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The European Union, GEPLAC and Georgian Economic Trends

The relations of the European Union (EU) with the countries of Eastern Europe and Central Asia were underpinned in 1991 through a programme of technical assistance called Tacis. Since then these relations have deepened through political dialogue into a partnership resulting in greater cooperation towards common goals. In the case of Georgia, such cooperation is the subject of a Partnership and Cooperation Agreement with the EU which entered into force in July 1999. The Georgian – European Policy and Legal Advice Centre (GEPLAC) was first established in 1998 as a project under the Tacis programme. The current phase of the project is being implemented by Deutsche Gesellschaft fur Technische Zusammenarbeit (GTZ) GmbH. In addition to Georgian Economic Trends (GET) and the Georgian Law Review, GEPLAC is involved in the provision of economic policy and legal advice to the government of Georgia on both a programmed and ad hoc basis. While GET is produced with the financial assistance of the EU, the content is the sole responsibility of the authors and can in no way be taken to reflect the views of the EU.

Georgian Economic

Trends Quarterly Review 2004 No. 1

GEORGIAN ECONOMIC TRENDS

GEORGIAN ECONOMIC TRENDS – 2004 No.1

Georgian Economic Trends (GET), a quarterly publication, aims to provide all those interested in the progress of economic reform in Georgia with a review of developments and transition. GET was established in 1995 and is published in Georgian and English. This and previous editions of GET are available on the internet at:

www.geplac.org The following people worked on this edition (in alphabetical order): George Eradze, David Gvenetadze, Ivan Habanec, Mark Hudson, Natalia Kakabadze, Shota Keldishvili, Dimitri Kemoklidze, Gocha Kereselidze, Erekle Natadze, Veronica Schneider, Simon Stone, Irakli Tsereteli GET draws on information from a wide range of government and non-government sources including in particular the State Department for Statistics, the National Bank of Georgia, the United State Social Insurance Fund, the Ministry of Finance, the Ministry of Foreign Affairs, the Ministry of Economy, Industry and Trade, Department of Privatisation, the Ministry of Labour, Healthcare and Social Affairs as well as other Government ministries and departments. Wherever possible every care is taken to ensure that data sources are fully acknowledged since without the full co-operation and support of information providers, including regular consultation, it would not be possible to produce this review. The purpose of GET is to offer an independent analytical account of economic trends drawing on information made publicly available. As part of this work, commentary and advice are offered on policy and on the collection and dissemination of economic and other information. These are always intended to support the process of economic reform in Georgia, and also to relate this to the Partnership and Cooperation Agreement between Georgia and the European Union. However, they represent the view of the authors and editors only and do not represent any official view of the European Commission, the Georgian-European Policy and Legal Advice Centre or the Government of Georgia.

GET also publishes feature articles by outside contributors: academicians, government officials, members of parliament, independent scholars and researchers, etc. on economic issues of contemporary relevance in Georgia. Before being accepted for publication, all articles will be reviewed by members of GET Editorial Board that may also seek permission to edit such articles. Articles will be published only if they are deemed to be consistent with GET editorial policy. Contributors are requested to submit their papers either in English or in Georgian by e-mail as an attached Word file (Font: Arial, size 10 for English and AcadNusx, size 10 for Georgian) to Veronica Schneider, editor-in-chief at [email protected] or to deliver them as a Word file on a diskette to the address below. The ideas, opinions, findings, interpretations and conclusions contained in the feature articles are those of the author(s) only and do not necessarily coincide with those of GET Editorial Board, neither do they represent any official view of the European Commission, the Georgian-European Policy and Legal Advice Centre or the Government of Georgia. Readers may quote any information used provided it is properly acknowledged. For further information or comments please contact: Veronica Schneider Editor-in-Chief Georgian Economic Trends Georgian-European Policy and Legal Advice Centre (GEPLAC) 42, Kazbegi Ave, Tbilisi 380077 Tel: (995 32) 53 71 40 / 53 71 42 / 53 71 43 53 71 45 / 53 71 46 Tel/Fax: (995 32) 53 71 39 (direct) Fax: (995 32) 53 71 38 E-mail: [email protected] To subscribe to GET, please, send an e-mail or fax stating your contact details and language of the edition to the e-mail address/fax numbers above.

GEORGIAN ECONOMIC TRENDS

GEORGIAN ECONOMIC TRENDS – 2004 No.1 1

Contents Foreword 3

Part I. Economic Trends 1. Summary 7

2. National Accounts and Main Trends 11

3. Government Finance 18

4. Money and Finance 26

5. International Trade and Foreign Economic Relations 33

6. Privatisation 40

7. Labour Market, Incomes and the Social Safety Net 46

8. The EU-Georgian Relations 58

Calendar of Events 65

Part II. Appendix: Feature Articles I. Problems of Information and Communication Infrastructure in

Caucasian Region 80 By Paata J. Kervalishvili, Head of the Centre for Euro-Caucasus Technological Development, Paris II. Competition Policy and its Implementation 88 By Joseph McArdle, Barrister-at-Law, Dublin, London

III. Compliance of Securities Industry Operation in Georgia with

International Norms 109 By Tengiz Akhobadze, Commissioner, National Securities Commission of Georgia

Part III. Statistical Appendix Statistical Appendix 114

Abbreviations 127

FOREWORD


Dear Reader Welcome to GET 2004/1, and a new phase of GEPLAC, which will run until May of next year. There has been a longer than normal period since the last GET was published – in order to make up for this, and in the light of ongoing developments, our Foreword is also rather longer than normal. In planning the work of this phase (GEPLAC 4), the main players, the European Union, the PCA Commission, the GEPLAC Management and the Contractor, GTZ, were seeking both continuity, and the fostering of a much broader awareness and active application, of the Project’s work. As GET readers will know, this work is focussed on support for the implementation of the PCA – the Partnership and Cooperation Agreement between the EU and Georgia – and in particular the harmonisation of Georgian and EU legislation and standards in the economic field. Not anticipated of course were the events of the last few months and the emergence of a new political and administrative landscape in Georgia. As a Georgian organisation, operated with European support, and with a mandate to advise Government in its policymaking agenda, GEPLAC will obviously be actively involved in the weeks and months ahead. An important question then arises: What is GEPLAC’s view on the policies and priorities that might be adopted to meet the challenges and opportunities that Georgia now has before it? How do these relate to PCA? Addressing this question, it is perhaps useful to underline our introductory comments above. GEPLAC is concerned with improvement of the economic environment, in part through legislative and regulatory reform. This is our continuing role. It is especially true when we consider that, while the political landscape may have changed, the economic has not. Georgia faces the same challenges now as it did three or four months ago – the point is that a possibility exists to confront them in new ways. Still with continuity in mind, however, GEPLAC’s view of the essential requirements of policy remains the same as before and falls under three headings, which will also be familiar to our readers: • Promotion of Georgia’s increased participation in the global economy • Improvement of the business environment • Support for state bodies and public officials in the performance of their duties

These aims are the ultimate rationale for Georgia’s implementation of PCA and the National Programme for Harmonisation of Georgian Legislation with that of the EU. Revisiting them in the current environment, GEPLAC sees the following as important issues. Georgia in the global economy Georgia is not alone among former socialist economies in the difficulties it has encountered when seeking to develop foreign trade and encourage inward investment, though there are some quite specific exceptions, such as the BTC pipeline. The major success stories are in accession countries physically close to the EU, which have received heavy foreign investment in both manufacturing and services. However, they have often also benefited from what the EBRD, in its November presentation

FOREWORD

4 GEORGIAN ECONOMIC TRENDS – 2004 No.1

of the 2003 Transition Report, described as “brisk government spending”, that may have to be followed by a period of fiscal tightening. Commodity producers, such as Russia and Kazakhstan, have also performed well, though high revenues from such exports depend in part on high commodity prices and therefore may not be sustainable in the long term. In any event, it is clear that if Georgia is itself to have sustainable economic development, it must remedy the current unsatisfactory situation. Therefore, GEPLAC is of the opinion that, for Georgia, an exertion of control over its borders is of fundamental importance. This is not only politically necessary, but a precondition for the re-opening of traditional north-south trading links between Armenia (and countries even further south), Georgia and southern Russia, in markets and products with which Georgia can readily work. This would strongly complement the new east-west links that are now being successfully established. It is occasionally said that Georgia’s geographic position (with which the whole world is now much more familiar!) is at the same time one of its greatest strengths and greatest weaknesses. Shifting the balance decisively towards the former appears to be a major priority of Government, in part through its efforts at rapprochement with Russia. One of the aims of policy advice by GEPLAC and other organisations should be to support practical efforts at the re-establishment of economic ties in the wider Caucasus region. Our first external contribution – by Prof. Paata Kervalishvili, Head of the Centre for Euro-Caucasus Technological Development, Paris – describes an approach to possible establishment of a new information infrastructure in the Caucasus, including organisational and training/capacity-building issues. The Georgian business environment Even if Georgia were to rely solely on its position as a transit country, further reforms to transport and customs procedures would be a minimum requirement, as contemplated by the National Programme. If, however, it is to develop a trade in its own goods and services, far more extensive reforms are needed that would assist it to promote small business and attract foreign investment. This has been stated as a clear priority of Government and the role of advisors and donors is to provide appropriate support. What are the principal issues in regard to the business environment? A large number of details and potential initiatives may be listed, and could form an “industrial policy” of Government, though the major elements that might be publicly expressed in a single strategy are as follows: • Fair treatment of economic players under the law; the so-called “level playing field” • Reduction of the costs of doing business in Georgia • Improvement of the competitiveness of Georgian firms GEPLAC’s position is that all new legislation in the economic sphere should meet these criteria and that public officials involved should be trained to support the efforts of firms of all sizes and types. A number of the points mentioned above are considered in detail by our second external contributor, Joseph McArdle, a barrister-at-law in Ireland, and a specialist in Competition Policy, who has worked with GEPLAC and other PCA implementation projects in recent years.

FOREWORD


Performance of public officials in Georgia The issue of the performance of public officials raises even broader issues regarding the functioning of the state overall, and how it might best utilise resources. According to the Government’s recent projections, it will seek to expand its role to some extent as budget revenues increase from the present 14 per cent of GDP to 20 per cent by 2008. However, a strict prioritisation of expenditures will still be needed – the above mentioned “brisk government spending” is not an option. Indeed, a process of careful evaluation is occurring in all countries. For example in the UK, where tax revenues are projected at 37 per cent of GDP this year, the state budget is nevertheless under severe pressure. Quite radical proposals are being discussed, for example, regarding job reductions, much tighter procurement procedures and contracting-out of support services. The background of budget constraints in Georgia argues strongly in favour of a re-design of state institutions. Their role remains crucial and naturally concentrates on the provision of general support for, and appropriate regulation of, the activities of civil society and the private sector. This represents both a challenge and an opportunity to adopt new approaches to policy. The challenge is to provide the necessary structural environment for normal economic and community life, for example through the provision of basic “public goods” (e.g. security, roads), special services (e.g. emergency hospital care) and the effective recognition of legal rights and obligations. As concerns opportunities, it is recognised that Georgians have become increasingly self-reliant in the resolution of their problems and the acquisition of other important services – a good example is education, where private expenditure is already considerable. In the future, a system of private pension provision must also eventually be introduced, as in many other countries. Education and care for the elderly are good examples of fields in which Georgian values coincide (and have always coincided) closely with those of Europe as a whole, and the opportunity exists to support initiatives in these fields. Private pension provision is one of the desired outcomes from the further evolution of the Georgian securities market. This evolution, including progress to date, is described in full in our third external contribution; by Tengiz Akhobadze, Commissioner, National Securities Commission of Georgia, an organisation with which GEPLAC has worked closely in the elaboration of the National Programme. These recommendations of course place new responsibilities on officials to administer with the greatest possible understanding of their functions and the legal/regulatory regime under which they work. In fact, an emphasis needs to be placed on the reasonable regulation of functions mainly carried out by the private sector. A great deal of effort should therefore be directed towards the general professional training of officials in sectoral Ministries and agencies and to give them the tools to maximise their efficiency, in the form of relevant and applicable legislation and procedures; again, this is a central aim of the National Programme.

____________________ The preceding recommendations rely strongly on the reasonable assumption that improvements to and/or the completion of legislation are a key to progress. However, it has long been accepted that, whatever the scope of legislation and regulations already enacted in Georgia, they are frequently not implemented. If this is intentional, then there is an “enforcement” problem, but if unintentional or due to simple misunderstanding, it is more a question of “interpretation” and “application”. Each of these requires a different remedy and, in the current phase of the Project, GEPLAC has the task of producing recommendations in this regard. Suffice to say here that, a major effort will need to be made to increase the common understanding of the technical nature of legislation, as well as its

FOREWORD


justification in terms of the public welfare. This in part involves the adoption of new vocabulary used by economic players, which is rather taken for granted in well-established market economies. It would contribute to a higher degree of acceptance of laws and their voluntary enforcement, and correspondingly reduce the need for compulsion. The three pillars of economic policy, which GEPLAC is recommending, can contribute to a strategy that would potentially achieve broad support. With the requisite resources, including technical assistance, it can in time be successful. The questions are: Where do the resources come from and how much time is reasonable? In regard to the first question, it is clear that the donor community has a vital role to play. However, GEPLAC’s view is that donor activity should seek to support both improvements to fundamental infrastructure and also target the various initiatives of the private sector, which Government may also facilitate. In regard to time, any government is inevitably concerned with the difficult task of managing the expectations of the public. The essence of the “contract” between the governing and the governed in a democracy is that the latter should believe that any short-term sacrifices are worthwhile in the longer term and that policies derive from a long-term strategy. This in turn argues in favour an approach of increasing the public’s awareness of: • The enduring close ties between Georgia and the EU, including such formal structures as PCA • The mutual undertakings of PCA, including that of Georgia to pursue reforms and of the EU to

provide technical assistance • The essential concordance of values in Georgia and Europe as a whole

As the guiding blueprint for Georgia’s relations with the EU, and as implemented in part through the National Programme, PCA provides a sound basis for policy advice. It also provides a very concrete translation of the European-oriented ideals, which Government has frequently expressed. In the hands of conscientious and energetic Ministers and officials, a well-grounded policy agenda, supported by the donor community with an emphasis on private sector solutions, can fundamentally transform the Georgian economy and society.

CHAPTER ONE: SUMMARY


NATIONAL ACCOUNTS AND MAIN TRENDS Georgia’s GDP in 2003 was GEL 8,465.60 million. The GDP growth rate rose to 8.6 per cent compared with 5.4 per cent in 2002. It is interesting fact, that such a high growth rate was not observed in the country since the economic crises of 1998. The positive economic trends were reported in all sectors of the economy, except of the sectors of state management and defense. Acceleration rate of the economic growth resulted from expansion in industry, agriculture, construction and services. Problems associated with the non-recorded operations and the informal economy still remains one of the main challenges of the economic reforms and policy, which equaled 31.8 per cent of total output in 2003. More or less favorable weather conditions as well as the structural reforms in the agricultural sector (land privatization and formation of land market) promoted to the increase output in this sector. The annual growth rate has attained 7 per cent in 2003. Like in 2002, a positive trend of 2003 was also a considerable expansion in industry. Registered output of industrial enterprises increased by 14 per cent compared with the previous year. As far as the transport and communication sectors is concerned there is evidenced the increase of activities of all types of services. If in the transport sector there was the modest growth rate 1.3 per cent in 2003, in the telecommunication sector it reached 31.3 per cent. FOREIGN DEBT The foreign debt still is remains the heavy burden for the scarce state budget and although it stabilized in the resent years Georgia’s outstanding foreign debt amounted to USD 1, 849.262 million in 2003. The foreign debt constituted to 47 per cent of GDP and state allocated about 145.2 million for its service. The restructuring of the foreign debt is still remains the sole feasible option for the country. To embark on a sustainable path would also require to maintain solid GDP growth and considerably increase tax revenue collection. BALANCE OF PAYMENTS The balance of payments continues the trend of deterioration and its deficit increased also in the Q1-Q3 2003 compared with the corresponding period of 2002. The deterioration is related to the increased deficit in the balance of current accounts as well as in the balance of capital accounts. At the same time some positive developments was observed in the balance of financial accounts. GOVERNMENT FINANCE According to the 2003 State Budget, total revenues were expected to reach GEL 1,103.9 million. Actual state budget revenues were GEL 932.4 million, GEL 171.5 million less than planned. Not all the anticipated external payments were received and this explains GEL 47.6 million of the shortfall. Another source of shortfall was lower than expected non-tax revenues. These account for GEL 10 million not received by state. Shortage of the most important item – tax revenues was GEL113 million. However, overall tax collection has improved by 12 per cent over the year. A sharp rise of profit tax receipts over the year is accompanied by also sharp decrease of VAT revenues from imports and marginal increase of all other tax revenues. Law on state budget of Georgia 2003 envisaged GEL 1,343.7 million on the expenditure side. Actual spending of state budget for the year was GEL 1118.5 million, that is 83.2 per cent of target. Growth of expenditures over the year was lower compared to growth in revenue mobilisation and made up 7 per cent against 12 per cent.

