georgia: economy, poverty and environment poverty and environment initiative inception workshop...

Georgia: Economy, Poverty and Environment Poverty and Environment Initiative Inception Workshop Bratislava (Slovakia) December 9, 2008

1 Country overview Population: 4.6 mln (Department of Statistics) Capital: Tbilisi Government type: Republic Area: 69,700 sq km (26,911 sq miles) State language: Georgian Major religion: Christianity Life expectancy: 69 years (men), 77 years (women) (UN) Median age: 38 years Monetary unit: Georgian Lari (GEL) GEL/US$: 1.4155, GEL/EUR: 1.7916 2007 GDP: GEL17.0 bn (US$10.2 bn) 2007 GDP per capita: GEL3,868 (US$2,315) 2007 Real GDP Growth: 12.4%, versus 9.4% in 2006 and 9.6% in 2005 CPI Change: 2007 period average was 9.2% versus 9.2% in 2006 and 8.2% in 2005 Net FDI inflows: US$937.6 mln in 1H 2008, US$2,014.8 mln in 2007 versus US$1,076 mln in 2006 and US$542 mln in 2005 Source: CIA Factbook, BBC

2 Governments Policy Governments Program Document United Georgia without Poverty (2008-2012): National wellbeing Wellbeing of the population Logistics, transport and the infrastructure Natural resources

3 Sustained liberal reforms of 2004-2008 have laid a sound foundation for long term growth Political stability and continuity Fresh five-year mandate for the confirmation of the reforms after President Saakashvilis first-round re- election (53.5%) and parliamentary elections in 2008 Strong capital inflows Net FDI 19.8% of GDP in 2007 Total private capital inflows 23% of GDP in 2007 Breadth of institutional investor coverage Moderate banking and private sector borrowing Net remittances 7.4% of GDP in 2007 Expanding economic base Radical deregulation & liberalization since 2004 Entrepreneurial boom, with over 50,000 new business registered p.a. Pronounced shrinkage of grey economy & corruption since 2004 Export diversification and growth (03-07 CAGR of 26%) Robust Economic Performance & Sustained Growth Prudent fiscal policy Low, flat and decreasing taxes Modern public finance framework MTEF, Single Treasury Account, etc Budget expenditure cap of 25% of GDP mandatory from 2011 Vibrant & rapidly growing financial sector Banking sector assets/GDP at 44% at YE2007, up from 16% at YE2003 Assets 03 07 CAGR of 52% Loans 03 07 CAGR of 57% Deposits 03 07 CAGR of 48% No state-owned banks since 1996 No restrictions on foreign ownership of the banks, 7 of the top 10 banks foreign-controlled NPLs at a manageable level of 2.6%, predominantly collateralized lending BIS CAR of circa 15.8% Loan/deposits ratio of 1.5x (Deposits + Equity)/Assets ratio of 0.66x Borrowed funds 30% of total assets Further sector reforms Effective monetary policy Move to explicit inflation targeting in 2009 CPI target limited to single digits Parliamentary confidence vote on central bank governor in case of four consecutive quarters of +/- 2% deviation from the target Period average CPI of 11.1% - 10.2% since 2006 Cumulative increase of the main policy rate by 500bps to 12% in November 2007 July 2008, decrease to 11% in Aug. 2008 and to 10% in Sep. 2008 YTD CPI of 5.8% September 08 y-o-y period-end CPI of 10.6% - one of the lowest in the region Broad money y-o-y growth reduced to 6.3% by Sep. 2008 Full currency convertibility since 1997 Stable currency and managed float Positive external momentum Total public debt as % of GDP reduced from 56% in 2003 to 23% in 2007 External public debt as % of GDP reduced from 38% in 2003 to 15% in 2007 FX reserves increased from US$191 mln in 2003 to US$1,446 mln in July 2008 Successful debut 5-year 7.5% RegS Eurobond of US$500 mln issued in April 2008

4 Radical reforms created a favourable market environment Corruption Perception Index, 2008 Economic Freedom Index, 2007 Ease of Doing Business, 2009 Percentile rank indicates the percentage of countries worldwide that rate below the selected country. Higher values indicate better governance ratings Source: World Bank Source: Transparency International; 180 countries ranked (Percentile ranks) Worldwide Government Indicator, 2007 Source: World Bank, 2008 (Rank out of 181 countries) Source: The Heritage Foundation (Up from 130 in 2005) (Up from 112 in 2005) (Up from 93 in 2005) Euromoney - country risk rating, Sep. 2008 UNCTAD Inward FDI Performance Index Ranking, 2007 Source: Euromoney (Up from 144 in March 2005) Source: UNCTAD (Up from 16 in 2005)

