that there is low competition in the country and this is evident. The operating profit margin in 2015 was 5.2%, in 2016 – 5.8% and in 2017- 7%, that is, the growth made up 1.2% as a result of growing assets of leading commercial banks. At the same time, the net interest margin declined by only 0.4%. This factor reaffirms that in 2015-2017 the high concentration in the banking sector brought not very desirable effects, first of all, in terms of market competitive capacity.

According to his statement, the net interest margin due to countries demonstrate that the Georgian banking sector practices high interest margins. “Georgia ranks beside developing economies of Africa and Latin America in terms of interest rate margin. The mentioned countries (Ghana, Aruba, Honduras, Kenia, Uganda, Nicaragua and others) have worse economic development level and living standards than Georgia, For example, incomes per capita  due to the purchasing power parity  (PPP) is 10000 USD in Georgia and 3000 USD in Kenia and Tanzania, about 4000 USD in Ghana and Zambia”, Tsutskiridze said.

High margin of operating profits and its growth tendencies point to declining banking competition amid growing ratios of two major commercial banks and this process comprises oligopoly tendencies, he explained.

Shota Gulbani, president of Association of Young Financiers and Businessmen (AYFB) says that there is nothing new in IMF statements.

“We have been supervising and examining these sectors for many years. Regretfully, IMF recommendations and suggestions will change nothing in this respect. Development of competitive environment is a long-term process and this process requires bold steps by the Authorities. The fact is that we have oligopoly in the banking sector, as the ratio of these two commercial banks in total net profits of the sector accounts for 71%. The same figure is reported for the crediting portfolio. This situation generates multilateral problems in the economy. Access to money resources is of crucial importance, the crediting market concentrated on the banking sector offers expensive credits and this factor frequently frustrates the business development”,Gulbani said.

IMF expresses fears that low competition in pharmaceutical and banking sectors will grow into monopolies, however, citizens of Georgia have suffered from monopolies for a long period. For example, it is unclear how Georgian manufacturers manage to sold their generics for higher prices compared to original medications, or sell the same medications cheaper in Armenia, when the same companies take additional transportation costs and pay customs taxes in addition.

However, Competition Agency keeps silent on these issues for many years. It has announced plans for examining the pharmaceutical market starting 2019. Let’s see what results the agency, which is responsible for valuable competition, will bring to the country.

By Merab Janiashvili
Economic Analyst
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