SUMMARY


Central budget deficit financing was GEL 186.1 million instead of planned GEL 293.8 million. The only sub item of sources of deficit financing that was fully financed (98 per cent) was National Bank credit. Sharp drop in both revenue mobilisation and public expenditures comes on second half of the year. This apparently was connected with political tension in the country and inability of previous administration to exercise due control over bureaucracy. Poor budget preparation along with lack of appropriate commitment control and cash management resulted in build-up of arrears including on wages, pensions and social contributions. MONEY AND FINANCE During 2003, 49 T-Bills auctions held. On average 8-13 commercial banks participated in that auctions. The weighted average annual interest rate was 43.3 per cent, which indicates that it was not a notable increase comparing with the previous year. In 2003, the Net Domestic Assets grew by GEL 58.2 million (GEL 27.5 million less than targeted) caused by the Net Claims on Government raising. As of January 1st, 2004, the Net Claims on Banks were GEL 6.3 million that was the outstanding debt for the NBG’s overnight loans (a new instrument to regulate current liquidity). M1 (reserve money) annual growth by 13.9 per cent was generally caused by foreign currency absorption provided by the NBG. M3 grew by 22.8 per cent in 2003 while M2 rose by 14.1 per cent. Deposit liabilities grew by 30.9 per cent notably at the expense of foreign currency denominated deposits. The annual inflation in 2003 was 7 per cent, the highest since 2000. One could say that it was caused by imports reduction and the Lari devaluation expectation during the political crisis. During the other months there were not any dramatic changes in inflation rate. Foreign exchange reserves of the NBG were USD 191 million that was equivalent of 1.31 months of imports and was USD 15.1 million more than targeted. INTERNATIONAL TRADE AND FOREIGN ECONOMIC RELATIONS During 2003, external trade turnover was equal to USD 1 502 million, of which exports were USD 444 million and imports USD 1 057 million. The trade deficit of USD 614 million is about USD 231 million more than in 2002. Trade balance/GDP ratio increased from 11.6 in 2002 to 15.6 in 2003. Imports increased by 45 per cent USD reflecting needs for imported goods for construction of BTC, mainly tubes and pipes. 28 per cent export growth is a result of 8.6 per cent GDP growth and partially result of some improvements in export registration procedures. The export coverage of import ratio decreased in 2003 to 42 per cent, while in the 2002 the ratio was 47.6 per cent. Georgian exports are partially concentrated on low value-added commodities such as ferrous, copper, aluminum, iron and steel and mineral fuels. However the dynamics of exports seems to indicate that the concentration of exports on low value-added commodities will decrease gradually. Imports are dominated by mineral products, pharmaceuticals and food, which indicates the dependence of Georgia on foreign energy and domestic problems with the economic development. Equipment imports do not seem to be significant, which could be explained by the seemingly low level of investments – an impediment for long-term growth. PRIVATISATION

SUMMARY


Privatisation process showed little progress in the second half of the 2003. The abolishing of Ministry of State Property Management (MSPM) implemented in the first half of the year was followed by the transformation process. The ministry has been transformed into two bodies. A Department of Privatisation was created in the Ministry of Economics, Industry and Trade and it deals with the privatisation issues. The State Property Management Agency was established as a legal entity of the public law and deals with the issues related to state property management and has no right to sell the state shares. The transformation process considerably slowed down actual privatisation of the state enterprises. Political crisis emerged by the parliamentary elections hold in November resulted in the change of the regime. New government is to be appointed in February 2004. The political situation in the country also slowed down the privatisation process. However, it seems that the developments will take a new pace when the new government is in place. Moreover, new president and his team are determined to combat existing corruption in the country and consequently the privatisation process is likely to become more transparent and some suspicious cases of privatisation may be reconsidered. All this measures should bring more revenues to the state and ensure that the enterprises are acquired by the most capable and efficient owners. In the second half of 2003 privatisation of the small enterprises saw some progress. There was no news in privatising medium and large enterprises (MLE). Some MLEs are facing liquidation/bankruptcy procedures. A tender to identify the future leaseholder company of Tbilisi Water Utility was completed. The technical and financial proposals of the only bidding company Compagnie Generale des Eaux (France) have successfully passed the evaluation by the tendering commission and the contract is to be signed after the approval by municipal authorities and WB. There was no progress in the privatisation of telecommunications and energy assets. EMPLOYMENT, INCOMES AND THE SOCIAL SAFETY NET LABOUR MARKET The labour market situation remains largely unfavourable and unstable. Whilst unemployment rate figures are generally in line with those for transition economies and, if taken alone, may even suggest optimistic conclusions, the overall picture is flawed by persistent underemployment, widespread hidden and disguised unemployment and salaries falling way below the minimum subsistence level. All the above-mentioned long-term labour market problems adversely effect the poverty situation that is continuously reflected in painful declines in living standards experienced by increasingly larger numbers of households. Most of the working age population is either underemployed or non-employed. New stable jobs are rarely created. The labour market is dominated by agricultural subsistence self-employment. A large portion of the employed are engaged in unofficial and unregistered low-paying largely self-employment activities. Just around 20 per cent of the working age population have waged or salaried jobs and the vast majority of those employed are hardly earning a living. SOCIAL POLICY AND THE SOCIAL SAFETY NET The vast majority of the population, including informal sector employees, the self-employed and the unemployed, as well as their family members, have no social protection whatsoever, and the assistance for those covered by the social safety net is symbolic. Fundamental steps are to be taken on the way to restructuring the state social protection system to create an economically viable, affordable and equitable social safety net that would be fit to alleviate poverty effectively, especially for the most vulnerable. In conditions of inadequate pension assistance, alleviating poverty in old age is of vital importance. The pension is supposed to grow, and the government hopes to be able to pay GEL 18 countrywide beginning from April-May 2004, where in addition to GEL 14 of the main flat-rate pension allowance another GEL 4 would be added to cover for previously accumulated pension arrears.

SUMMARY


Social policy and reforms are among the top government priorities. The national Economic Growth and Poverty Reduction Programme (EGPRP), that has been endorsed by the donor community and is to be revised, considers among its priorities the reduction of poverty through support to economic growth leading to the creation of new jobs, and reform of the pension system. The reform has already started, and is aimed at introducing a sustainable multi-pillar pension system, based on insurance principles. EU-GEORGIAN RELATIONS According to the State Department for Statistics, in 2003 Georgia’s trade relations with the Member States of the European Union amounted to USD 456.2 million, which is about USD 77.9 per cent more than in the previous year. During this period Georgian exports to the EU market amounted USD 76.0 million (126,7 per cent to compare with 2002). To compare with previous year the export increased by USD 16 million. EU Member States imports in Georgia significantly increased and came to USD 380.1 million (to compare with previous year it was increased twice). For the period of observing 30.3 per cent of Georgia’s foreign trade counts on EU member States, among them 17.1 per cent of exports and 35.9 per cent of imports. INDICATIVE PROGRAMME 2004-2006 The Indicative Program 2004 to 2006 for Georgia was signed on January 14th, 2004 in Tbilisi. According to the program EU in the frame of TACIS program will allocate EURO 28 mln., including EURO 4 mln. for the rehabilitation programs. The areas of co-operation are discussed as below. IMPLEMENTATION OF THE CONCEPT OF A WIDER EUROPE Wider Europe, European Convention, new Constitution of Europe, different debates on the future of Europe, undoubtedly all are a manifestation of ever growing process of European Integration. European Commission “Wider Europe” initiative gives the enlarged EU an opportunity to define the Union’s policy towards the new neighbours for the nearest 10-15 years. Georgia considers that Wider Europe – New Neighbouring initiative is a good mechanism facilitating the ongoing integration processes in Europe and therefore, attaches great importance to the inclusion of the South Caucasian countries, particularly Georgia in this initiative. Country’s inclusion in the Wider Europe initiative will highly contribute to Georgia’s gradual integration into the EU structures. Discussing the concept of the Wider Europe, to answer the obvious questions is crucial: Who are the Unions’ new neighbours? What benefits would Wider Europe offer the EU and its new neighbours? What principles should apply and what instruments should be used in its implementation?

CHAPTER TWO: NATIONAL ACCOUNTS AND MAIN TRENDS


GDP AND MAIN TRENDS According to the preliminary estimates of the SDS, Georgia’s GDP in 2003 was GEL 8,465.6 million (USD 3,948.1 million, i.e., USD 866.7 per capita). GDP growth rate rose in 2003 to 8.6 per cent, compared with 5.4 per cent in 2002. It is an interesting fact, that such a high growth rate in Georgia was not observed since the economic crisis of 1998. In 2003, the GDP grew in every quarter compared with the corresponding quarter in the previous year. In the first quarter it was 4.8 per cent, in the second 12.2 per cent, in the third 8.4 per cent and in the fourth quarter the rate reached 8.5 per cent. The only negative growth rate was in the state management and defence sector, and the reduction of the expenses for state management can be considered as a positive development in the circumstances of the scarce budgetary resources. The acceleration of economic growth resulted from expansion in industry, agriculture, construction and services. But the main driver of such a high rate of growth was the launch of construction of Baku-Tbilisi-Ceyhan pipeline. The launch of the project positively affected the construction and services sectors. It is also worth mentioning, that the project employed many people and that increased the income of population and correspondingly boosted domestic demand. Domestic demand is still the main driving force of economic growth in Georgia. Table 2.1 shows the structure of GDP and its growth rates. Table 2.1: Structure of GDP, 2002-2003 (GEL million)

2002 2003 Share in GDP 2003 (per cent)

2003 vs. 2002 (2002=100)

Agriculture, forestry and fishing 1,435.2 1,715.3 20.3 107.0

Industry and construction 1,694.1 1,929.5 22.8 114.0

Industry 985.1 1,129.2 13.3 114.0 Domestic processing of products 329.5 361.5 4.3 102.7

Construction 379.5 438.8 5.2 116.3

Services 3,919.7 4,363.8 51.5 111.0

Trade 956.2 1,103.3 13 107.0

Hotel and restaurant 218.6 245.7 2.9 114.4

Transport 838.7 857.8 10.1 101.3

Telecommunication 217.4 292.6 3.5 131.3

Financial intermediation 108.0 124.1 1.5 119.8

Operation with real estate, commercial activities

446.8 503 5.9 118.0

State management, Defence 295.4 326.2 3.9 97.4

Education 290.1 273.5 3.2 101.7

Health care and social services 347.9 364.5 4.3 105.1

Other services 200.6 273.1 3.2 136.0

Amendments by financial intermediation services

-72.7 -93.2 -1.1 124.6

Net taxes 495.4 550.3 6.5 111.0

GDP 7,471.7 8,465.6 100 108.6 Source: State Department for Statistics

NATIONAL ACCOUNTS AND MAIN TRENDS


Non-recorded operations and the informal economy still remain a major problem for economic reform and policy. From table 2.2 we can observe that in 2003 the share of the non-recorded economy in the total output remained almost stable. Table 2.2: Share of Non-recorded Economy in Total Output, 2000-2003 (Per cent)

2000 2001 2002 2003

Non-recorded 32.8 32.9 33.6 31.8 Recorded 67.2 67.1 66.4 68.2

Source: State Department for Statistics SECTORS OF ECONOMY Agriculture The agricultural sector in 2003 was characterised by high growth of about 7 per cent. Unfavourable weather conditions (especially frequent rainfall) adversely affected the agrarian sector in the beginning of 2003. Seasonal agricultural work was carried out with delays in the spring. As a result, in the first quarter the real growth rate in agriculture fell to –0.9 per cent compared to the same period of 2002. In the following quarters the situation improved and finally the annual growth rate in the sector attained 7 per cent. Compared with 2002, there was an increase in the production of almost all the main agricultural products. Particularly, there were increases in the production of grain, wheat, maize, sunflower, potatoes, vegetables, fruit, tea, citrus and grapes. The average yields of these crops also increased. Like the arable sector, livestock-related agriculture (production of meat, milk and eggs) also expanded. The high growth rate in the sector can be ascribed to the structural reforms implemented in the sector as well as more or less favourable weather conditions in 2003. As a result of land reform, by 2003 about 25 per cent of the country’s total arable land was privatised and about 30 per cent was leased out. The growth evidenced in the sector is an important fact due to strategic importance of the sector as about 50 per cent of the total labour force is employed in the agriculture (See Chapter Eight). Despite some positive developments in the sector, there is still evidence of some acute problems. In agriculture labour productivity is much lower (about 4 times) than in other sectors of economy. Most households are too small and rely on manual work; agricultural techniques are commonly obsolete; the fertility of soil is declining; and the irrigation and drainage systems need restoration. Solving these problems is related to the creation of favourable conditions for investment in agriculture. Partially, the solution of these problems can be found in the development of land market, that correspondingly can attract creditors in the sector. Together with the above-mentioned problems, protecting the domestic market from smuggling and counterfeit goods also should be on the top policy agenda of the government.



Table 2.3: Agricultural Products (Thousand tonnes)

1995 1996 1997 1998 1999 2000 2001 2002

2003 Grain & beans, total 516.2 652 902 598 773 407 713.6 680 738.7

Wheat 76.5 114 311 145 226.1 89.4 306.5 200 225.0

Maize 386.5 491 546 420 490 295.9 288.6 400 450

Haricot bean 14.3 21.7 15 9.2 9.3 2.6 10 10 9.6

Sunflower 7.1 4 31.4 22.8 40.5 2.6 41.8 20 24

Potatoes 353.3 285 353 350 433.3 302 422.2 415 424

Vegetables 428.3 386 513 380 417 354.2 396 405 430

Fruits 383.9 361 299 279 296 250 200 150 260

Grapes 422.4 311 309 238 220 210 150 80 200

Tea 38.5 86.2 33.2 47.2 60 24 23 24 25.5

Citrus 118 117.8 57.1 85.1 56 40 60 33 50Source: State Department for Statistics

Industry and Construction As in 2002, a positive trend of 2003 was a considerable expansion in industry. Registered output of industrial enterprises increased by 14 per cent compared with the previous year. According to the SDS, output amounted to GEL 1,129.2 and was distributed by main fields of activity as follows: processing industry 61.5 per cent; energy and water supply 30.1 per cent; and mining industry 8.4 per cent. The general situation in the industrial sector still depends heavily on the activity of a small number of enterprises. 50 enterprises account for a little over three quarters of industrial output. The development of the small and medium enterprises is hindered by non favourable legislation and widespread corruption. In previous years the practice of the “state capture” and unfair competition was still in place. As a result, the most economically viable are enterprises that are lobbied by the political elite by illicit means. In such a business environment small and medium enterprises have little chance for survival and further development. It is worth mentioning that in the small and medium industrial enterprises only 15 per cent of general industrial output was produced, while in the most developed countries the share of such firms is 50-60 per cent. The boom in demand for private apartments facilitated the development of the construction sector in Georgia. The growth rate of the sector in 2003 was 16.3 per cent. In 2003, 528 new objects were built. The total output of the sector was GEL 438.8 million. It is worth mentioning that considerable part of the output fell on the share of the construction of Baku-Tbilisi-Ceyhan pipeline. Private sector accounted for 84.4 percent of the output. Transport and Telecommunications The transport sector has shown a slight growth trend in 2003. It is important to mention that there is evidence of increased activity in all types of transport services (railways, motorways and airlines as well as sea ports and city transport). Increases in international transportation of cargo contributed to the growth of turnover of Georgian transport services. The volume of transported cargo increased by 8.8 per cent and the turnover of cargo increased by 6 per cent. In the transportation of cargo the lion’s share fell on the motorway transport at about 60 per cent, and in terms of turnover of cargo the highest share fell on the railway transport at about 88.7 per cent of total turnover. The turnover of passengers of Georgian air companies increased by 34.6 per cent.



In 2003, Batumi and Poti sea ports processed 15.3 million tonnes of cargo that was 13.2 per cent more than in 2002. The further development of TRACECA project is likely to increase the output of the Georgian transport system. The possibility of transportation of humanitarian shipments to Afghanistan and Iraq through the territory of Georgia also creates an additional opportunity of raising transit volumes in the near future. There was a substantial extension of ordinary as well as mobile telephone communication networks In 2003. The number of ordinary phone customers reached 1,103 thousand (increased by 10.7 per cent) and the number of mobile telecommunication subscribers amounted to 560.8 thousand (increased by 35.9 per cent). FOREIGN DEBT As of 31 December 2003, Georgia’s outstanding foreign debt, including state guaranteed debt, amounted to USD 1,849.262 million (GEL 3,837.219 million), that is 46.8 per cent of GDP. Compared with the end of 2002, the outstanding debt increased by USD 96 million. In addition to new loans, the depreciation of USD against SDR, EUR, JPY, CHF and KWD, in which more than half of Georgia’s foreign debt is denominated, induced a rise in total debt in USD terms in 2003. In the previous year, Georgia paid USD 145.2 million for debt servicing, including USD 105.1 million in principal and the rest for interest, commitments and penalties. The debt to GDP ratio is a key statistics in any assessment of debt sustainability. It is important to mention that this figure decreased compared with the same ratio in the previous year from 52.7 per cent to 47 per cent. Due to high debt obligations and limited budgetary revenues, the rescheduling of payments for foreign debt in 2004 is the sole feasible option for Georgia. A concessional restructuring of Georgia’s foreign debt would enhance its sustainability prospects. However, Georgia’s position in the negotiations with the official creditor countries of “Paris Club” significantly depends on the position of the IMF and the fulfilment of obligations accepted by the Government. At the end of 2003, negotiations between the IMF and the Government of Georgia continued, that gave possibility for the renewal of the terminated co-operation between the parties. The support of the IMF is crucial in the process of debt rescheduling. Still to embark on a sustainable path would also require that Georgia (a) abstains from borrowing on commercial terms and continues to shift its financing mix towards more concessional sources (including grants); (b) considerably increases tax revenue collections; and (c) implements the reforms required to achieve and maintain solid export and GDP growth. Table 2.4: Foreign Debt, 2002-2003 (USD Million)

2002 2003 Total Debt 1, 753.2 1, 849. 2 Debt service of which:

100.3

Principal Repayments

62,6 105, 1

Interest Payments 37,7 40, 1 Ratios, %

Debt to GDP Ratio 52.7 47 Source: Ministry of Finance



BALANCE OF PAYMENTS Figures for the balance of payments for 2003 were not available at the time when this issue of GET was being written. Thus, we will elaborate on the trends that occurred in the balance of payments based on the data of Q1-Q3 2003. The overall balance of payments deteriorated in Q1-Q3 2003 compared with the corresponding period of 2002. The increased deficit in balance of payments is related to the deterioration of balance of current accounts and balance of capital accounts. It is an interesting fact that the balance of financial accounts increased in the corresponding period from USD 143,355 million to USD 206, 279 million.



Table 2.5: Balance of Payments, Q1 2002 - Q3 2003 (USD Million)

Q1 2002 Q2 2002 Q3 2002 Q1-Q3 2002

Q4 0202 Q1 2003 Q2 2003 Q3 2003 Q1-Q3 2003

A. Current Account -64,088 -57,140 -54,325 -175,553 -82,240 -113,103 -104,685 -52,478 -270,266

Goods : exports (FOB)

100,597 149,500 151,936 402,033 176,653 104,732 171,809 291,668 568,209

Goods : imports (FOB)

-231,009 -261,176 -250,978 -743,163 -287,685 -235,675 -333,064 -411,099 -979,838

Balance on Goods -130,412 -111,676 -99,042 -341,130 -111,032 -130,943 -161,255 -119,431 -411,629

Services : Credit 74,326 90,467 101,331 266,124 87,378 87,647 107,558 127,998 323,203

Services : Debit -57,498 -65,041 -74,116 -196,655 -63,662 -94,988 -93,809 -111,057 -299,854

Balance on Goods and Services

-113,584 -86,250 -71,827 -271,661 -87,316 -138,283 -147,506 -102,490 -388,279

Income : credit 27,984 24,260 23,052 75,296 17,748 31,488 50,671 51,430 133,589

Income : debit -33,730 -35,233 -40,628 -109,591 -38,543 -34,535 -37,650 -39,206 -111,391

Balance on Goods, Services, and Income

-119,330 -97,223 -89,403 -305,956 -108,111 -141,329 -134,485 -90,266 -366,080

Current transfers : credit

61,148 45,730 42,236 149,114 32,150 35,537 40,885 49,260 125,682

Current transfers : debit

-5,906 -5,647 -7,158 -18,711 -6,279 -7,311 -11,086 -11,475 -29,872

B. Capital Account 16,860 15,971 16,624 49,455 17,081 4,944 4,682 4,395 14,021

Capital account : credit

18,750 17,750 18,746 55,246 18,678 6,984 7,261 6,593 20,838

Capital account : debit

-1,890 -1,779 -2,122 -5,791 -1,597 -2,040 -2,578 -2,198 -6,816

Total, Groups A plus B

-47,228 -41,169 -37,701 -126,098 -65,159 -108,159 -100,003 -50,280 -258,442

C. Financial Accounts

32,900 31,069 79,386 143,355 74,239 89,673 109,205 42,525 241,403

Direct investment 30,195 35,667 38,127 103,989 41,693 59,892 72,767 73,620 206,279

Direct investment abroad

0 0 0 0 -100 -1,075 -9,138 -9,138 -19,351

Direct investment in Georgia

30,195 35,667 38,127 103,989 41,793 60,967 81,905 82,758 225,630

Portfolio Investment 2 0 0 2 3 -500 0 491 -9

Assets 2 1 0 3 3 -500 0 491 -9

Liabilities 0 -1 0 -1 0 0 0 0 0

Other Investment 2,703 -4,598 41,259 39,364 32,543 30,281 26,970 -31,839 25,412

Assets 7,007 -19,192 -11,010 -23,195 -5,759 6,370 5,850 -28,914 -16,694

Liabilities -4,304 14,594 52,269 62,559 38,302 23,911 21,120 -2,925 42,106

Total, Groups A Through C

-14,328 -10,100 41,685 17,257 9,080 -18,487 9,202 7,755 -1,530

D. Net Errors And Omissions

3,404 8,003 -7,276 4,131 8,051 9,381 -9,201 5,558 5,738

Overall Balance (Total, Groups A Through D)

-10,924 -2,097 34,409 21,388 17,131 -9,105 1,242 -7,970 -15,833

E. Reserve Assets 10,924 2,097 -34,409 -21,388 -17,131 9,105 -1,242 7,970 15,833

Source: State Department for Statistics The deterioration of the current account is the direct result of the decreased net exports in Q1-Q3 2003 compared with Q1-Q3 2002, as well as decreased transfers to government and remittances of longterm workers from abroad. The improvement in the balance of financial accounts is a consequence of the increased direct and portfolio investments. It is worth mentioning that the direct foreign investments in Georgia in Q1-Q3 2003 were two times higher than in the corresponding period in 2002. The start of the construction of oil pipeline Baku-Tbilisi-Ceyhan and institutional reforms in the country, are likely to support this trend in 2004. There was a drastic reduction of the capital account in the period under consideration compared with corresponding period of the previous year.