5 and provided the platform for high economic growth GDP Nominal GDP (US$bn)Real GDP growth, y-o-y (%) Components of nominal GDP, 2007Comments Boosted by aggressive economic reforms and substantial FDI inflows, Georgias economy continues to show strong growth Rapid economic growth has been driven by A burst of entrepreneurial activity Growth in domestic consumption led by a new middle class Rehabilitation of infrastructure, and Exports Georgias economic performance in 2006 and 2007 is particularly impressive, taking into consideration the consecutive external shocks (Russian embargo, rising commodity prices & subprime meltdown) and tight monetary policy Source: Department of Statistics of Georgia Nominal GDP = US$10,175 mln Source: Department of Statistics of Georgia

6 Improving living standards and providing economic diversification Source: Department of Statistics of Georgia GDP per capita (PPP)Broad-based economic growth Nominal GDP per capita US$ GDP per capita (PPP) (US$) US$ Source: International Monetary Fund 2007 2005 20012003 2001 Source: International Monetary Fund Source: Department of Statistics of Georgia, National Bank of Georgia B+/B/NA B1/BB-/BB- Baa2/BBB+/BBB+ Baa3/BBB+/BBB Baa2/BBB-/BBB Baa3/BBB-/BBB US$

7 LABOUR MARKET Challenge: structural unemployment/job mismatch The most Liberal Labour Code 99% labour freedom (IEF, Heritage Foundation) State Programs: Vocational Training and Retraining, Development of Professional Training Infrastructure Professional Education for Employment (PPP format), Cheap Credit, 100 new Agro Industry Enterprises More than 163 800 job seekers took part in active labour market measures Growing share of employment policy expenditures (active and passive measures) in GDP: from 0.5% (2005) up to 0.8% (2007) Source: Department of Statistics Unemployment rate declined to 13.3% in 2007, down 0.3% y-o-y Employed population 1678.7 thousand, among which: Salaried employees 625.4 thousand (+3.5% 07/06) Employers 19.4 thousand (+46% 07/06) Accelerated growth rate of the number of salaried employed and decrease of the number of self- employed Source: Department of Statistics Unemployment Rate, % Monthly Salary of Employed in State and Non-state Enterprises

8 LABOUR MARKET AND DEMOGRAPHIC TRENDS Number of Population 4,382,105 people In 2007, the number of births increased by 3.1% y- o-y to 49,287 people Number of deaths declined by 2.5% y-o-y to 41,178 people in 2007 Positive natural growth of the population - 8,109 people (up 46% y-o-y) in 2007. Economically active population in Georgia decreased by 2.7% to 1 965,3 th. people in 2007 Subsistence minimum for working age male 118.6 GEL monthly, increasing 11,1% y-o-y Subsistence minimum for average consumer GEL 105 Average monthly income per household - GEL 422 more than two times as more as subsistence level of average household No minimum wage regulation in private sector, minimum wage in public sector 115 GEL Source: Department of Statistics Natural Growth of Population (person) Income per Household

Agriculture, GDP (bln) and Share(%) in GDP, y-o-y Opportunities Support to creation of new food processing enterprises Privatization of the state owned plots of agricultural land Rehabilitation of irrigation infrastructure Favorable foreign trade regimes of agro- products Rural infrastructure rehabilitation/development Cheap credits and delivery of machinery and technique The Agriculture sector is the largest jobs provider - 53 % of the total population are employed in agriculture Though the sector provides only about 9 % of GDP, the productivity is very low Extremely fragmented holdings app. 1 mln land owners with 4 mln parcel and 0.25 ha average parcel size Georgian agriculture largely is non- commercialized subsistence forms prevail Dilemma: Artificially accelerated growth of productiveness in agriculture would imply substantial job distraction If not supported by job creation in other sectors rise in unemployment is unavoidable Governments Vision Agricultural development must be deeply integrated into a comprehensive rural integrated development policy: development of social infrastructure promoting creation of new agro-processing industries stimulating non agro-employment improved physical infrastructure Agriculture Source: Department for Statistics