Box 2.1: EU ENLARGEMENT

Pre-Accession Economic Programmes (PEP) in 2003 and Acceding and Other Candidate Countries’ Growth Rates

All acceding and candidate countries have submitted their third Pre-accession Economic Programmes (PEP) in 2003. The programmes address the main economic challenges faced by these countries on heir road to accession. The achievement of high real growth, which can be sustained without jeopardising economic stability, remains a challenge for most of the acceding countries. Only such growth will allow to catch up with EU income levels. In addition, economic stability and nominal convergence is a pre-requisite to successfully participate in EMU. Compared to the 2002 PEPs, covering the projection period 2002-2005, growth scenarios have been revised downward in 5 acceding countries for the present projection period 2003-2006. The largest downward revision to average GDP growth occurred in the Czech Republic by 0.7 percentage point. While still within the normal forecast margins, it conveys the message that the way forward may be more difficult than initially anticipated. Extrapolating recent buoyant economic activity in Latvia and Lithuania, average growth has been revised upward by about 1 percentage point as well as in Poland, expressing confidence in the emerging recovery. Compared to the recent past, most countries foresee an acceleration of growth. Only Cyprus, Hungary, Malta and Poland project on average weaker growth in the period 2003-2006 compared to the period 1998-2002. The result is that the growth performance is projected to diverge more and among the acceding countries two groups could be identified. Reaping the benefits of structural reform and macroeconomic stability, partly thanks to the hard currency option, the Baltic States are expected to perform best, according to the PEPs, and to realize average growth rates above 5.5 per cent. The other acceding countries project growth rates below 5 per cent. Due to a weak performance in 2003, the average growth rate in Malta is only 2.7 per cent over the projection period. The remaining candidate countries are, with growth rates of more than 5 per cent, close to the performance of the Baltic countries. Regained macroeconomic stability would allow them to realize their relatively elevated growth potential. Where calculations area available (not in Bulgaria, Estonia and Malta), most countries are expected to close the output gap by 2005, but in Hungary and Slovenia the output gap is expected to remain marginally negative. Poland anticipates actual growth significantly above potential growth at the end of the projection period.

Gross domestic product

average annual real growth rate

GDP/head (PPS, in % of EU average)

1998-2002

2003-2006

2002 2006

Cyprus 4.2 3.8 72.3 77.3 Czech Rep. 1.5 3.0 59.8 62.0 Estonia 4.7 5.5 41.7 47.6 Hungary 4.3 4.0 55.9 60.2 Latvia 5.7 6.2 35.2 41.2 Lithuania 4.5 6.4 39.1 46.1 Malta 2.8 2.7 Na Na Poland 5.4 4.7 39.4 43.5 Slovak Rep. 3.0 4.3 47.3 51.6 Slovenia 3.9 3.9 73.7 79.0 Bulgaria 4.1 5.3 24.7 28.0 Romania 1.4 5.2 24.5 27.6 Turkey 1.2 5.2 22.9 24.5 EU 2.4 100 100

Also because the EU growth outlook suffered, catching up towards EU income levels continues according to the PEPs, but living standards remain very diverse among the acceding and remaining candidate countries. By 2006, Slovenia is expected to have reached 79 per cent of the average EU GDP per head measured in purchasing power standards, closely followed by Cyprus with more than 77 per cent. Latvia, at 41 per cent of the EU level in 2006, will remain the poorest among the acceding countries, although up from a level of 27 per cent still 5 years ago. The remaining other candidate countries are well below the level of Latvia and, despite projected catching-up, will continue to do so over the programmes’ horizon. Source: 2003 pre-accession economic programmes of acceding and other candidate countries: overview and assessment; Directorate General for Economic and Financial Affairs.

CHAPTER THREE: GOVERNMENT FINANCE


According to the 2003 State Budget, total revenues were expected to reach GEL 1,103.9 million. Actual state budget revenues were GEL 932.4 million, GEL 171.5 million less than planned. Not all the anticipated external payments were received and this explains GEL 47.6 million of the shortfall. Another source of shortfall was lower than expected non-tax revenues. These accounted for GEL 10 million not received by state. The shortfall in the most important item, tax revenues, was GEL 113 million. However, overall tax collection has improved by 12 per cent over the year. A sharp rise of profit tax receipts over the year has been accompanied by a sharp decrease of VAT revenues from imports and a marginal increase of all other tax revenues. The Law on state budget of 2003 envisaged GEL 1,343.7 million on the expenditure side. Actual state budget expenditures for the year were GEL 1,118.5 million, that is 83.2 per cent of target. The growth of expenditures over the year was lower than the growth in revenue mobilisation these being 7 and 12 per cent respectively Central budget deficit financing was GEL 186.1 million instead of a planned GEL 293.8 million. The only sub item of sources of deficit financing that was fully financed (98 per cent) was National Bank credit. There was a sharp drop in both revenue mobilisation and public expenditures in the second half of the year. This was apparently connected with political tension in the country and the inability of the previous administration to exercise due control over bureaucracy. Poor budget preparation, along with lack of appropriate commitment control and cash management resulted in a build-up of arrears including on wages, pensions and social contributions. The new government is planning to raise the public revenue share in GDP to 20 per cent from today’s 14 per cent by 2008. Social expenditures are intended to reach 10 per cent of GDP while GDP growth is expected to be not less than 5 per cent annually. As a result of the proposed reforms the State Budget is supposed to become an effective instrument for redistribution of value created by economy. These reforms first of all are aimed at improvement of the tax administration and covers personnel, institutional, structural and legal changes. Another immediate objective set by the Government is improvement of management in state owned enterprises. The first effects of the political changes are already being observed at the beginning of 2004. Several court cases have been announced connected with the loss of public revenues in the past, including production of false excise stamps. Some amounts have already been returned to budget. Cases are given publicity in order to stress the Government’s intention to combat corruption. In order to achieve sustained results co-ordinated action by the government is needed including fiscal and law enforcement structures. Constitutional changes and the introduction of a new cabinet of ministers are expected to be helpful in this regard. One of the important developments after the change of regime in November was that Achara started to transfer due revenues to central budget. The first such transfer took place in early January 2004 after a 2 year break. The GEL 2.5 million transferred comprise part of the VAT Excise duty and profit tax collected on the territory of the autonomous republic. Besides the shortcomings of central budget, regular non-payments to central budget from the side of Achara were connected with problems in calculation of public revenues and making comparisons with planned amounts. The National Bank

GOVERNMENT FINANCE


has been including amounts collected in Achara into central budget revenue accounts while the State Treasury has not. From April 2004, the function of accounting for central budget revenues will be performed only by State Treasury. CONSOLIDATED BUDGET REVENUES Revenues of Consolidated budget for the year 2003 were expected to reach GEL 1,482.2 million. Actual revenues collected were GEL 1,320.2 million that is 89 per cent of target. We would like to remind the reader that consolidated budget incorporates the central government budget, special state funds and local government budgets. Because of its universal nature, figures of Consolidated Budget are most suitable for making judgements about the global trends and comparisons with GDP. Despite the shortfall of 11 per cent compared to target, total revenues of the consolidated budget were 14 per cent higher compared to the corresponding figure of the previous year and made up 15.6 per cent of GDP (against 15.9 per cent in 2002). Tax revenues collected were 92.4 per cent of target and formed 89.9 per cent of consolidated budget revenues. Growing at 13 per cent over the year, tax revenues made up 14 per cent of GDP, (14.4 per cent in 2002). STATE BUDGET REVENUES Initial revenue projections for the State Budget 2003 envisaged collections of GEL 1,103.9 million. According to MOF preliminary estimates, State Budget receipts were actually GEL 932.4 million, that is 84 per cent of the planned amount. The shortfall of GEL 171 million is mainly explained by lower than expected tax revenues. Non-tax revenues and external grants were also short of target. Nevertheless the amounts received were 14 per cent higher compared to the corresponding figures of the previous year. The tax revenue target of the State Budget was set at GEL 919.9 million. Actual tax revenue receipts of GEL 806.6 million is closer to the projected figure of the overall budget and indicates a 88 per cent collection performance. It should be mentioned that amounts collected in Achara and not transferred to central budget are not included in preliminary estimates. Revenues of the Special State Funds which are actually included in tax revenues were GEL 251.5 million that is 93 per cent of target. However data are presented excluding social contributions of budget-financed organisations. Revenue mobilisation has sharply improved here. Collected amounts were 36 per cent higher compared to 2002 revenues. Non-tax revenues were 8.4 per cent of total State Budget revenues. These mainly consist of: NBG profits transferred to the central budget; dividends of state owned enterprises; various fees; and penalties. The mobilisation of GEL 72 million under this category was slightly better compared to the overall budget performance and was 88 per cent of the planned amount. However, a comparison with 2002 figures shows that growth was below the average. External grants received were GEL 47 of which GEL 25 million was received after the political changes in December. The Government had expected to get GEL 95 million under the Grants category. However, the received amounts were considerably higher compared to the previous year. This is explained by extremely low grant receipts in 2002. Generally, owing to a loss of confidence by international community in the previous administration, grants and concessional lending had become increasingly scarce over past two years. A comparison of 2003 State Revenues with planned and previous year figures is provided in Table 3.1.

GOVERNMENT FINANCE


Table 3.1: State Budget Revenues, 2002-2003* (GEL million)

Year target 2003

Actual revenues

2002

Actual revenues

2003 Difference

Actual as per cent of target

Actual compared

to previous year

Total revenues and grants 1103.9 816.8 932.4 -171 84 114 Tax revenues 919.9 722.2 806.6 -113 88 112 Central budget tax revenues 659.9 537.8 555.8 -104 84 103 Non-tax revenues 88.6 72.1 78.1 -11 88 108 Revenues of Special State

Funds 270.2 185.1 251.5 -19 93 136 Grants 95.4 21.8 47.8 -48 50 219

Source: Ministry of Finance, GEPLAC calculations * excluding social contributions paid from central budget The nominal growth of overall budget revenues over the year was 14 per cent. Comparing this with the inflation rate between the periods of 4.8 per cent indicates a real growth of public revenues. The 12 per cent nominal growth of the most important item, tax revenues, was also higher than the inflation indicator. Another comparison can be made in order to decide whether growth discussed in this paragraph is attributable to economic growth or administrative improvement. The 4.8 per cent inflation and 8.6 per cent economic growth between the periods suggested that a 13.8 per cent growth of tax revenues was expected at the given constant administration efficiency. Thus, the nominal growth figures suggest that administration of tax collection worsened. A detailed breakdown of central budget tax revenues is provided in Table 3.2. Table 3.2: Central Budget Tax Revenues, 2002-2003 (GEL million)

Year target 2003

Actual revenues

2002

Actual revenues

2003 Difference


Actual compared

to previous year

Central budget tax revenues 659.9 537.8 555.8 -104 84 103 Income tax 21.3 18.5 20.0 -1 94 108 Profit tax 12.5 9.3 11.8 -1 95 128 VAT 448.3 370.9 368.5 -80 82 99

On domestic products 236.6 200.3 218.0 -19 92 109 On imports 211.7 170.6 150.4 -61 71 88

Excise duty 111.2 81.9 89.2 -22 80 109 On domestic products 30.1 21.5 21.9 -8 73 102 On imports 81.1 60.4 67.3 -14 83 111

Customs duty 59.8 47.3 56.1 -4 94 118 Other taxes 6.8 9.9 10.2 3 151 103

Source: Ministry of Finance, GEPLAC calculations

GOVERNMENT FINANCE


Almost all taxes were collected below the target. The only exceptions were the one per cent social tax and fixed tax on car imports (included in other taxes in the table above) which were collected at 150 per cent of target but the amounts collected are not significant. However, a comparison with previous year figures shows improved revenue mobilisation in all tax categories except VAT on imports. Revenues of GEL 20 million from personal income tax and GEL 11.8 million from corporate income tax were short of target by 6 and 5 per cent respectively. Comparison with year 2002 figures shows an 8 per cent increase of personal income tax revenues, while corporate income tax receipts improved by 28 per cent. It is worth noting that mobilisation of social contributions which actually have the same tax base as personal income tax has improved by 38 per cent over the year. This reflects serious deficiencies in tax administration control procedures. The collection of VAT was worse in terms of projected figures. Being critical to overall budget performance (as VAT receipts were 69 per cent of central budget tax revenues) VAT revenues of GEL 368 million were only 82 per cent of target. Overall VAT collection declined by 1 per cent over the year. This happened due to extremely poor collection of VAT on imports (88 per cent of 2002 figure). Excise duty collections were 80 per cent of target. GEL 89.2 million in revenues under this heading was 9 per cent higher compared to the previous year. Compliance with target was 73 per cent in case of taxation of domestic products while excise revenues on imports was 83 per cent of target. The collection of customs duty was considerably better compared to other taxes on imports, both in terms of projected figures as well as in growth terms. The GEL 56 million collected were 94 per cent of target with an 18 per cent growth rate over the year. The overall picture of tax collection can be summarized as follows. A relatively sharp rise in profit tax receipts (28 per cent) and customs duty (18 per cent) was accompanied by marginal changes of all other tax revenues. The most critical source for budget performance, VAT receipts, decreased compared to previous year. There is no consistent picture in relation to revenues from imports. Revenues from VAT on imports decreased dramatically while excise revenues from imports and customs duty increased. At the same time, there is no evidence of such important changes in GDP and imports value or structure which could explain the tax developments discussed above. Another striking inconsistency is the discrepancy between growth rates of social tax receipts and personal income tax receipts. These taxes have almost the same tax base, however, social taxes collected in 2003 were 38 per cent higher compared to year 2002 while income tax receipts rose only by 8 per cent. All this reflects inefficiencies in the planning process and poor application of control procedures by the Government. REVENUES OF SPECIAL STATE FUNDS The State Budget for 2003 envisaged GEL 270 million under the revenue target for special state funds, of which GEL 220 million was assigned for own revenues of the United State Social Insurance Fund and GEL 49 million for the Roads Fund. Actual own revenues of the United State Social Insurance Fund in 2003 were GEL 204 million, excluding social contributions of budget financed organisations, that made up 93 per cent of the planned amount. The 38 per cent growth over the year under this category was the highest among items of own revenues of the State Budget. In addition to its own revenues the social security fund received transfers from central budget. Expenditures of United State Social Insurance Fund mainly consist of State pensions and various social benefits. Own revenues of the Roads Fund during the year (which comes from excise on oil products and other taxes) were GEL 36.9 million (87 per cent of target). The main spending of the Fund was on: road

GOVERNMENT FINANCE


maintenance; payments for works performed in previous periods; co-financing of projects financed by foreign credits; repayment and servicing of credits; and administration. STATE BUDGET DEFICIT The State Budget deficit was expected to be GEL 293.8 million. Actual financing of the state budget deficit was considerably lower at GEL 186.1 million. Of this amount, GEL 23.6 million was obtained from privatisation of state property (instead of a planned GEL 41.5 million); GEL 39.2 million was borrowed from the National Bank, in line with the GEL 40 million target; and GEL 123. 3 million was attracted from other sources, mainly investment credits of international financial organisations and by means of T-bills. (For detailed information on T-bill market developments see the Money and Finance chapter.) STATE BUDGET EXPENDITURES The initial law on the state budget for 2003 envisaged GEL 1,343.7 million on the expenditure side. Actual spending of the state budget for the year was GEL 1,118.5 million, that is 83.2 per cent of target. Growth of expenditures over the year was lower compared to growth in revenue mobilisation and was 7 per cent as against 12 per cent. A breakdown of state budget expenditures by function is provided in the Table 3.4. Table 3.3: Structure of State Budget Expenditures by Function, 2002-2003 (GEL million)

Expenditure

2003 Expenditure

2002 Growth over

the year Per cent in

total

General Government 221.2 213.1 103.8 19.8 Defence 55.4 48.0 115.6 5.0 Law and Order 82.0 80.4 102.0 7.3 Education 37.8 37.0 102.1 3.4 Health care 7.1 39.9 17.8 0.6 Social Security 288.4 258.1 111.7 25.8 Housing 3.1 4.3 73.0 0.3 Culture sports and religion 23.6 24.7 95.3 2.1 Energy 36.6 16.9 216.5 3.3 Agriculture 11.0 8.9 123.5 1.0 Construction and mining 0.4 0.8 55.6 0.0

Transport and communications 53.8 42.1 127.9 4.8 Other economic activities 2.1 2.8 76.6 0.2 Other expenses 296.1 264.0 112.2 26.5

Total 1,118.5 1,040.7 107.5 100.0 Source: Ministry of Finance General government, social security and other expenses remain the main spending items in the Government expenditures. General government incorporates current expenses of government agencies (mainly salaries and goods purchased) as well as expenses of programmes financed by

GOVERNMENT FINANCE


international financial organisations. GEL 221 million spent under General Government category was 3.8 per cent higher compared to respective spending in 2002. The largest item of government spending is under the category Other, which makes up 25.6 per cent of state budget expenditures. GEL 296 million was spent under this heading; a 12 per cent (higher than average) growth over the year. The amount is mainly comprised of state debt service payments (interest as well as principal payments) and transfers to lower level budgets. The second largest expenditure item was social security. Growth here was 11.7 per cent. However, the figure differs significantly between sub-items of the social expenses. Goods and services purchased of GEL 200 million were 23 per cent higher compared to the previous year, while subsidies and current transfers decreased by 5 per cent and amounted to GEL 87.9 million. Other functional categories were each less than 10 per cent of total expenditures. Highest growth was in financing of energy sector, transport and communications and agriculture 116, 27, and 23 per cent respectively. The economic breakdown of state budget expenditures provides some useful insights on government spending priorities. Table 3.4: State Budget Expenditures by Economic Classification, 2002-2003 (GEL million)

Budgeted expenditures

2003

Actual expenditures

2003

Actual expenditures as per cent of

target

Actual expenditures

2002 Growth over

the year

Total 1,343.7 1,118.5 83.2 1,040.7 107.5

Salaries 126.0 108.7 86.3 92.0 118.1 Business trips 5.1 4.8 94.1 5.4 89.1

Social Contributions 22.8 22.4 98.2 20.0 112.0 Other goods and services 294.3 292.8 99.5 249.4 117.4 Interest payments 137.9 168.5 122.2 146.7 114.9

Subsidies and current transfers 479.8 252.6 52.7 250.2 101.0

Capital expenditures 5.5 54.7 990.2 42.2 129.7

Net lending 272.4 214.1 78.6 195.4 109.6 Source: Ministry of Finance, GEPLAC calculations “Other Goods and Services” were purchased to a total of GEL 292.8 million against a target of GEL 294.3 million. This heading received the best financing in absolute terms. Financing was perfect in comparison to planned amounts (99.5 per cent of target) and increased over the year by 17 per cent. This heading covers a great diversity of state expenditures and needs some clarification. The greatest portion was spent for social security needs (GEL 200.3 million). Other major components for this heading were: expenditures for General Government of GEL 28 million (mainly for the diplomatic corps and the organisation of elections); military structures of GEL 16 million (mainly for food procurement and for NATO integration reasons); and law enforcement structures of GEL 23.4 million (mainly for food procurement).

GOVERNMENT FINANCE


Subsidies and current transfers was the second largest spending category in the period: 22.6 per cent of total State budget expenditures. GEL 252.6 million disbursed under this category was only 52.7 per cent of target. However, comparison with 2002 figures shows a marginal increase of expenses. This mainly covers expenditures of social nature to social security fund and local budgets. However, the energy sector received a subsidy of GEL 36 million and various events connected with culture and sports were subsidised by GEL 18 million. Interest payments were financed at 22 per cent above the target. GEL 168.5 million disbursed under this category was 14 per cent higher compared to the respective 2002 figure. This is partly connected with unexpectedly high discount on treasury bills throughout the year. Interest payments made up 15 per cent of state budget spending compared to 13.9 per cent in 2002 and 12.3 per cent in 2001. Box 3.1: EU PRACTICES

European Anti-Fraud Office (OLAF) Cigarette smuggling, counterfeit euro coins, diversion of aid for Kosovo, subsidies for oranges grown on farms which do not exist - all these defraud European taxpayers. The European Anti-Fraud Office (OLAF) has more than 350 officials looking after the financial interests of the European Union and its taxpayers. OLAF's special status OLAF is set up as if it were a part of the European Commission, but has a special status to ensure its independence. The Director-General is specifically prohibited from seeking or accepting instructions from any government or institution, including the Commission itself, and can bring an action in the European Court of Justice if this independence appears to be at risk. The size of the problem By its very nature, fraud is hard to quantify. It has been estimated, however, that the EU has a shortfall in the revenue from agricultural levies, customs duties and value-added tax of several hundred million euro each year. Of its total budget (which includes these revenues plus a top-up from member state contributions), it is estimated that as much as 1 per cent, or one billion euro annually, ends up in the pockets of people who were not entitled to it. However, not all the money is lost for ever. Often as a result of OLAF investigations or subsequent court cases, some of the embezzled money is recovered. Maintaining an unbroken chain of action One of OLAF's key roles at present is coordination. National investigation and judicial systems are still very different. By sitting at the centre of the investigative network, OLAF can ensure that the chain of action is not broken. OLAF also helps with funds to train member state officials and lawyers specialising in fraud against the EU's financial interests. There is a special programme for training officials to prevent and detect euro counterfeiting. OLAF cooperates not only with member states, but also with other countries and other agencies, notably Europol, the European Police Office, and Eurojust, the agency set up to improve co-ordination of the fight against serious crime. OLAF's responsibilities also include investigating misconduct within the EU institutions. OLAF operates a policy of "zero tolerance" towards corruption or fraud. An investigation is launched even if the source of allegations is questionable or the amounts of money involved are very small. Internal cases make up around 10 per cent of all the cases OLAF investigates. The number of proven cases so far is very small.

GOVERNMENT FINANCE


Prevention begins at home Fostering a culture of prevention is central to the EU's anti-fraud strategy. Many of the cases OLAF investigates exploit shortcomings in EU legislation. So OLAF is working with the European Commission to make sure that new legislation with significant financial implications is "fraud-proof" from the time it is drafted. This is a particular priority for legislation in the areas of taxation and the customs union, the budget, external relations (including aid), agriculture and regional policy. These are the departments involved in raising revenue for the EU or with the largest sums of money to spend. OLAF also helps in drafting clear standard clauses for contracts between the European Commission and firms and individuals with which it does business. Administrative reforms currently under way within the European Commission are raising staff awareness of the importance of sound project management in preventing fraud. Source: www.europa.eu.int

CHAPTER FOUR: MONEY AND FINANCE


Besides the traditional parts, this chapter provides a separate sub-chapter about credit bureaux and a box with brief information on the world’s leading currencies. TREASURY BILLS One could say that political risk determined Georgian T-Bills market developments in 2003. During 2003, 49 T-Bills auctions were held. On average, 8-13 commercial banks participated in those auctions. The weighted average annual interest rate was 43.3 per cent, which was not a notable increase compared with the previous year. Table 4.1: Annual Volume of T-Bills Placed and Average Weighted Annual Interest Rates

T-Bills placed (GEL mln)

Weighted annual (%)

1997 13.9 35.63 1998 47.7 32.33 1999 3.9 14.11 2000 38.4 17.17 2001 69.6 30.16 2002 250.2 40.7 2003 226.9 43.3

Source: National Bank of Georgia It was mentioned in previous GET issues, that the non-bank investors’ activity determines the level of interest rates. Usually non-bank investors bid higher interest rates than banks. Each non-bank investor has less to place and puts a higher risk premium in the interest rates. Therefore, the lower the share of bank investors and the greater that of non-bank ones, the higher the interest rates bid. The structure of the T-Bill primary market changed during 2003. In Q1 2003 commercial banks predominated (71 per cent). However, the political risk reduced the activity of commercial banks. Their participation was gradually decreasing during the whole 2003, and fell to 33 per cent in Q4. Concurrently, company and individual activity increased during 2003. Foreign individual investors’ activity was the highest in Q2, 2003 (31 per cent of the market). Due to the political risk their share fell notably in Q3 and Q4 (2 and 4 per cent), which was not the case for Georgian non-bank investors. The companies’ share increased from 8 per cent in H1 2003 to 36 and 31 per cent in Q3 and Q4. Georgian individual investors showed high activity on the market during 2003, which was probably caused by high interest rates expectations during the whole of 2003. In November 2003, the Ministry of Finance introduced a mechanism aimed at preventing a dramatic growth of interest rates. A certain (variable) percentage added on an average weighted interest rates on an auction creates the top price that the issuer pays for each issuing. The bids with higher interest rates will not be satisfied. In November and December 2003, that percentage was set at 8 per cent. However, the top prices bid by investors were not more than the average prices plus eight per cent, so the new mechanism was not needed. One could say that this threshold in interest rates will protect the issuer against payment of occasionally overvalued prices.

MONEY AND FINANCE


The 2003 Budget Law provided for GEL 22 million net budget financing from T-Bills. However, the demand for the T-Bills fell prior to the November parliamentary elections. The Ministry of Finance had to reduce the intended volume of issuing and retire T-Bills outstanding from budget sources. As a result, the total annual net budget financing was reduced to GEL 9 million. The total outstanding amount payable in 2004 is GEL 73.3 million. According to the 2003 Budget Law, the NBG financed the Budget through buying T-Bills. The total amount bought was GEL 5.8 million. MONEY SUPPLY The NBG continued its strict control over the money supply according to the IMF programme target set during 2003. The annual inflation target was 4-6 per cent. The strict money supply and low level of inflation provides macroeconomic stability in Georgia. Low inflation and a stable nominal exchange rate were accompanied by an 8.6 per cent real GDP growth in 2003. Within these circumstances the NBG took measures to enlarge the possibility for money creation by reducing the required reserves ratio from 14 to 13 per cent in July 2004. Following that, in September, the NBG diversified reserve requirements ratio for deposits in foreign and national currencies. Within a policy of strict money supply control, the reserve requirements for Lari deposits became less than for fast growing foreign currency deposits. For Lari deposits the reserve requirement were cut to 9 per cent. This measure leads towards an increase of M2 money multiplier. Moreover, to stimulate deposit creation in the national currency the NBG set up an annual 6 per cent interest rate for Lari reserve requirement, while for foreign currency deposits the payable annual interest rates is 3 per cent. In 2003, Net Domestic Assets grew by GEL 58.2 million (GEL 27.5 million less than targeted) caused by a rise in Net Claims on Government. As of January 1st, 2004, the Net Claims on Banks were GEL 6.3 million, that was the outstanding debt for the NBG’s overnight loans (a new instrument to regulate current liquidity). M1 (reserve money) annual growth of 13.9 per cent was generally caused by foreign currency absorption provided by the NBG. The NBG purchased USD 42.7 million on TICEX and converted USD 13.41 million according to the Government’s order. The money supply increased by GEL 29.9 million in external financing received by the MoF. The NBG’s outstanding claims on Government increased by GEL 40 million in 2003. The NBG issued into circulation GEL 16 million as its profit transfer to the MoF. It should be noted here that cutting the reserve requirements ratio also had an expansionary effect on reserve money. The money issued was sterilised during 2003 by debt servicing. Overall in 2003, money in circulation increased by GEL 56.1 million. (See Tables A4.1-4.3).

1 Of which USD 8.1 million were received from privatisation.

MONEY AND FINANCE


Figure 4.1: Money Supply, December 2001 – December 2003

0

2 0 0 , 0 0 0

4 0 0 , 0 0 0

6 0 0 , 0 0 0

8 0 0 , 0 0 0

1 , 0 0 0 , 0 0 0

1 , 2 0 0 , 0 0 0

De c -0 1

F e b A p r J u n A u g O c t D e c F e b A p r J u n A u g O c t D e c

GEL

thou

sand

D e p o s i t s i n f o r e i g n c u r r e n c i e s

G E L d e p o s i t s

C u r r e n c y o u t s i d e c o m m e r c i a l b a n k s

M 3

M 2

M 0

Source: GEPLAC calculations based on data provided by the National Bank of Georgia M3 grew by 22.8 per cent in 2003 while M2 rose by 14.1 per cent. Deposit liabilities grew by 30.9 per cent notably in foreign currency denominated deposits. Such a growth was a consequence of a foreign currency inflow in 2003. The level of the deposit dollarisation ratio remained high in 2003. National currency denominated deposits growth was comparatively small. M2 money multiplier remained less than 1, M3 money multiplier was significantly high at 1.8-1.9. Table 4.2: Monetary Ratios, December 2002 - December 2003

Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov DecDollarisation Ratio % 84.9 83.6 84.4 85.3 85.9 85.7 86.3 85.5 85.7 85.5 85.7 86.5 86.1Money Multiplier (M2) 0.91 0.91 0.94 0.91 0.91 0.90 0.89 0.90 0.90 0.92 0.92 0.91 0.91Money Multiplier (M3) 1.70 1.78 1.84 1.81 1.78 1.82 1.83 1.83 1.83 1.92 1.87 1.85 1.83

2002 2003

Source: GEPLAC calculations based on data provided by the National Bank of Georgia

MONEY AND FINANCE


DOMESTIC INFLATION Table 4.3: Monthly Consumer Price Index and Inflation, 2002- 2003 (December 2001 = 100)

Price Index Inflation from previous month

2002 Jan 102.00 2.0

Feb 103.22 1.2

Mar 103.64 0.4

Apr 105.50 1.8

May 105.50 0.0

June 103.08 -2.3

July 101.94 -1.1

Aug 101.84 -0.1

Sep 102.25 0.4 Oct 102.66 0.4

Nov 103.79 1.1

Dec 105.55 1.7 2003 Jan 107.77 2.1

Feb 107.23 -0.5 Mar 107.23 0.0 Apr 107.76 0.5 May 107.98 0.2 June 108.09 0.1 July 107.11 -0.9 Aug 107.01 -0.1 Sep 107.54 0.5 Oct 107.54 0.0 Nov 112.70 4.8 Dec 112.93 0.2

Source: State Department for Statistics and GEPLAC calculations. In January 2003, the CPI growth (2.1 per cent) was affected by seasonal rising of prices for vegetables and fruits and the increase of railway tariffs by 32 per cent. The highest inflation rate was in November 2003. One could say that it was caused by imports reduction and the expectation of a Lari devaluation during the political crisis. During the other months there were no dramatic changes in the inflation rate. The annual inflation in 2003 was 7 per cent, the highest since 20002.

2 In 1999, 10 per cent of the annual inflation was caused by the financial developments influenced by the financial crisis in Russia.

MONEY AND FINANCE


DOMESTIC FOREIGN EXCHANGE MARKET Figure 4.2: USD/GEL and EUR/GEL Nominal Exchange Rate, H2 2003

2.0000

2.1000

2.2000

2.3000

2.4000

2.5000

2.6000

2.7000

2.8000

03.06

.03

10.06

.03

17.06

.03

24.06

.03

01.07

.03

08.07

.03

15.07

.03

22.07

.03

29.07

.03

05.08

.03

12.08

.03

19.08

.03

26.08

.03

03.09

.03

10.09

.03

17.09

.03

24.09

.03

01.10

.03

08.10

.03

16.10

.03

23.10

.03

30.10

.03

06,11

,03

13,11

,03

20,11

,03

27,11

,03

04,12

,03

11,12

,03

18,12

,03

25,12

,03

01,01

,04

USD/GEL

EUR/GEL

Source: National Bank of Georgia During 2003, Georgian current operations’ balance improved notably. Generally it was the result of recovering of the economic activity in Turkey. The demand for Georgian raw materials increased in 20033. (See the next Chapter). The foreign currency inflow into Georgia increased due to the launch of the oil pipeline construction project. During 2003, the NBG withdrew USD 42.7 million through TICEX to prevent a drastic growth of the demand for the Lari and its appreciation. Foreign exchange reserves of the NBG were USD 191 million, that was the equivalent of 1.3 months of imports and was USD 15.1 million more than targeted. Fluctuations of the nominal exchange rate of the Lari were not drastic during H2 2003. After the parliamentary elections on November 2nd, 2003 the Lari started to depreciate slowly. The official nominal exchange rate was the following: November 1st 2003 - 2.1044; November 14th- 2.2275; November 22nd - 2.2200. There was anecdotal evidence that a purchase price of the US Dollar was 2.2600 on Saturday, November 22nd on the foreign exchange bureaux market. It reflected the market players’ expectations of a possible dramatic devaluation of the Lari. But the rapid and peaceful settlement of the political crisis on November 23rd resulted in an appreciation of the nominal exchange rate. On November 25th, the official rate appreciated to 2.2100 and 2.1575 (on November 27th), leaving no room for a collapse of the Lari. 3 During H1, 2003 Georgian registered exports with Turkey increased by 150 per cent. There is anecdotal evidence that during the pre-election period transfers from abroad increased.

MONEY AND FINANCE


Box 4.1: WORLD’S LEADING CURRENCIES

Briefly about the World Leading Currencies In December 2003, the Harmonised Index of Consumer Prices (HICP) in the Euro Area was 2.1 per cent. In 2004, the ECB expects it to fluctuate around 2 per cent. Monetary developments indicate that there is significantly more liquidity available in the euro area than needed to finance non-inflationary growth. Increasing food and oil prices, growing indirect taxes and administrative prices lead to growing inflation and th ereduction of consumption. Within the strong Euro trade balance profits decline. A part of the population thinks that the Euro brought inflation in their home countries. The ECB cut interest rates by 0.5 per cent in H1 2003, to stimulate growth in domestic consumption and investments. The ECB authorities assure that they will continue their policy to prevent any danger for financial stability and economic growth in 2004. According to the ECB’s authorities within the conditions of low interest rates, short-term rates at zero in real terms, long term rates at a low level and large savings there is a prospect of growth of Europe’s economy and confidence in the Euro. At the same time the US authorities are not likely to support strengthening of the US Dollar in the near future. Existing depreciation of the US currency against the EURO will reduce the US trade deficit. Moreover, the weakness of the US Dollar supports a US trade expansion. According to the US Ministry of Trade, in November 2003, the trade deficit was USD 38 billion, the lowest since 2002. US imports fell by 0.4 per cent , while exports grew by 2.6 per cent, the highest rate in the last 3 years. US exports reached USD 3.3 billion that was the highest indicator among all existing data of US-Chinese trade. The US is pushing China and some other Asian countries towards revaluation of their national currencies. First of all, it applies to the Chinese Yuan. The US has the biggest trade deficit with China, so that the revaluation of the Yuan will reduce the deficit. There are some expectations that the Chinese central bank will revalue the Yuan by 5 per cent during 2004. These expectations are high enough to make western investment funds and companies convert their assets into Yuan to make profit on its revaluation. The policy of the EU foresees future development of trade and investment with China. Currently, the EU is the second trade partner of China following the US. Thus world financial market developments are determined by the exchange rates of the Euro, US Dollar and Yuan. According to the results of G-7 summit in Florida in February 2004, the exchange rate of the US Dollar against the Euro will correspond to current economic developments. Though, any sharp movements of exchange rates are not desired. Source: GEPLAC

CREDIT BUREAUX International practice in credit markets indicates that the mechanisms of checking the solvency of borrowers based on their credit history plays an important role. In order to manage credit risk effectively, creditors must have adequate information to examine the creditworthiness of potential borrowers. This mechanism works through a credit bureau. Credit bureaux collect, verify, store and disseminate information. A typical credit bureau offers its clients a range of services such as independent confirmation of particulars of individuals and provision of credit history of individuals of companies. Two types of information are collected: public information and private information. The former relates to basic information about the borrower such as his or her full name, address, and passport or identification number. This information is usually obtained from the Ministry of Internal Affairs and updated on a weekly basis. Private information includes for each individual or company, information on their arrears profile, outstanding debt, judgements and court actions. The most important of these is the arrears profile. This is the primary indicator used to predict the ability of borrowers to settle their debt obligations. Lenders are able to obtain this information in order to decide whether or not to grant credit to a potential borrower. In return for this service, the credit bureau will charge its customers a fee which is usually levied on a per query basis.

MONEY AND FINANCE


Credit bureaux have arisen out of a need by creditors to share information. Each individual creditor understands that the amount of information they individually have is not enough to make sound credit decisions. If creditors co-operate with one another and accumulate a larger pool of information, the benefits will outweigh the costs. These benefits arise because through the use of a credit bureau, creditors are able to get access to a large pool of information that they individually would not have. This information can then be used to improve the quality of their lending decisions. Since the probability of default by borrowers is greatly reduced by lenders using a credit bureau to verify the identity and creditworthiness of borrowers, they are likely to charge lower rates of interest than would otherwise have prevailed. This is because creditors often use part of the interest payment to cover bad loans. The fewer the number of bad loans, the more lenders can afford to lower the cost of credit. Thus, ultimately good borrowers are rewarded with cheaper credit. Officially, a credit bureau has been recently established in Georgia as a limited liability company “National Credit Information Bureau LLC” set up by a Georgian-American company. However, its activity is on the initial stage. The establishment of independent credit bureaux in Georgia would play very crucial role in developing the financial infrastructure. Credit bureaux could facilitate the reduction of the shadow economy in the country. The establishment of the credit bureau leads to creation of a structure similar to the State Business Register. The goal of the SBR is to provide all interested with transparent information about all existing companies. Potential partners could find information about a company’s capital and equity holders. The same happens with a credit bureau where the proper information about credit histories of potential borrowers is available. It helps banks and similar financial institutions to make qualified decisions. In Georgia the “National Credit Information Bureau” is established according to the American model without participation of the public sector. The same model was used in the Czech and Slovak republics during the establishment of similar bureaux4. One could say that the following factors could be taken into consideration on the current stage for high effectiveness of the credit bureau functioning in Georgia: Existing credit bureau and newly established should have a foreign partner as equity holder. The foreign partner will be independent (from any Georgian part) that will minimise the risk of lobby of domestic interests. This fact will increase the credibility of the credit bureau for potential clients. Potential clients of credit bureaux (financial institutions) should become equity of share holders of the credit bureaux. It will provide the higher level of transparency of the information within the bureaux. It will also help to set up new products for potential customers and develop the financial services’ market.