Poverty 1997-20032003-20071997-2007 Real GDP Growth+33%+43%+89% Real Agric GDP Growth+3%-1%+2.5% Rural Poverty LevelIncreased by 24% Fell in some regions (Real increase of 55% in non-farm cash income) 60% of the poor currently live in rural areas Strong economic growth has happened outside of agriculture 60% of the poor live in rural areas Economic growth and poverty

Poverty: profile 23.6 percent of the Georgian population is poor, and 9.3 percent is extreme poor (note: extreme/total poverty lines in Sep. 2007 prices is 47.1 Lari & 71.6 Lari per person per month, respectively; extreme poverty line is based on the cost of 2,260 calories per day; consumption per adult equivalent is used as a welfare aggregate) Rural areas account for 59% of the total poor (poverty incidence is 29.7% in rural vs. 18.3% in urban areas) Employment status is strongly correlated with poverty Rural areas account for 59% of the total poor, and 62% of the extreme poor Livelihoods in rural areas continue to rely on low productivity self- subsistence agriculture, making eradication of poverty extremely challenging Rural poverty has a strong regional dimension (i.e., rural areas are not equally poor)

Poverty: Causes, Factors Since 2003 Georgia has implemented an impressive number of reforms, embracing various spheres (economy, governance, human development, etc.) The available data indicate that living standards in Georgia have improved since 2003. Household monetary incomes between 2003 and 2007 increased in real terms on average by 31.6%, or 7.9% per annum Poverty in Georgia continues to be deeply entrenched in rural areas, accounting for 60% of the poor Employment has not played its expected role in the poverty reduction, due to narrowly-based growth and decline in employment numbers Social assistance became an increasingly important lifeline for Georgias poor, the role of Targeted Social Assistance (TSA) is very important Narrowly based growth (construction, finance, communications, tourism, mining); these sectors registered the highest rates of growth in output and real earnings, but they account for only 8% of the total employment Stagnant agriculture output, still based on subsistence production systems; The bulk of employment (54% of the total) continues to be concentrated in low productivity, mostly self-subsistence agriculture hence the poverty is deeply entrenched in rural areas

Policy Targeted Social Assistance, Jobs Creation 1/3 of State Budget allocated for social affairs in 2008 and 2009 Cash transfers But rapidly improving capacity to redistribute the benefits of growth through social assistance; as of September 2007 targeted social assistance (TSA) covered 30% of the extreme poor, and 19% of the overall poor Non-cash transfers Universal health insurance package for poors Reforms in the education and health sectors since 2003; early evidence suggests that those reforms contributed to improved health and education outputs and outcomes

15 Environment Protection - Institutions Government - Ministry of Environment: monitoring and enforcing environmental law and regulations Responsibilities of Ministry of Environment: - Development of Environmental Policy; - Resource Management and Environmental Control; - Examination of EIAs and Issuance of Environmental Permits; - Enforcement of Environmental Law; - Monitoring and Control of Emissions Parliament - Committee for Environmental Protection and Natural Resources: drafting of environmental law and overseeing the conduct of environmental affairs on behalf of Parliament.

16 Environment Protection Institutions cntd StateInspectorate on Environment Protection State Inspectorate on Environment Protection Execution of the state control in the field of environmental protection; Detection and deterrence of the cases of natural resources illegal using and violations of environmental law; Control over the regulated community on implemtation of conditions stipulated in environmental license/permit; Implementation of the preventive measures and compliance promotion; Response on the detected environmental violations; Monitoring of environmental activities accomplished on high ecological risk objects during construction and operation phases

17 Environment Protection Legislation LawAreasYear Basic Law On Environmental Protection On licenses and permits On State Environmental Control 1996 2005 Other Environme ntal Laws Concerning protection of air quality On Protection of Atmospheric Air 1999 Concerning protection of water resources On Water 1997 Concerning waste __ Concerning nature protection On the wildlife Forest Code On Protected Area System On Mineral Resources 1996 1999 1996

18 Environment Protection Challenges Problems Classification of problems Main Locations Main Causes 1 Air pollution Big cities of the country Out of date autopark; Low quality of fuel; Poor traffic management. 2 Pollution of Kura and other various small rivers; Pollution of the Black Sea Pollution of water resources Industrial areas; The Black Sea Amortized treatment plants; Discharge of untreated waste water 3 Waste ManagementGarbage/WasteIndustrial Areas; Populated areas Lack of legislation; Low level of environmental awareness 4 Illegal logging, poaching Degradation of nature Whole country Social problems; Low level of environmental awareness