4 www.creditbureau.cz

CHAPTER FIVE: INTERNATIONAL TRADE AND FOREIGN ECONOMIC

RELATIONS


During 2003, external trade turnover was USD 1,502 million, of which exports were USD 444 million and imports USD 1,057 million. The trade deficit of USD 614 million was about USD 231 million more than in 2002. Trade balance/GDP ratio increased from 11.6 in 2002 to 15.6 in 2003. Imports increased by 45 per cent in USD terms reflecting needs for imported goods for construction of BTC, mainly tubes and pipes. 28 per cent export growth was a result of 8.6 per cent GDP growth and partially a result of some improvement in export registration procedures. The export coverage of import ratio decreased in 2003 to 42 per cent, from 47.6 per cent in 2002. Georgian exports are partially concentrated on low value-added commodities such as ferrous metals, copper, aluminum, iron and steel and mineral fuels. However the dynamics of exports seems to indicate that the concentration of exports on low value-added commodities will decrease gradually. Imports were dominated by mineral products, pharmaceuticals and food, which indicates the dependence of Georgia on foreign energy and domestic problems with economic development. Equipment imports do not seem to be significant, which could be explained by the seemingly low level of investments – an impediment for long-term growth. Table 5.1: Trade Balance, 1994-2002

1995 1996 1997 1998 1999 2000 2001 2002 2003 Exports (million USD) 152 199 240 192 238 330 320 348 444 Imports (million USD) 395 687 942 880 602 651 684 731 1,058 Trade balance (million USD)

-243 -488 -702 -688 -364 -321 -364 -383 -614

GDP(million USD) 1,909

3,072 3,576 3,620 2,804 3,043 3,210 3,302 3,948

Exports/GDP 8 6 7 5 8 11 10 10.5 11.2 Trade/GDP 29 29 33 30 30 32 31 32.6 38 Trade balance/GDP 12.8 15.9 19.6 19 13 10.5 11.3 11.6 15.5

Source: State Department for Statistics UNRECORDED TRADE AND MIRROR STATISTICS A significant share of Georgian trade is still not recorded at all. Furthermore, recorded figures do not often reflect effective transactions and that does not facilitate conclusions about trade flows. Unfortunately, the same trend was observed during 2003. The only difference was that in previous years export registration was quite problematic as well. The limitations of foreign trade statistics can be illustrated by the use of so-called “mirror statistics”. In particular, export registration problems can be illustrated by comparing Georgian and Turkish statistical data. According to the State Institute for Statistics of Turkey (SIS)1 Georgian exports into Turkey in January-November 2003 was USD 240 million (USD 116 million in 2002 ), while the SDS registered exports to Turkey at USD 71 million (USD 48 million in 2002). There are “mirror problems” with most sets of bilateral statistics. However, the Georgian case seems to be an extreme one.

1 State Institute for Statistics of Turkey (www.die.gov.tr)

INTERNATIONAL TRADE AND FOREIGN ECONOMIC RELATIONS


Figure 5.1: Comparison of Georgia’s Exports to Turkey, Registered by the SIS (State Institute for Statistics of Turkey) and by the SDS, January-November 2002, 2003

(USD millions)

Georgianexport(SDS)

Georgianexport(SIS)

Georgianimport(SDS)

Georgianimport(SIS)

January-November 2002


50

100

150

200

250



Source: Data from the State Department for Statistics of Georgia and the State Institute for Statistics of Turkey TRADE TURNOVER, TRADE BALANCE AND DIRECTION OF TRADE According to the SDS data, recorded external trade turnover was equal to USD 1,502 million, of which exports were USD 444 million and imports USD 1,057 million. The trade deficit of USD 614 million was about USD 231 million more than in 2002. Trade balance/GDP ratio increased from 11.6 in 2002 to 15.6 in 2003. The figures above suggest that the growing negative trade balance trend continued during 2003. Exports increased in USD terms by about 28 per cent, while imports increased by 45 per cent reflecting needs for imported goods for construction of BTC, mainly tubes and pipes. 28 per cent export growth was a result of 8.6 per cent GDP growth and partially result of some improvements in export registration procedures. The export coverage of import ratio decreased in 2003 to 42 per cent, while in the 2002 the ratio was 47.6 per cent. Figure 5.2: Registered Exports, Imports and Trade Balance, 1995 –2003 (USD thousands)

-1200

-1000

-800

-600

-400

-200

0

200

400

600

1995 1996 1997 1998 1999 2000 2001 2002 2003

Trade Balance export import

Source: Data from the State Department for Statistics



The share of the ten main trade partners in the total registered trade turnover was about 75 per cent. As indicated in Table 5.2, the main partners in the first half of 2003 were Russia, UK, Turkey, Azerbaijan and Ukraine. These countries together represented about 53 per cent of Georgia’s registered trade turnover. Table 5.2: Registered Foreign Trade Turnover and Direction of Trade, 2003 (USD thousands)

Foreign Trade Turnover

Export (FOB) Import (CIF) Trade Turnover

USD Per cent USD Per cent USD Per cent Total 444,086.9 100 1,057,790.8 100 1,501,877.7 100Main partner countries (total)

342,444.8 77.1 778,576.7 73.6 1, 121 021.5 74.6

Russia 75,578.5 17.0 149,848.0 14.2 225,426.5 15.0Turkey 78,851.1 17.8 107,529.4 10.2 186,380.5 12.4UK 25,677.7 5.8 140, 805.9 13.3 166,483.6 11.1Azerbaijan 15,995.9 3.6 92,802.8 8.8 108,798.7 7.2Ukraine 27,161.0 6.1 80,689.9 7.6 107,850.9 7.2Germany 10,340.8 2.3 80,472.4 7.6 90,813.2 6.0USA 14,645.5 3.3 52,951.0 5.0 67,596.5 4.5Turkmenistan 56,644.2 12.8 9,472.3 0.9 66,116.5 4.4France 4,942.7 1.1 51,368.0 4.9 56,310.7 3.7Switzerland 32,607.2 7.3 12,636.9 1.2 45,244.1 3.0Others 101,642.1 22.9 279,214.1 26.4 380,856.2 25.4

Source: State Department for Statistics During 2003, the CIS and the EU accounted for 70 per cent of Georgia’s registered imports. Turkey accounted for another 10 per cent. Imports from USA were relatively small. Figure 5.3: Georgia’s Registered Imports by Regions, 2003

Turkey10%

Others20%

EU36%

CIS 34% CIS (including Russia)

EU

Turkey

Others

Source: State Department for Statistics The main market for Georgian products was still the CIS. Turkey was a destination for 18 per cent of Georgian exports. The EU’s share was about 17 per cent.



Figure 5.4: Georgia’s Registered Exports by Region, 2003

Others17%

Turkey18%

EU17%

CIS 48%

CIS (includingRussia)EU

Turkey

Others

Source: State Department for Statistics COMPOSITION OF REGISTERED EXPORTS Georgian exports were partially concentrated on low value-added commodities such as ferrous metals, copper, aluminum, iron and steel and mineral fuels. However the dynamics of exports seems to indicate that the concentration of exports on low value-added commodities will decrease gradually. The overall composition of Georgia’s recorded exports shows that the share of 10 product groups represented about 65.6 per cent of all registered exports during 2003. Export of iron and steel (HTS chapter 72) still holds the leading position with a value of USD 83.5 million. In comparison with the same period of the previous year, this item increased by USD 46 million. From this commodity group ferrous waste and scrap (HTS chapter 7204) was in the first place with USD 56.4 million. 93 per cent of export of ferrous waste and scrap went to Turkey. The export of military aircraft and its parts (HTS chapters 8802, 8803) during 2003 represented only 8.4 per cent of all recorded exports; unfortunately the export of this item in 2003 decreased by USD 15 million, which was probably, a reflection of the problems in the aircraft building factory. Beverages and spirits ((HTS chapter 22) were the second most important export items. The export of this item exceeded 79 million USD in 2003. This chapter includes, wine from fresh grapes and waters, including natural or mineral. Exports of wine (HTS chapter 2204) reached USD 36 million. It is worth mentioning that Georgia’s wine industry has great possibilities of growth (see figure 5.5). However, this sector is still heavily dependent on the Russian consumer market. The destinations of the exports of wine (HTS chapter 2204) during 2003 were Russia (75 per cent), Ukraine (10 per cent), and the USA (4 per cent).



Figure 5.5: Georgia’s Wine Exports, 1997-2003

0

10

20

30

40

1997 1998 1999 2000 2001 2002 2003

Wine exports in million USD

Source: State Department for Statistics Despite the fact, that the export of Georgian wine has some market access problems in the EU market, it seems that this problem will be solved soon. According to the Ministry of Agriculture and Food, Georgian wine will be legally exported to the EU without any quotas. The negotiations for the official recognition of the Georgian wines between Georgian Government and the Agricultural Director General of EU Commission were over in January 2004. The EU regulations state that only wine accompanied by an official EU analysis Certificate VI1 will be cleared by the authorities at its destination. A VI1 is a document issued in a third country of origin giving a description and analysis details for wines imported into the European Community. When an application is submitted to the EU, Georgian wine exporters will need to provide the EU labels and a VI1 Certificate. Table 5.3: Composition of Registered Exports According to the Harmonized Commodity

System, By HTS 2-digit Categories, 2003 USD

thousands Per cent

Total exports 444,087 100Ferrous waste and scrap: ingots of iron or steel-7204 56,461 12.7Aircrafts, spacecraft, and parts thereof – 8802, 8803 37,441 8.4Wine of fresh grapes, including fortified wines -2204; 36,247 8.2Sugar –1701 30,935 7.0Waters, including natural or artificial mineral waters- 2201, 2202; 28,884 6.5Ferroalloys –7202 26,078 5.9Copper ores and concentrates –2603 23,051 5.2

Gold, unwrought or in semi manufactured forms-7108 18,541 4.2

Mineral or chemical fertilizers, nitrogenous –3102. 18,466 4.2Petroleum oils and oils from bituminous minerals, crude –2709; petroleum oils and oils from bituminous minerals –2710;

15,133 3.4

Other 152,850 34.4

Source: State Department for Statistics Sugar (HTS chapter 1701) has become an important export item valued at USD 31 million, which was about 7 per cent of all exports in 2003. The destination for this was Turkmenistan, Ukraine, Russia and Azerbaijan. It has to be mentioned that the destination of 50 per cent of the sugar export was Turkmenistan. Because of a bilateral agreement between Georgia and Turkmenistan Georgia makes debt repayments through sugar exports, at a price 60 per cent higher than the market price. Other



main export items are: mineral waters, ferroalloys, copper ores and concentrates, gold in semi manufactured forms, mineral fuels, mineral and chemical fertilizers. Table 5.3 indicates the main registered export items according to the Harmonized Commodity Description and Coding System (HS). Box 5.1: EU REGULATIONS

New EU Wine Labeling Rules: Country of Origin

On 1st February, 2004, the European Union (EU) began to enforce its new wine labeling regulations

which came into effect on 1st August, 2003. These new wine regulations may be subject to further changes. WineScience.com does recommend that you implement one change to all of your labels for export to the

EU. This change concerns the Country of Origin statement. In previous regulations, the Country of Origin statement read: "Product of Georgia" or "Produce of Georgia" The new regulations require that the Country of Origin statement should read: "Wine of Georgia" "Wine Product of Georgia" "Wine Produce of Georgia" The word "wine" separated from the country of origin statement is not acceptable. The Country of Origin statement is mandatory. Rules for other mandatory items have not changed

including the Net Contents statement and the Alcohol Content statement. Further changes may be made to the regulations governing wine labeling. However, we are confident that the regulations concerning the Country of Origin statement will not change. Therefore, it is recommended to follow this new rule for wine exports to the EU.

Source: Based on WineScience.com

COMPOSITION OF REGISTERED IMPORTS Imports are dominated by mineral products, pharmaceuticals and food, which indicates the dependence of Georgia on foreign energy and domestic problems with economic development. Equipment imports do not seem to be significant, which could be explained by the seemingly low level of investments – an impediment for long-term growth. Imports were dominated by mineral products in 2003. Despite the fact that a significant share of Georgian imports was not recorded, the figures demonstrate that Georgia’s dependence on foreign energy continues. The import of petroleum, gases, oils, and electrical electrical energy together represented about 18 per cent of total recorded imports. Import of articles of iron and steel (mainly pipes for the BTC construction) was the second largest item with the value of USD 93.7 million. Imports of pharmaceutical products (HTS chapter 3004) accounted for 5 per cent of recorded imports. The share of food (milling industry, wheat) and tobacco was slowly decreasing. Table 5.4 shows the largest imported product groups that together constituted about 46 per cent of total imports in 2003.



Table 5.4: Composition of Registered Imports According to the Harmonized Commodity System, By HTS 2-digit Categories, 2003

USD thousands

Per cent

Total imports 1,057,793 100Petroleum oils and oils from bituminous minerals (other than crude) – 2710

102,543 9.7

Tubes and pipes - 7305 93,723 8.9Petroleum gases -2711 65,994 6.2Medicines –3004 51,567 4.9Sugar -1701 50,563 4.8Motor cars and other motor vehicles- 8703 44,516 4.2Electrical energy – 2716 21,519 2.0Tobacco and manufactured tobacco substitutes –2402 19,807 1.9Steam turbines and other vapor turbines, and parts thereof -8406 17,721 1.7Aircraft, powered ; spacecraft (including satellites) and spacecraft launch vehicles– 8802

16,942 1.6

Other 572,898 54.2Source: State Department for Statistics NEW LABELLING REQUIREMENTS IN GEORGIA As of 1 January 2003, for medical and pharmaceutical products and 1 March 2003, for products such as food, cosmetics, household cleansers and appliances, an amendment to the Law on Protection of Consumer Rights requiring the labelling in Georgian came into effect. Label information required in Georgian includes product designation and name, producer, country of origin, terms of use, weight/volume, contents and major features, terms of maintenance and rules for proper use. The law requires information be made available to consumers regarding anticipated adverse reaction (illness) if a product is consumed in case of any particular disease. Not all food products have this indication even in English or other languages. It implies that producers or importers have, not only to translate the label, but also make medical enquiries for possible reactions or allergies. This new law was introduced by the Anti-Monopoly Service after accidents having occurred due to the improper use of products not labelled in Georgian. The law also provides that the requirements stipulated by the law shall not apply to unprocessed agricultural products including products of animal origin, poultry products and fish. However, the law does not clarify what is meant by unprocessed agricultural products. According to the Tax Code of Georgia, processing is defined by "changing of commodity nomenclature code". According to the Law, products can either be labelled by producers in their country of origin, or labels can be attached to imported products in Georgia.

CHAPTER SIX: PRIVATISATION


The privatisation process showed little progress in the second half of 2003. The closing down of the Ministry of State Property Management (MSPM) implemented in the first half of the year was followed by a transformation process. The ministry has been transformed into two bodies. A Department of Privatisation was created in the Ministry of Economy, Industry and Trade and it deals with privatisation issues. The State Property Management Agency was established as a public legal entity and deals with issues relating to state property management and has no right to sell state shares. The transformation process considerably slowed down the actual privatisation of state enterprises. The political crisis that emerged with the parliamentary elections in November resulted in a change of the regime. A new Government was appointed in February 2004. The political situation in the country also slowed down the privatisation process. However, it seems that developments will take a new pace now when a new Government is in place. Moreover, the new President and his team are determined to combat corruption in the country and consequently the privatisation process is likely to become more transparent and some suspicious cases of privatisation may be reconsidered. All these measures should bring more revenues to the state and ensure that enterprises are acquired by the most capable and efficient owners. In the second half of 2003 the privatisation of the small enterprises saw some progress. There was no news in privatising medium and large enterprises (MLE). Some MLEs are facing liquidation/bankruptcy procedures. A tender to identify the future leaseholder company of Tbilisi Water Utility was completed. The technical and financial proposals of the only bidding company Compagnie Generale des Eaux (France) have successfully passed evaluation by the tendering commission and the contract is to be signed after approval by municipal authorities and the World Bank. There was no progress in the privatisation of telecommunications and energy assets. SMALL ENTERPRISE PRIVATISATION Privatisation of small enterprises still remains the most successful aspect of the privatisation. As shown in Table 6.1, as of 1st January 2004, 14,117 small enterprises had been approved for privatisation and 17,571 small enterprises have been actually privatised1 since 1993. The difference between the total numbers of actually privatised and approved for privatisation small enterprises indicates that many of them split during the privatisation process. The increasing number of the small enterprises approved for privatisation suggests that many of them had been parts of MLEs and became independent units after restructuring of the latter. The small enterprise privatisation in 2003 was probably speeded up by the transformation of the Ministry. In 2003, 761 small enterprises were privatised. This figure exceeds the number privatised in 2002. The sectoral breakdown shows that the basic trends are unchanged. Most small enterprises are in the trade and service sectors, 32 and 46 per cent respectively. The regional breakdown given in Table A.6.1 of the statistical appendix, shows that the majority of privatised small enterprises are in Tbilisi. Enterprises were privatised in every region of Georgia during 2003. The Autonomous Republic of Achara is the only region where no small enterprise privatisation cases were registered in the given period.

1 The total number of small enterprises, including those not approved for privatisation, is not available. Small enterprises are those with a book value of less than USD 44,000 on April 1st 1993.

PRIVATISATION


Table 6.1: Small Privatisation by Sector as of 1st January, 2004

Sector Approved Privatised % of total privatised

Privatised in 2003

1 M anufacturing and process ing 412 341 1,9 10

2 Energy and Utilities 82 95 0,5 7

3 Bread products 142 127 0,7 -

4 Agriculture & food 801 1 026 5,8 45

5 Construction 452 406 2,3 20

6 Trade 4 723 5 608 31,9 70

7 Services 5 716 8 049 45,8 527

8 Oil products 172 174 1,0 -

9 Health 848 667 3,8 24

10 Social sphere 536 786 4,5 27

11 Transport 233 292 1,7 31

Total 14 117 17 571 100,0 761 Source: Department of Privatisation in the Ministry of Economy, Industry and Trade The privatisation of small enterprises in Georgia started in 1993. Figure 6.1 shows the dynamics of small enterprise privatisation by year. The largest numbers of enterprises were privatised in 1995, when the Georgian economy started to stabilise and in 1998, when the largest zero reserve price auctions were held. Since then it seems that privatisation is approaching its end because the amount of available entities is diminishing. It is likely that the increase in the number of privatised small enterprises in 2003 compared to 2002 was prompted by the transformation of the MSPM - the ministry speeded up privatisation of leftover enterprises. Also, privatisation of large enterprises is still underway (telecommunications, energy, manufacturing sectors) and presumably there will be new small enterprises created as a result of that restructuring. Thus the privatisation process of small enterprises may last longer. The acquisition of small enterprises by insiders is still widespread, which in many cases diminishes government revenues and retards efficient operation of the small enterprises. However, the existing resale market seems to be effective enough to ensure the acquisition of assets by more capable owners and increasing competition puts pressure on companies to increase efficiency. Figure 6.1: Small Enterprise Privatisation

0

500

1000

1500

2000

2500

3000

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Source: Ministry of State Property Management

PRIVATISATION


MEDIUM AND LARGE ENTERPRISE PRIVATISATION Privatisation of MLEs that are still in state ownership remains a problematic issue. As of 1st January 2003, the number of medium and large enterprises approved for establishment as JSCs has remained unchanged at 1,4262. The total number of medium and large enterprises actually established as joint stock companies reached 1,377. The highest numbers of both approved and actually incorporated state enterprises are in the Agriculture and Food sector. The main obstacles to privatising MLEs are: indebtedness; poor condition of the assets of the enterprise; overstaffing; the size itself; and influential interest groups. In the first half of the 2003, some progress was achieved in privatising large enterprises. The Russian company ITERA bought 90 per cent of the shares of the JSC Azot and 51 per cent of the state shares of Zestafoni Ferro Alloys plant was privatised by direct sale to the Austrian company DECOmetal. In the second half of the 2003, there were no privatisations of MLEs. This was mainly due to the political situation in the country. After the revolution, the State Property Management Agency started to appoint new boards of trustees to the large enterprises. First in the list was Madneuli Ore Company. Due to existing corruption in the enterprise the state was losing revenues. Now the board of trustees is working on the change of management of the enterprise. Similar activities are scheduled in Electrokavshiri and other large enterprises. In response to conditions set in the World Bank Structural Adjustment Credit III (SAC), liquidation/bankruptcy procedures have been started in some enterprises. The MSPM started liquidation procedures in the JSC Elva, JSC Saktseoliti and JSC Saksamtometalurgia. Although the liquidation of the enterprises should have been completed by the end of 2002, the process is stalled. JSCs Tami, Kimbochko, Tkibulnakhshiri, Sakabreshumi and Chiaturmanganumi were facing bankruptcy procedures. Bankruptcy procedures lead to reorganisation or liquidation of an insolvent enterprise. In some cases the courts allow implementation of the rehabilitation programmes in the enterprise, which through reorganisation may lead to the improvement in the efficiency of the enterprise. If rehabilitation is successfully implemented, the enterprises will be able to service their debts, improve overall performance and contribute to the economy of the country. Privatisation of efficient enterprises will be much easier and will result in larger revenues to the state. Liquidation of unviable, unattractive enterprises is a logical end of the painful privatisation process and it has benefits to the economy: some tax and arrears will be paid. The previous Government was reluctant to enforce bankruptcy/liquidation procedures, which can be explained by the influence of managers of the respective enterprises and other interest groups. Hopefully, the new Government will push forward the liquidation/bankruptcy procedures, which will benefit the economy of the country. Water Supply and Sewage System A tender to transfer JSC Tbiltskalkanali (Tbilisi Water Utility) into management by leasing was announced in 2001. JSC Tbiltskalkanali is 100 per cent owned by the Tbilisi Mayor’s Office and is to be transferred into management for 10 years. After that the contract can be prolonged for 5 years upon the mutual agreement of the parties. To facilitate the rehabilitation of this sector, the World Bank is to allocate a credit worth USD 25 million. The credit is for 35 years and has a grace period of 10 years with interest at 0.75 per cent per annum. The credit will allow the water tariff to remain unchanged in the beginning of the reform.

2 The updated information as of 1st January 2004 is not available yet due to the transformation process of the MSPM.

PRIVATISATION


To participate in the tender a company had to have 5 years experience of providing service to 1.5 million customers, an annual turnover not less than USD 50 million and qualified personnel. 5 companies passed the pre-qualification phase of the tender and participated in the bidding process. The unsealing of bids took place on 15th January 2003. Compagnie Generale des Eaux (France) was the only company, which had submitted a proposal. The tendering commission evaluated the technical and financial proposals of the company and finally in September declared the proposal successful. According to the proposal Compagnie Generale des Eaux is to pay a fix amount of GEL 20,000 per month for leasing. The customer tariff should not be changed for the first three years of operation and in the fifth year it should be equal to the operator’s tariff. The leaseholder is to carry out rehabilitation of the parts of water supply system that are urgent and the implementation of which will have the maximum immediate positive effect on its operations. The company has to introduce metering of water resources, which is crucial for payment collection, in two years. The most malfunctioning parts of the supply system are to be changed or rehabilitated. The company has also to carry out water quality control. As for the structural and staff changes, the company is to employ the entire personnel of Tbilisi Water Utility engaged in the exploitation and maintenance of the system. It is important to note that today the total number of the abovementioned personnel is 2,800 people. Even though the enterprise is overstaffed, according to the conditions of the contract, the leaseholder company has no right to lay off personnel during the first year of lease. The company can offer financial compensation to those employees who will agree to leave. However, starting from the following year the company can lay off excessive workforce without compensation, which will probably be a frequent occurrence. The company is also to undertake training programmes for the staff. Although the Company was successful in the tendering process the results still have to be approved by the municipal authorities and the World Bank before the contract is signed. The political developments in Georgia postponed the completion of the tender and fate of the tender is to be decided by the new Government. Energy There was no progress in privatising the assets of the energy sector in the second half of 2003. The planned privatisation of hydroelectric generation companies has been halted. The United Distribution Company (UDC) created by the MSPM in co-operation with the International Finance Corporation, on the basis of grouping of state regional electricity distribution companies, is to be transferred into management for 5 years. A tender has been announced and 8 companies have already sent letters of interest to manage the distribution company. Meanwhile, PA Consulting was awarded an interim management contract for 18 months. In August 2003, the Russian company RAO UES bought AES Silk Road Holdings, which was the owner of 75 per cent of the shares of AES Telasi and some other assets of Georgia’s energy sector. The new owner may improve the operation of the electricity sector, since the company is financially strong and will not have problems in purchasing electricity from Russia. However, on the other hand, this deal gives Russia a serious economic lever, which can be used for political reasons.

PRIVATISATION


Box 6.1: PRIVATISATION PRACTICES

Types and Techniques of Privatisation

A variety of alternative service delivery techniques can be employed to maximise efficiency and increase service quality. Some methods will be more appropriate than others depending on the service. In searching for ways of cutting costs and increasing delivery, consider using a combination of these techniques: • Contracting Out (also called "outsourcing"). The government competitively contracts with a private

organisation, for-profit or non-profit, to provide a service or part of a service.

• Management Contracts. The operation of a facility is contracted out to a private company. Facilities where the management is frequently contracted out include airports, wastewater plants, arenas and convention centres.

• Public-Private Competition (also called "managed competition," or "market testing"). When public services are opened up to competition, in-house public organisations are allowed to participate in the bidding process.

• Franchise. A private firm is given the exclusive right to provide a service within a certain geographical area. • Internal Markets. Departments are allowed to purchase support services such as printing, maintenance,

computer repair and training from in-house providers or outside suppliers. In-house providers of support services are required to operate as independent business units competing against outside contractors for departments’ business. Under such a system, market forces are brought to bear within an organisation. Internal customers can reject the offerings of internal service providers if they don’t like their quality or if they cost too much.

• Vouchers. Government pays for the service; however, individuals are given redeemable certificates to

purchase the service on the open market. These subsidise the consumer of the service, but services are provided by the private sector. In addition to providing greater freedom of choice, vouchers bring consumer pressure to bear, creating incentives for consumers to shop around for services and for service providers to supply high-quality, low-cost services.

• Commercialisation (also referred to as "service shedding"). Government stops providing a service and lets the private sector assume the function.

• Self-Help (also referred to as "transfer to non-profit organisation"). Community groups and neighbourhood organisations take over a service or government asset such as a local park. The new providers of the service also are directly benefiting from the service. Governments increasingly are discovering that by turning some non-core services, such as zoos, museums, fairs, remote parks and some recreational programmes over to non-profit organisations, they are able to ensure that these institutions don’t drain the budget.

• Volunteers. Volunteers are used to provide all or part of a government service. Volunteer activities are conducted through a government volunteer programme or through a non-profit organisation.

• Corporatisation. Government organisations are reorganized along business lines. Typically they are required to pay taxes, raise capital on the market (with no government backing, explicit or implicit), and operate according to commercial principles. Government corporations focus on maximizing profits and achieving a favourable return on investment. They are freed from government procurement, personnel and budget systems.

PRIVATISATION


• Asset Sale or Long-Term Lease. Government sells or enters into long-term leases for assets such as airports, gas utilities or real estate to private firms, thus turning physical capital into financial capital. In a sale-leaseback arrangement, government sells the asset to a private sector entity and then leases it back. Another asset sale technique is the employee buyout. Existing public managers and employees take the public unit private, typically purchasing the company through an Employee Stock Ownership Plan (ESOP).

• Private Infrastructure Development and Operation. The private sector builds, finances, and operates

public infrastructure such as roads and airports, recovering costs through user charges. Several techniques commonly are used for privately building and operating infrastructure.

• With Build-Operate-Transfer (BOT) arrangements, the private sector designs, finances, builds, and operates the facility over the life of the contract. At the end of this period, ownership reverts to the government.

• A variation of this is the Build-Transfer-Operate (BTO) model, under which title transfers to the government at the time construction is completed.

• Finally, with Build-Own-Operate (BOO) arrangements, the private sector retains permanent ownership and

operates the facility on contract. Source: The Reason Foundation, Reason Public Policy Institute, www.privatization.org

http://www.privatization.org/

CHAPTER SEVEN: LABOUR MARKET, INCOMES AND

THE SOCIAL SAFETY NET

46 GEORGIAN ECONOMIC TRENDS – 2004 No. 1

LABOUR MARKET The labour market situation remains largely unfavourable and unstable. Whilst unemployment rate figures are generally in line with those for transition economies and, if taken alone, may even suggest optimistic conclusions, the overall picture is flawed by persistent underemployment, widespread hidden and disguised unemployment and salaries falling way below the minimum subsistence level. All the above-mentioned long-term labour market problems adversely effect the poverty situation that is continuously reflected in painful declines in living standards experienced by increasingly larger numbers of households. Most of the working age population is either underemployed or non-employed. New stable jobs are rarely created. The labour market is dominated by agricultural subsistence self-employment. A large portion of the employed are engaged in unofficial and unregistered low-paying largely self-employment activities. Just around 20 per cent of the working age population have waged or salaried jobs and the vast majority of those employed are hardly earning a living. UNEMPLOYMENT The analysis of economic status of the population below is based on the data of the SDS on-going Household Survey1. These internationally comparable sets of figures, being calculated according to the ILO principles and methodology (e.g., registration figures cannot be considered a good source of information in internationally adopted terms, i.e., according to the ILO definitions2), yield a lot of interesting information on the labour market. The estimates derived from the survey figures are instrumental for tracking changes in the labour force, employment and unemployment, labour force participation rates, and the population outside the labour force. There is no doubt that the household survey results are indispensable for following the overall trends in the labour market and household income. However, a lot remains beyond the figures and beyond the survey. In accordance with internationally applied methodology, the survey does not take into consideration the size of remuneration. In addition, it does not cover those engaged in the informal economy, nor does it reflect the full extent of underemployment and poverty. According to the SDS integrated survey results, the national unemployment rate calculated by the ILO “strict” methodology in Q3 2003 (the latest available sets of figures), compared to a year before, fell by 1.3 percentage points to 10.5 per cent, while the unemployment rate calculated by the “loose” methodology fell by 1.4 percentage points to 12.9 per cent. The national unemployment rates in the three first quarters of 2003, by “strict” and “loose” measurements were accordingly 11.8 and 14.6 per cent, i.e., by 0.6 and 0.4 percentage points lower than in the same period of 2002. The gap between the two measurements of unemployment rate in the three first quarters of 2003 compared to a year before, therefore, grew by 0.2 percentage points, that might suggest that fewer people were engaged in active job search.

1 The continuous Household Survey has been implemented by the SDS since Q3 1996 with the financial support of the World Bank and in co-operation with Statistics Canada. The SDS was implementing the Labour Force Survey (LFS) in 1998-1999 with the assistance from the ILO and the UNDP and figures for those years come from the LFS (see Statistical Appendix Table A7.1). 2 In accordance with the ILO definition, employment is based on any work done for an hour during the reference period (a week).

LABOUR MARKET, INCOMES AND THE SOCIAL SAFETY NET


Table 7.1: Economic Status, Q1 2000 – Q3 2003 (thousands)

Q I Q II Q III Q IV Q I Q II Q IIITotal population over 15 years old 3, 016 3, 033 3, 021 2, 971 3, 082 3, 060 3, 132Total economically active population (labour force) (1) 1, 912 1, 983 2, 003 1, 945 1, 941 2, 037 2, 120Total economically active population (labour force) (2) 1, 983 2, 036 2, 063 2, 015 2, 025 2, 095 2, 170 Employed 1, 659 1, 742 1, 768 1, 713 1, 679 1, 805 1, 897 Hired 625 598 597 607 594 604 640 Self-employed 1, 028 1, 141 1, 168 1, 102 1, 083 1, 200 1, 255 Unemployed (1) 254 241 236 232 262 233 223 Unemployed (2) 324 294 296 303 345 290 273Total population outside the labour force (1) 1,103 1,050 1,017 1,026 1,141 1,023 1,002Total population outsde the labour force (2) 1,033 997 957 956 1,057 965 952Unemployment rate (per cent) (1) 13.3 12.1 11.8 11.9 13.5 11.4 10.5Unemployment rate (per cent) (2) 16.3 14.4 14.3 15.0 17.1 13.9 12.9

Labour force participation rate (1) 63.4 65.4 66.3 65.5 63.0 66.6 67.7Labour force participation rate (2) 65.7 67.1 68.3 67.8 65.7 68.5 69.3Self-employment share in total labour force 53.7 57.5 58.3 56.6 55.8 58.9 59.2Self-employment share in total employment 62.0 65.5 66.1 64.3 64.5 66.5 66.2

2002 2003

Source: Data from the SDS Household Survey Note: (1) ILO Standard (or “strict” methodology), i.e., excluding “discouraged” workers. (2) ILO “Loose” methodology, i.e., including “discouraged” workers. * At the time of writing this issue of GET, the latest available results of the on-going Household Survey were those for Q3 2003. For a more detailed table and 1998-2000 figures see Statistical Appendix Table A7.1. Changes in the gap between the “strict” and “loose” measurements of unemployment applied by the ILO point to “labour market flows” that is one of the key indicators of the labour market used by the ILO and shows “migration” into and out of the labour force. Showing the difference between the numbers of those actively looking for a job and those who are not, rather than just changes in the number of employed, unemployed and those outside the labour force, “labour market flows” can serve as an indicator of the capability of the labour market to absorb unemployed rather than “produce” them. Therefore, the bigger the gap between the two measurements, the more people are outside the labour force. The more people outside the labour force, and the fewer people economically active, the lower will be the ILO “strict” standard unemployment rate calculated from the smaller base of the labour force number. For the low indicators of the unemployment rate to be real signs of improving trends in the labour markets, the participation rate should be at least stable, or growing. At the same time, a persistently large gap occurs where there is usually long-term unemployment and unstable insecure jobs when many people, in the light of dim employment prospects, are not even actively looking for job any more and others do not start looking for a job immediately after losing one. The unemployment rate was lower both in Q3 2003 and during the three quarters of 2003 than that of a year before and the labour force participation rate was slightly higher, which implies that more people joined the active job search, thus returning to the labour force. The figures also suggest that while economic situation urged some of those formerly outside the labour force to make attempts to return to active participation in the labour market, not many of them were successful. However, if the lower unemployment rate was not due to technical changes preconditioned by the new methodology of the integrated survey in 2003 only, one can assume that employment trends improved, even if only slightly. The labour force participation rate grew by 1.4 percentage points in annual terms to 67.7 per cent in Q3 2003. This is a quite high indicator, though in line with the last years’ trend. The growing participation rate, may be a reflection, apart from demographic changes in the working age population, of various processes: when an extremely hard household income situation urges those outside the labour force to start job search, when better prospects of finding a job emerge on the labour market



that affect the decision of the former “discouraged” workers to actively engage in job search again, or when both factors are involved. Given the slightly improved unemployment figures for Q3 2003 (see table above) on the one hand, and anecdotal evidence of persisting grave household budget situation on the other, one can assume that this is the case when the labour force participation rate grew due to the both factors mentioned above. And last, but not least, symbolic pensions and pension arrears making pensioners engage in whatever activity they can find also contribute to growing participation rate and a reduced, if only slightly, unemployment rate. While both the unemployed and the “discouraged” workers outside the labour force are virtually “non-employed”, and stand a high risk of poverty, optimistic employment and participation rate figures can also conceal a frequent incidence of underemployment, low remuneration, an overwhelming agricultural subsistence self-employment and a large number of pension age workers, who have to work to compensate for their token pensions. In line with the usual trend, in the three quarters of 2003, the urban unemployment rate was not comparable to the rural one: 22.3 and 26.3 respectively by the “strict” and “loose” standards. The rural unemployment rate, as always, was supernaturally low and distorted the national figures – at 4.3 per cent by the ILO “strict” methodology and 5.7 per cent, by the ILO “loose” methodology. The existing Law on Employment artificially contributes to misrepresentation of the unemployment situation in the villages and in the whole country as well. Considering each farmer owning 1 hectare or more of agricultural land, or his/her family member as self-employed artificially reduces the unemployment rate, since the majority of those employed are engaged in agricultural self-employment. At the same time, the participation rate is automatically raised. In reality, while land is the basic source of income for most rural households and provides them with a subsistence minimum, many village dwellers, especially those whose lot of land is not very large and those who cannot afford to work their land, are hardly earning a subsistence. Having said that the rural unemployment rate is usually over 5 times lower than the urban one and almost 2 times lower than the national one, one has to say as well that over half of the rural unemployed fall under the category of “discouraged” workers, which means that most of those country dwellers who neither have a job, nor a plot of agricultural land in the family, are not even looking for job, as such job search would be definitely in vain. The vast majority of the rural population comprises elderly people, and younger people migrate to cities in search of some employment. While some of them manage to find at least some kind of job and sometimes even help their relatives in villages, others join the urban unemployed. The number of urban “discouraged” workers also surpasses that of the urban unemployed, and if some of the country dwellers can hardly earn subsistence, the “discouraged” unemployed in the cities are left without any income whatsoever. Registered unemployment at 48,600 accounted for over 20 per cent of the “strict” measured and 16 per cent of the “loose” measured unemployment as of the end of Q3 2003 (48,700 as of end of 2003). For the majority jobless the registration procedure is not worth going through in order to be eligible for the monthly GEL 14 (approximately USD 6) paid as benefit, while the chances of finding a job through registration remain minimal. In a situation where the unemployed are not covered by sound unemployment insurance schemes or any other form of support, providing at least a subsistence minimum, the unemployed are especially at risk both from an economic and social point of view, and prolonged periods of unemployment bring with them not only loss of income, but also diminishing employability of the job-seeker. Long-term unemployment persists, and being out of practice results in loss of qualification and access to



information on available jobs. It contributes to growing poverty and leads to social isolation and social exclusion. Both the economic and social dimensions of this persistent and serious problem are enormous and have to be tackled with policy measures and programmes aimed at raising the employability of the long-term unemployed and reintegrating them into the labour market. EMPLOYMENT Slow growth and lack of job creation in the formal sector find their reflection in a declining trend in the numbers of wage and salaried workers and a rise in self-employment and the numbers of unpaid family workers. Employment and the labour force both remain dominated by self-employment that accounted for 66.2 per cent of the former and 59 per cent of the latter in Q3 2003. Being on the upswing, self-employment has been dominated by agricultural self-employment, now 81.6 per cent. Self-employment in agriculture is largely a pre-defined status, since, as mentioned above, 1 hectare of agricultural land in the possession of a family renders its members self-employed by definition (Law on Employment). However, whereas land for many, especially rural, households is the basic source of livelihood, whether 1 hectare of land is enough to keep an average family of four employed enough to earn at least minimum subsistence remains a controversial issue. Many of such agricultural self-employed are likely to be poor. Nevertheless, assuming that urban unemployed and underemployed have no land to work on whatsoever, they are likely to be in much more extreme poverty than the rural poor. While poverty in the countryside is more associated with a lack of cash income, urban poverty involves insufficient food supply and undernourishment. In marked contrast to expanding self-employment, hired employment has been shrinking (see table above), that is primarily preconditioned by poor job creation in the private sector due to an unfavourable business climate, and the contraction of the state sector, that still accounted for over 66 per cent of dependent employment in the three quarters of 2003. As of end of Q3 2003, wage and salary earners accounted for 33.7 per cent of total employment. Although the proportion of dependent (or hired) employment in total employment has been on a downwards trend for several years already, it was still largely perceived as a conventional “permanent employment”. However, anecdotal evidence suggests that many hired employees, especially those in the state sector, where salaries have been mostly low, were also engaged in self-employment, or some other alternative employment as a secondary activity, most of which was in the informal sector. Since the state sector was still the main supplier of waged and salaried jobs, and civil servants occupied over half of such jobs, the downward trend of hired employment is likely to continue at least in the short term, as further staff cuts are likely to take place by the end of Q1 2004 and beyond, especially those associated with reorganisation of the State Chancellery into the Cabinet of Ministers, staff cuts at the ministries also will probably follow. Active employment policy, including training and re-training and other special policy measures will be likely to be needed to facilitate employment of those former civil servants, who will fail to be absorbed by the private sector, mostly due to their low competitiveness on the tough labour market. Overwhelming self-employment indicates a worsening labour market situation where more and more people are either non-employed or engaged in low-income, low-productivity and unstable activities, mostly in the informal sector. The SDS integrated survey results suggest that at least 67 per cent of those employed are the working poor, of which 39 per cent are rural unpaid family workers, almost 16 per cent are employees at budgetary organisations and another 12 per cent are non-agricultural own-account self-employed.