19 Rehabilitation plan for water & sanitation Currently access to water and sanitation system is unreliable and limited The most urban water supply and sanitation infrastructure is outdated - more than 40 years old The whole system faces very high technical losses The management of the sector is ineffective, resulting in: ineffective financial management unpredictability of companies low level of collection high indebtedness of the companies underinvestment in infrastructure development GNEWRC is empowered with regulating the tariffs in the sector Restructuring: parceling all state and municipal water and sanitation assets into large viable companies will be performed: East Georgian agglomeration West Georgian agglomeration And, Tbilisi agglomeration (already privately owned) Investments for infrastructure development [500 mln USD] for development of water and partially sanitation system GoG commits to a five-year protected line in the state budget, covering up to [50%] of the [municipal] capital costs Donors fund a management contract for an international operator to come in, design the water and sanitation system and operate the companies for [five] years. The operator would be chosen by means of international competitive selection process The final aim: privatization of the companies through international competitive selection

Landfills require a modern, nation-wide solution, entailing the creation of several landfill nationwide, which meet key standards Based on the above, donors grants contribute as equity with any SPV is capitalized EBRD/IFC etc agree to lend long-term circa EUR 70-80 mln to the SPV (non-recourse) GNEWRC (energy and water independent regulator) is empowered with regulating the landfill operator tariffs GoG commits to a five-year protected line in the state budget, covering up to 50% of the municipal costs, thus giving the SPV some visibility of revenues Donors fund a management contract for an international operator to come in, design the landfills and operate them on a nationwide basis for five years. The operator would be chose by means of international competitive selection process 20 Nationwide waste disposal/landfill management plan

21 Sustainable Forestry The GoG has two-dimensional policy in forestry: environment dimension - effective management and protection for preservation of biodiversity, protection of rare species and ensuring conditions for their sustainable development economic dimension economically viable forestry, with proper incentives, i.e. long-term tradable lease of forest lands and good supervision Environment dimension The GoGs priorities in protection of forestry protection and preservation of forest's ecological values Currently forests represent 43% of total territory of Georgia Natural Protected Areas cover 10 % of total forest territory and GoG plans to increase them by 23% for 2010 year Economic dimension The GoG will modify forestry management forms (Communal, Cultural, State and Private management) The GoG will support effective utilization of forests economic potential taking into account long-term benefit: Licenses are issued for long-term - 20 years Stimulating long-term private interest in the process of forestry resource utilization for Ensuring of Ecological, Economical and Social Benefits Highly valuable forest restoration activities will be implemented taking care of protect forests territory with respect of forests high conservation value Management Plan (including inventory), based on international standards and approved by the respective OECD member country certified/accredited Eco-Audit Annual Eco-Audit Reporting, proved by relevant organisation concerning the fulfilment of the Implemented Activities TOP FIVE RANK IN THE WORLD

22 Ecological Damage of the August Conflict Forest Fire Despite the huge effort taken against the fire, it has been spread for over 950 ha. The fauna of the region experienced a significant damage. Fire spread to the Nedzvi Sanctuary direction - estimated 150 ha area burnt around the Sanctuary Representatives of fauna from burnt areas forced to move to Nedzvi Sanctuary The worlds largest stands of Oriental White Spruce (Picea orientalis - Caucasian endemic) were burnt The territory, covered with fire was inhabited by the numerous animal species, including those which are part of the Red List: Brown Bear (Ursus arctos); lynx (Lynx lynx); deer (Cervus elaphus); chamois (Repicapra rupicapra); otter (Lutra lutra), whitetail eagle (Haliaeetus albicilla), Caucasus cock (Tetrao mlokosiewiczi); Caucasus viper (Vipera kaznakovi); Caucasus salamander (Mertensialla caucassica); vesper bat (Myotis bechsteinii); European bat (Barbastella barbastellus); Caucasian Squirrel (Sciurus anomalus).

23 August Conflict Pollution of Poti port water area 5 warships of Georgian navy and 3 patrol boats of Georgian coast guard full of fuel were sunk in the Black Sea Approximately 50 tonne of oil, diesel fuel and lubricants have been spilled into the Black Sea The substances spilt from the damaged and sunk ships are: Diesel fuel, Diesel oil, Hydraulic oil, Sewage water. Source: UNOSAT www.unosat.org

24 Thank you for attention

georgia: economy, poverty and environment poverty and environment initiative inception workshop...

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