Widespread part-time employment, mostly involuntary, indicates the manner in which people attempt to adjust to downward labour demand choosing to accept short-time work rather than not to work at all. The patterns of employment are changing towards part-time employment and temporary employment. Time-related underemployment3 relates to the number of employed persons “whose hours of work in the reference period are insufficient in relation to a more desirable employment situation in which the person is willing and available to engage”4. So called “external groups” including agency or firm temporaries, outsourcing, subcontracting and casual workers, i.e., short-term workers, represent quite a substantial share of hired employment, indicating labour underutilisation. Part-time workers are more vulnerable from the point of view of their employability, since their career prospects and their competitiveness on the market are restricted. Much of the part-time and temporary work is involuntary and tends to be poorer quality employment rather than full-time work in respect of pay, benefits, security and access to on-the-job training. Figure 7.1: Employment characteristics of the population over 15 years old, Q3 2003

Self-employed39%Unemployed

8%

Outside of labour force

34%Employee in state sector

13% Employee in private sector

6%

Source: Data from the SDS Integrated Household Survey

Note: Share of the population outside labour force is given according to the ILO ‘strict’ standard of measurement, i.e., including discouraged workers.

In line with the general trend of recent years, as of end of Q3 2003, the two largest groups by economic status accounted for the majority of the population over 15 years: the self-employed, for 39 per cent and those outside of labour force, for 34 per cent (see pie-chart above). Compared to a year before, in Q3 2003, the share of hired employees (employed in state sector and private sector taken together) shrank by 1 percentage point to 19 per cent. In contrast, the self-employed category showed a corresponding increase by the same 1 percentage point. This could mean that loss of jobs in dependent employment had to be offset by engaging in self-employment. Jobs were lost not only in the state, but also in the private sector that reflects the instability of private businesses. It is likely that many of the jobs in the private sector, with the exception of those at large private companies, are insecure, unstable and low paid; it is also very likely that many of them would be in the informal sector. At the same time, the overwhelming majority of the state sector employees (78 per cent) were civil servants, and, as mentioned above, their number is to be further reduced. Salaries of the majority of them have been low and irregular, and effectively oblige them seek additional income to support the family. The share of the unemployed (ILO “strict” standard) and those outside the labour force

3 A resolution concerning the measurement of underemployment and inadequate employment situations, adopted by the 16th International Conference of Labour Statisticians, Geneva, 1998 calls it “visible underemployment”. 4 “Key Indicators of the Labour Market 2001-2002”, ILO



remained unchanged over the year, and the overall pattern of the economic status of the working-age population has been basically stable in recent years. The majority of jobs, especially in cities, are created in the informal sector. The informal economy, dominated, as overall employment, by irregular self-employment, is represented largely by unrecognised, unrecorded and unregulated small-scale activities. Underemployment is widespread. The majority of the employed are engaged in low-paying and insecure segments of the labour market and working under poor conditions. Stable, long-term, full-time jobs are rare, both in the formal and informal sectors. Hidden and disguised unemployment are widespread and growing long-term unemployment leads to the downsizing of the labour force, and, hence to the misleadingly low unemployment rate. The economic status figures fail to reflect all the drama of the situation, since the ILO methodology of counting the unemployed ignores the size of labour remuneration and its consistency with the size of the minimum subsistence. The Economic Development and Poverty Reduction Programme (EDPRP), that has been endorsed by the donor community and is to be revised by the new Government, considers among its priorities the reduction of poverty through support to economic growth leading to the creation of new jobs. SALARIES AND WAGES The average monthly nominal salary of hired employees across the economy was GEL 106.4 in the first three quarters of 20035, according to the SDS Integrated Household Survey figures. The share of the average monthly salary in the minimum subsistence of a family of four did not change over the year and was almost 48 per cent, and compared to two years ago, it grew by 1.4 percentage points. About 52 per cent of all waged and salaried workers – budgetary organisations6 employees – were earning on average GEL 75.7 per month in Q3 2003. Employees of public enterprises and organisations, accounting for almost 15 per cent of hired workers, were paid GEL 120.5 per month on average in Q3 2003. Monthly remuneration of another category of wage and salary earners (about 29 per cent), private sector employees, was GEL 137.7 on average. 3.5 per cent of hired workers, those working in foreign organisations or joint ventures, had a monthly salary of GEL 244.1 on average, and hired employees under “other” category (about 1.3 per cent) were earning monthly salaries of GEL 158.3. Salaries of public sector employees (67 per cent of hired workers) as well as remuneration of the majority of private sector employees remain predominantly way below the subsistence minimum. Whilst hired employment remains the primary source of income for urban households, it is as unstable as any other source of household income in the country. Instances of non-payment of salaries are frequent, resulting in building up budgetary arrears, and the growth of salaries in real terms is eroded by inflation. MINIMUM SUBSISTENCE LEVEL According to the SDS, the official minimum subsistence, calculated basing on the old methodology, introduced in early 1990s, was GEL 112.6 for an average consumer in Q3 2003, GEL 128.3 for a working man, and GEL 222.1 for an average family of four. (It was respectively GEL 119.4,

5 At the time when this issue of GET was being written, the latest available Integrated Household Survey figures were those for Q3 2003. 6 A budgetary organisation is a public organisation fully financed by the state budget.



GEL 136 and GEL 236.7 in Q1 2003). A new methodology has long been ready at the SDS and until recently it used to publish it as an “alternative” minimum subsistence7. However, it can be argued which of the methodologies better takes into consideration the real basket that can secure a reasonable minimum subsistence. The minimum subsistence levels, calculated in accordance with the new “alternative” methodology are closer to the average salary levels in the economy, i.e., are much lower than the “official” level. As the data from the SDS integrated survey suggests, in Q3 2003, the average remuneration of only 3.5 per cent of hired employees (those working at foreign organisations or joint ventures) surpassed the minimum subsistence for a family of four. Average salaries of almost 34 per cent of hired workers (private enterprises, foreign organisations employees and those under “other” category) were higher than the minimum subsistence for a working man, and another 15 per cent (employees of public enterprises) added to the aforementioned 34 per cent, i.e., 49 per cent were paid slightly over the minimum subsistence for an average consumer (that is a non-working consumer). The average monthly remuneration of 52 per cent of waged and salaries workers was way below even that level, and the flat rate pension rate paid nationwide accounted for a mere 12 per cent of the level for an average consumer. Subsisting on GEL 222.1 (about USD 105) per month for a family of four does not seem to be an easy task. According to the above and anecdotal evidence, however, many households have to survive on much less than that, especially those with only one breadwinner. At the same time, even a family of four with only one member working and the rest being dependents would not be considered among the most vulnerable and subject to receipt of a state social allowance (see below), since to fall under this category, a household has to consist of non-employed pensioners and/or orphans only. Apparently, this challenge is to be tackled among others on the priority agenda, and especially through providing more opportunities for employment. SOCIAL POLICY AND THE SOCIAL SAFETY NET The vast majority of the population, including informal sector employees, the self-employed and the unemployed, as well as their family members, have no social protection whatsoever, and the assistance for those covered by the social safety net is symbolic. Fundamental steps are to be taken on the way to restructuring the state social protection system to create an economically viable, affordable and equitable social safety net that would be fit to alleviate poverty effectively, especially for the most vulnerable. In conditions of inadequate pension assistance, alleviating poverty in old age is of vital importance. Social policy and reforms are among the top government priorities. Reform of the pension system, provided for by the national Economic Growth and Poverty Reduction Programme (EGPRP), has already started, and is aimed at introducing a sustainable multi-pillar pension system, based on insurance principles. Currently, the three main existing forms of social assistance for the vulnerable (except certain healthcare programmes) are state social allowance, unemployment benefit and the flat rate pension. The State Social Allowance for vulnerable families is targeted at households comprised exclusively of “poor non-working pensioners” or of orphans, disabled children and invalids, and families with at least 7 children. In fact, it represents a topping-up of symbolic pensions of the poorest elderly and a modest child allowance for the most destitute families. The State Social Allowance payable to recipients is GEL 22 for a qualifying household consisting of one member, or for each orphan under 7 Since a governmental decision ”On Introducing Changes into Calculation Methodology and Re-calculation of the Minimum Subsistence Level” was passed in August 1999 and a draft presidential decree “On Defining and Applying Subsistence Minimum” was drawn up, no other formal steps have been taken.



guardianship, and GEL 35 for a pensioners’ family of two or more, and for a family with at least 7 children. The amount of the standard monthly Unemployment Benefit payable for the first six months of registered unemployment is fixed at GEL 14 for the duration of the eligible period. To become an official benefit recipient, a person should be registered as unemployed, therefore should have a certain working record in the official sector. As a result, the number of the unemployed who bother to register is usually way below the actual one and the number of the benefit recipients is insignificant. Pension System According to the current pay-as-you-go public pension system, a flat-rate old age pension payable to the majority of pensioners countrywide does not take account either of the years worked or the salary history, and, at a monthly GEL 14 (approximately USD 6.5) on the one hand, is a poor incentive for tax compliance, and on the other, falls far below any minimum subsistence level (about 12 per cent of the official minimum subsistence of an average consumer). Starting from April 2003, the pensioners in Tbilisi are receiving an additional GEL 3 from the municipal budget. The pension rate is supposed to grow, and the government hopes to be able to pay GEL 18 countrywide beginning from April-May 2004, of which GEL 14 will be the main flat-rate pension allowance and another GEL 4 would be paid to cover previously accumulated pension arrears. (Therefore, pensioners in Tbilisi will be paid GEL 21). The state pay-as-you-go pension system covering all the population of the pension age has long encountered a number of problems. Under the conditions of a narrow tax base, a big informal economy, and constant tax under-collection and non-compliance, the pensions financed by the payroll tax proceeds8 fall short of the target, and the system has been accumulating arrears for several years already. In the conditions of a transition economy the public pension system, inherited from the Soviet past, has long proved to be unsustainable and insolvent The prerequisites necessary for the smooth functioning of a PAYG (pay-as-you-go) system fully dependent on the level of tax collection under the diminishing tax base and widespread tax avoidance and evasion cannot be working smoothly. The dependency ratio9 at an unsustainably low 1:1.4 is a reflection of shrinking hired employment and growing informal economy, resulting in an extremely low number of contributors to the fund. Low wages and no link between current contributions and future benefits are a poor motivation for those in employment to pay social tax, and a relatively high payroll tax rate. Inadequate law enforcement and widespread corruption discourage tax compliance on the part of employers. The existing PAYG pension system fails to carry out its basic function of providing basic minimum pensions to the elderly. Average taxable salaries/wages are low, resulting in the low replacement rate10 of the current PAYG universal pension system. The average pension flat rate of the majority of pensioners is around 13 per cent of the average hired employees’ monthly salary. The majority of pensioners are either relying on extended family ties, or try to engage in any kind of employment providing them with a subsistence minimum.

8 The contributions from workers’ wages that form the United State Social Insurance Fund (USSIF) revenue are 26 per cent of gross wages for budgetary organisations and 27 per cent for others paid by the employer and 1 per cent paid by employees. 9 The number of pensioners as a percentage of the number of people employed, or contributor to beneficiary ratio. 10 The average pension in terms of the average wage.



The economic, political and social consequences of the crisis that the current pension system has been experiencing cannot be neglected as they place the most vulnerable elderly at poverty risk that may further result in social disintegration, marginalisation and social exclusion. SOCIAL INSURANCE AND PENSION SYSTEM REFORM Implementation of the social insurance and pension system reform, whose principal goal is to introduce a new financially sustainable modern pension system suited to changing demands of a transition economy has already started, with the support of the World Bank and other donors. The pension reform programme provides for the introduction of social insurance and the transition of the pension system to insurance principles. Certain measures have already been taken, while others are underway. The reform envisages elimination of double entries and non-existent recipients as a result of adjusting the lists of benefit recipients, as well as further verification of registered pensioners and, finally, introduction of personal identification cards. As a result of restructuring of the United State Social Security Fund and the State Medical Insurance Company, in December 2002, the United State Social Insurance Fund was formed. A number of laws, providing the necessary legal framework for introducing the social insurance system and new pension system based on insurance principles, prepared by the USSSF and the Ministry of Labour, Healthcare, and Social Affairs, in consultation with the World Bank, were passed by the Parliament on 20th July 2003, the last day of its spring session, all by ad hoc procedure, i.e., in their second and third reading. They are: laws “On Mandatory Insurance Pensions”, “On Mandatory Social Insurance”, and “On Introducing Individual (Personalized) Registration and Individual Accounts in the System of Mandatory Social Insurance”. The following is a short review of the newly adopted laws. REVIEW OF LAWS Law on Mandatory Social Insurance The reformed social protection of the population, including pension system is to be based on insurance principles, which is essential for a socially oriented society in the conditions of transition to a market economy. The law “On Mandatory Social Insurance” provides for transition of the social safety net to insurance principles that would build a basis for real guarantees of social protection. According to the law, the social insurance is going to be universal and mandatory; the social insurance funds will be distributed based on a solidarity principle; the insurance benefits will be differentiated, based on the size of insurance contribution and length of insurance period; and payment of the insurance benefits will be guaranteed. The following cases are stipulated for by the law: old age; disability; the loss of the breadwinner; temporary disability; pregnancy and childbirth; taking care of a child of up to 18 months of age; unemployment insurance; assistance in case of death of the insured (survivor’s pension); health rehabilitation; and mandatory medical insurance. The law provides for a distinct demarcation between the insurance and state obligations that is supposed to guarantee the viability of the insurance system. In accordance with the new system of social protection, the non-insurance benefits (e.g., family assistance and pensions for those pensioners who will not be subject to insurance pensions, i.e., social pensions) will be financed from the state budget. Currently the annual state budget transfer to the United State Social Insurance Fund (the USSIF) covers hardly half of the sum necessary to pay the non-pension benefits, and the fund has to fill the gap using social tax proceeds, that, in its turn has been contributing to growing pension arrears. The fund management considers that when the function of payroll tax collection is exercised by the fund itself, the proceeds directed to the fund would grow as the fund would be able to work on



increasing the tax base coverage and strengthening tax administration, and the possibility of re-directing social tax proceeds to cover other under collection of other taxes would be eliminated. Law on Mandatory Insurance Pensions In accordance with the law “On Mandatory Insurance Pensions”, the following persons will be eligible to receive mandatory insurance pensions after the law comes into effect: Georgian citizens, who will have been insured in accordance with the law “On Mandatory Social Insurance” and will be meeting the conditions provided for in the law; their disabled family members; and permanent residents, foreign citizens or persons without citizenship. Pensions of those persons who will have been registered as pension recipients before the law “On Mandatory Insurance Pensions” comes into force will not be regulated by this law, with the exception of those, who would have been eligible for old-age pension before the law would have taken effect, but who would continue working past its enactment for at least 2 years. The law differentiates among the three types of mandatory insurance pension: old age pension, disability pension and pension for the loss of the breadwinner (survivor’s pension). The mandatory old age insurance pension will be granted to persons having reached pension age11 and having at least 15 years of work record and/or insurance history, and will be comprised of a basic part and of a defined-contribution part12. According to the law, state working pension will be financed out of insurer’s (the USSIF) budget that will be formed out of the mandatory social contributions paid to the insurer’s budget by the insured and the insurants. The pension capital accumulated on an individual (personified) account will be calculated on the basis of the mandatory insurance contribution paid to the insurer’s budget. The defined-contribution part of the state working pension will be granted on the basis of the funds accumulated on the insured’s defined-contributions individual account. The state will undertake the obligation of subsidizing the liabilities of the insurer – the United State Social Insurance Fund. The laws “On Mandatory Social Insurance” and “On Mandatory Insurance Pensions”, provide for the pension insurance tariff equal to 28 per cent, of which 27 per cent is to be paid by the employer (insurant) and 1 per cent by the employee (insured). For the self-employed (self-insurants) a 14 per cent tariff will apply. The tariff will be distributed as follows: 20 per cent (from the 28 per cent tariff) is meant to cover the basic part of the pension (that is to be financed in accordance with the PAYG (pay-as-you-go) principle) and 8 per cent (from both 28 per cent and 14 per cent tariffs) – the defined-contribution part (i.e., insurance part to be financed in accordance with the PAYE (pay-as-you-earn principle) of the mandatory insurance pension. The overall payroll tax will be comprised of 33 per cent, of which 31 per cent will be to be paid by the employer (27 per cent, social insurance contribution; 3 per cent, medical insurance contribution; and 1 per cent, unemployment benefit contribution), and 2 per cent by the employee (1 per cent, social insurance contribution, and 1 per cent, medical insurance contribution). Persons eligible for mandatory insurance pension will not have the right to claim this pension during the period of their employment, during which the size of their insurance contribution will be reduced from 28 to 8 per cent to be paid by the employer (insurant) of the pensioner engaged in hired employment or by the self-employed pensioner (self-insurant).

11 Currently, the pension age is 60 years of age for women and 65 years of age for men. The law “On State Pensions” provides for raising the pension age for women to 65 year of age. On the one hand, this would facilitate growth in the number of contributors, and on the other hand women will have equal rights with men to continue working. 12 Defined-contribution schemes (DC) specify in advance the contribution, but not the benefit, which depends on the accumulated contributions (and the rates of return on investments).



Law on Introducing Individual (Personalized) Registration and Individual Accounts in the System of Mandatory Social Insurance To be able to build successfully a new system of state social protection based on insurance principles a sophisticated and smoothly functioning registration system must be in place. A law “On Introducing Individual (Personalized) Registration and Individual Accounts in the System of Mandatory Social Insurance” provides a legal framework for introducing insurance principles based on defined-contribution individual accounts in the system of the social safety net. Overall individual registration is meant to contribute to broadening the insurance contribution base, and, therefore legalisation of the informal economy, by encouraging payment of contributions that, unlike the present payroll tax, are to be directly linked to future benefits. Although all the three laws that are to regulate social insurance and mandatory insurance pensions have now been passed by the Parliament, it will take some time, before the the new pension system is in place and running. The programme of introducing a multi-pillar system is to be carried out step by step. Before the multi-pillar system is in place, it is essential to: guarantee a transparent environment in the pension system; draft further appropriate legislation and improve existing normative acts; ensure continuous payment of current pensions and gradual repayment of accumulated arrears; implement personification and introduce identification cards; and, finally, ensure step-by-step transfer towards insurance principles and a differentiated pension system. A multi-pillar system is to provide a plurality of possibilities and availability of choice for those who can afford to make provisions for their future pensions, as well as increase personal responsibility and create savings funds for investment. However, putting the system in place and reaching its smooth functioning will require time, effort and investment. The success of the reform will largely depend on the overall economic situation in the country and the rate of economic growth, as well as the legislative process. Currently, only a tiny share of the population would be able to afford participation in private voluntary schemes, and there is a long way to go until those who can afford it have confidence in them. However, for those who choose to, it is already possible to provide for one’s private pension13. In the conditions of Georgia, where household incomes are currently extremely low, privately managed retirement savings systems could not substitute for universal social insurance schemes and can only serve as an option for those who can afford to save for higher retirement income. After the pension reform is implemented, the state pension system is supposed to provide a mandatory insurance pension for those eligible, topped up by voluntary private schemes. In the meantime, improving payroll tax collection and compliance, broadening the tax base, paying the pension arrears and ensuring regular payment of pensions to the current pensioners remain the most important short-term goals. Box 7.1: TRANSITION AND EU ACCESSION COUNTRIES’ EXPERIENCE

Pension Problems in Eastern Europe The World has turned out to be different from the one that the old had expected and grown accustomed to in the transitional socialist economies. For citizens who followed the rules, the old command economy had promised cradle-to-grave income security: support for families with children, a job with a modest and relatively undifferentiated wage, and compensation for these relatively low wages through a generous pension after retirement. But now that pensioners have come to collect, the coffers are bare.

13 The law “On Non-State Pension Insurance” was passed in 1998. Georgian Pension Investment Holding (GPIH) founded in May 2001, offers, in addition to the existing universal PAYG scheme, voluntary private pension insurance.



Old age security systems are part of the problem, not the solution. The transitional countries have only a single pillar, a publicly managed, pay-as-you-go scheme financed by payroll taxes. Occupational pension plans and voluntary saving did not emerge under central planning, as they had in OECD countries. Private financial intermediation and competitive financial markets never developed and personal saving was small. Though a dominant public plan with high tax rates could function in an authoritarian command economy, it is dysfunctional in a market economy that depends on incentives, compliance, decentralized capital mobilization, and competition in world markets on the basis of costs and price. Eastern Europe economies spend much more on old age benefits than their income or demography would predict. And this share has been rising rapidly. As GDP has falled, the share of GDP captured by the old, through public spending, has increased. In many countries pensions are the largest single item in the government budget, accounting for more than 15 per cent of spending or some 10 to 14 per cent of GDP in Bulgaria, Hungary, Poland and Slovenia. This is as large a share as in the OECD welfare states, where the proportion of old people, per capita income, and tax collection capacity are much greater. How did this come about and what are the consequences? High statutory replacement rates. Most Eastern European economies have set statutory replacement rates at about 80 per cent of wages. Although inflation has eroded these values, the average pension is still a very high percentage of the average wage – 67 per cent in Hungary, 70 per cent in Poland, and 85 per cent in Slovenia. High dependency rates and early retirement. Because of declining birthrates, dependency ratios are higher in transitional economies than income levels would predict. And the system dependency rate is higher still because of early retirement, unemployment, and evasion (many workers and employers simply do not pay). The average effective retirement age is 57 for men and 53 for women, pushing the ratio of beneficiaries to contributors up to 0.6 in Romania, 0.7 in Hungary, and 0.87 in Bulgaria, where every worker has to support almost a full pensioner. High payroll taxes. Payroll taxes required to support these benefits are enormous – typically about 30 per cent for pensions plus 20 per cent for other social insurance. Firms are squeezed from both sides: administered wages prevent them from fully shifting the payroll tax to workers, while partial shifts lead to low and falling real wages. This situation drives evasion to the growing informal economy, stirs up conflict between workers and employers and between workers and retirees, discourages private entrepreneurship, makes it impossible for firms to compete in international markets, and deprives the government of revenues to invest in much-needed public goods that might enhance growth. Shifting to a broader tax base would release some of these pressures, but the institutional capacity is not yet there. Lack of indexation. Real benefits and expenditures are being reduced implicitly because of high inflation without indexation. Indexation is not viable unless these countries cut benefits explicitly. While real pensions are not falling faster than real wages, young workers at least can hope for a better future. For older retirees the future is now. In sum: The transitional economies offer old age benefits that the old find unsatisfactory and the young cannot afford. Too much money goes to transfers to early retirees who could still work, while the truly old receive pensions that are barely adequate. High tax rates and excess government spending on pensions encourage evasion, distort employment, deter private enterprise, and crowd out public investments in productive infrastructure that could boost economic growth. Overhaul of the system is clearly needed. Source: Averting the Old Age: Policies to Protect the Old and Promote Growth. A World Bank Policy Research Report

CHAPTER EIGHT: THE EU-GEORGIA RELATIONS


GEORGIA’S TRADE WITH THE EU According to the State Department for Statistics, in 2003 Georgia’s trade relations with the Member States of the European Union amounted to USD 456.2 million, which is about USD 77.9 per cent more than in the previous year. During this period Georgian exports to the EU market amounted to USD 76 million (126.7 per cent compared with previous year), or increase of USD 16 million. EU Member States’ imports in Georgia significantly increased and reached USD 380.1 million (more than double the previous year). For the period 30.3 per cent of Georgia’s foreign trade was with EU Member States, 17.1per cent of exports and 35.9 per cent of imports. Table 8.1: Georgia’s Trade with the EU Countries, 2002-2003 (USD million) 2002 Year 2003 Year

Turnover Import Export Balance Turnover Import Export Balance Austria 10.6 10.1 0.4 - 9.7 11.2 10.7 0.5 - 10.2Belgium 9.0 7.0 2.0 - 5.0 12.47 9.47 3.0 - 6.4Denmark 8.7 8.3 0.3 - 8.0 8.87 8.4 0.47 - 8.0France 18.3 15.0 3.3 - 11.7 13.6 8.4 5.2 - 3.3Germany 62.3 56.6 5.7 - 50.9 90.8 80.5 10.3 - 70Greece 11.6 8.3 3.2 - 5.1 13.5 8.4 5.1 - 3.3Ireland 0.7 0.6 0.1 - 0.5 1.36 1.3 - - 1.2Italy 46.0 38.4 7.5 - 30.9 42.3 33.0 9.3 - 23.6Luxembourg 0.2 0.2 - - 0.2 0.4 0.4 - - 0.4Netherlands 19.4 15.9 4.4 - 10.6 32 22.6 9.4 - 13.0Portugal 1.4 1.3 0.09 - 1.2 1.3 1.1 0.2 - 0.9Finland 2.2 2.2 - - 2.2 2.6 2.6 - -2.6Spain 3.5 2.8 0.7 - 2.1 13.3 3.4 6.9 3.5Sweden 7/9 7.9 0.02 - 7.8 6.3 6.3 - - 6.3UK 59.4 26.5 32.8 6.3 166.5 140.8 25.7 -115.1Total 261.6 200.7 60.9 - 139.8 416.5 337.4 76 -260.8Source: State Department for Statistics Table 8.2: Georgia’s Trade with the New EU Member Countries, 2003 (USD thousand)

Import Export Balance Estonia 44.7 2.6 - 42.1 Cyprus 1,478.1 532.9 - 945.2 Latvia 4,480.1 655.6 - 3824.4 Lithuania 1,779.2 570.0 - 1,209.2 Malta 1.6 - - 1.6 Poland 3,538.6 213.9 - 3,324.7 Slovakia 910.2 105.5 - 804.7 Slovenia 2,860.6 17.5 - 2,843.1 Hungary 7,315.0 537/0 - 6,778.0 Czech Republic 4,843.1 819.2 - 4,023.9 Total 27,251.2 5,141.7 - 23,796.9

Source: State Department for Statistics

THE EU-GEORGIA RELATIONS


Table 8.3: Georgia’s Trade with the EU Acceding Countries, 2003 (USD thousand)

Import Export Balance Bulgaria 17,957.6 219.0 - 17,738.6 Turkey 107,529.4 7,8851.1 - 28,678.4 Romania 102.19.7 972.0 - 9,247.8 Total 135,706.7 80,042.1 - 55,664.8

Source: State Department for Statistics THE INDICATIVE PROGRAMME 2004-2006 The EU/EC Country Strategy Paper (CSP) for Georgia 2003-2006 was adopted and provides the strategic framework for EC assistance to the country. According to the CSP, the EU has a long-term interest in the success of transition to democracy, rule of law and a market economy in Georgia. EU enlargement, based on a stable neighbourhood, mutually beneficial political and economic relations will bring the South Caucasian Countries closer to the EU. To help Georgia in reaching the objectives of democratic principles, the rule of law, human rights and transition to a market economy the EU has provided significant financial assistance at EUR 385 million from 1992 to 2002 (Table 8.3). The Indicative Programme 2004 to 2006 for Georgia was signed on 14th January, 2004 in Tbilisi. According to the programme, the EU, in the frame of TACIS programme, will allocate EUR 28 million, including EUR 4 million for rehabilitation programmes (See Table 8.4). The areas of co-operation are as follows: A. Support for institutional, legal and administrative reform 1. Implementation of the PCA The Partnership and Co-operation Agreement (PCA) is the main legal instrument of relations between Georgia and the European Union. The TACIS programme is the main instrument for assisting the Government in the implementation of the PCA. The Government committed itself to adopt the National Programme for the implementation of the PCA, and in conformity with Article 43 of the PCA, the approximation of legislation in particular. The National Programme for harmonisation of Georgian legislation to that of the EU was adopted by the PCA Governmental Commission on 23rd September, 2003. The objective of this area of co-operation is to promote PCA implementation and assist in the approximation, application and enforcement of legislation, to assist and advise on matters related to rights and obligations deriving from Georgia’s accession to the WTO, as well as to pursue TACIS work in areas that are key for sustainable economic recovery; to promote institutional and administrative reform and related capacity building of stakeholders of the Government and civil society for PCA related policy reforms. 2. Reforms in judiciary and law enforcement These issues are at core of Georgia’s socio-economic crisis. The completion of the “Concept of the Reform of the Security and Law Enforcement System” and the expected adoption of a new criminal code in Georgia provide a basis for the reforms needed to bring Georgia closer in line with EU standards. In particular, reorientation of police and security services will require redefinition of powers,



modern transparency mechanisms and adapted conduct, mandate and management. Adequate border management is one of the key factors in improving regional stability as well as promoting regional trade. An integrated approach to improving border management and border crossing is essential to allow for the growth of legitimate traffic. The objective is to contribute to the strengthening of the State and sustainable economic transition by reinforcing the rule of law and law enforcement, with involvement of civil society. 3. Strengthening civil society and human rights The issue of good governance and transparency in the Georgian Government and public institutions calls for a greater capacity for civil society to bring its activities to bear in support of the reforms needed to improve effectively the situation at all levels of society. Active participation of civil society can be promoted at different levels of governance: at the political level for enhancing democratisation, respect for human rights, accountability of public entities and government, or at local, decentralised level, such as through the EDPRP1 process; at the policy level, through contributions to policy formulation, monitoring implementation and measuring results: the EDPRP process offers large scope for an increased contribution of civil society; at implementation level, by participation in anti-corruption initiatives, safety and justice mechanisms, as well as the level of direct public service delivery, notably in pro-poor policy and delivery of social services at local level. The objectives are to: support democratisation and the proper functioning of democratic institutions; protect human rights in the context of the rule of law and law enforcement; promote freedom of media and access to information by civil society; strengthen civil society and promote its involvement in public life, including through appropriate legal provisions. B. Social consequences of transition 1. Pilot schemes for poverty reduction TACIS will support pilot schemes in a couple of target areas of Georgia, intended to focus on the conditions that are necessary for alleviating rural poverty and providing for sustainable local development, food security, income generation and small business development over the medium term. The objectives are to assist in following-up and monitoring the EDPRP implementation; promoting secure food supplies for the most vulnerable groups and conditions for sustainable local development; supporting local governance and strengthening transparent decision-making mechanisms; assisting target groups identifying short and medium term priorities for outside assistance aimed at bringing themselves out of the cycle poverty and thus also contributing to community-based prevention; rehabilitating essential, small, local social and economic infrastructure to increase the capacity for self-sustained development of rural communities. 2. Improving the targeting of social assistance The examination of Georgian social transfers has indicated a bias in favour of higher expenditure groups, penalising in particular the rural poor. The EDPRP recognizes the importance of improving the efficiency of the system by effective targeting of social benefits. The EU Food Security Programme has focused its budget support on complementary activities, aiming at maximizing the impact of social protection on the most vulnerable groups. The process of reform needs to be accelerated and 1 Economic Growth and Poverty Reduction Programme



measures for a more efficient and effective delivery is required. The objective is the improvement in the effectiveness of targeting social assistance at the poor. 3. Health sector reform TACIS assistance in this sector will be launched under the previous Indicative Programme. It is co-ordinated with the World Bank and the Department for International Development (DFID) and aims at implementing Georgia’s National Health Programme. It is proposed to contribute further to this programme, in co-operation with other donors, subject to the assessment of progress with respect to the previous Indicative Programme. The objective is to continue to support the completion of the primary health reconstruction programme, targeting areas where the poor and vulnerable live. C. Other TACIS support In addition to the activities described above, assistance to Georgia will be provided also through Institutional Building Partnership Programme (IBPP) and Bistro. TEMPUS will continue its support for restructuring the country’s higher education system and its adaptation to socio-economic needs. Attention will be drawn to the development of European studies, information technologies sector, regional projects, and training courses for institutional building. Table 8.4: Indicative IP Budget, 2004-2006

Priority Programme activity Allocation (EUR million)

Support for institutional, legal and administrative reform

-support to PCA implementation -policy advice -statistics, customs -reform judiciary and law enforcement -strengthening civil society -bistro

11.5

Support in addressing the social consequences of transition

-pilot poverty reduction schemes -pro-poor targeting of social policies

primary health sector tempus bistro

12.5

Total 24.0 Note: EUR 4 million for Rehabilitation programmes are added to the total of EUR 24 million. Source: Indicative Programme, 2004-2006 IMPLEMENTATION OF THE CONCEPT OF A WIDER EUROPE The European Commission’s “Wider Europe” initiative gives the enlarged EU an opportunity to define the Union’s policy towards its new neighbours for the next 10-15 years. In discussing the concept of “Wider Europe”, answers to the obvious questions are crucial: Who are the Unions’ new neighbours? What benefits would a “Wider Europe” offer the EU and its new neighbours? What principles should apply and what instruments should be used in its implementation? While the main focus of the initiative is on Ukraine, Moldova and Belarus, the question arises - is it important to have Russia involved as an important partner in the region? The Wider Europe initiative will complement the existing EU-Russia dialogue in the PCA framework and Northern Dimension initiative; the more so that many of the issues regarding justice and home affairs, economic co-operation, energy dialogue and the environment are common for the region and should be addressed on a common basis if the EU wants to have a lead in these discussions. Russia could be offered a strategic partnership based on the provision of integration, while the other three



countries could be presented with an integration prospect built on the current logic of the EU enlargement. An extension of the initiative over the coming year to embrace Southern Caucasus Georgia, Armenia, Azerbaijan, could be considered as the EU relations with Wider Europe progress, especially with Turkey’s closer integration with the EU. Georgia considers that Wider Europe – New Neighbourhood initiative is a good mechanism facilitating the ongoing integration processes in Europe and therefore, attaches great importance to the inclusion of the South Caucasian countries, particularly Georgia in this initiative. The Government of Georgia welcomes the approval of the Draft Resolution of the European Parliament “Wider Europe-Neighbourhood: A New Framework for Relations with Eastern and Southern Neighbours” and appreciates the approach towards the region, according to which the European Parliament calls on the Commission and Council to develop a special policy within the framework of the Neighbourhood policy for the countries of South Caucasus, given the particular importance of conflict prevention (Box 8.1). The country’s inclusion in the Wider Europe initiative will contribute greatly to Georgia’s gradual integration into the EU structures2. The Wider Europe initiative should target at the following objectives: • support for democratic and economic reforms in new neighbours, thereby ensuring, in the long

term, their European choice and European perspective that is, giving a ”meaning of the EU” to the new neighbours as an impetus for political, economic and structural reforms;

• ensuring stability and security of the EU borders, with the objective to find an answer to the major concerns in the justice and home affairs such as border control, illegal migration and human trafficking, trans-border organised crime, smuggling and corruption, as well as good governance and mutual legal assistance;

• facilitating trade and promoting investment, expanding export markets for EU goods and ensuring a stable trade regime; promoting structural, administrative, and judicial reforms and approximation of national legislation with that of the EU;

• seeking new sources of energy through diversification of supply and energy transportation routes;

• narrowing the gap between the living standards across the borders, avoiding political and social tensions;

• easing environmental concerns and pursuing environmental co-operation. Some key principles should apply in the implementation of the Wider Europe concept: a). the principle of differentiation, based on the level of countries’ relations with the EU and the political will to adopt European political and economic values. There can be no one-size-fits-all approach. At the same time it is important to keep the gates of opportunity open for those countries. This will give them a choice, based on the principles of self-selection and conditionality, to decide how far and how fast they are able to go. It will also give an opportunity for the EU to push harder in demanding the implementation of agreed benchmarks. The negative agenda such as justice and home affairs issues or fight against corruption, should be put forward together with the positive agenda, which will give the answers to some of the new neighbours’ political and economic expectations vis-à-vis their relations with the EU.

2 Source: Ministry of Foreign Affairs of Georgia



The countries addressed by this initiative should have a sense of perspective. It should be discussed what level of relations the EU expects to have with the new neighbours over the coming years: PCA, Neighbour Agreement, Free Trade Agreement? Any of these targets should be strictly conditional on the process of political, economic, administrative and judiciary reforms and legal approximation. EU acceding countries should be involved in the preparation of the initiative from the outset, since they have practical reform experience, good links with the new neighbours’ political, administrative, economic and business establishment. Importantly, Wider Europe should not become just another theoretical exercise. The experience of the common strategies indicates that there is a need for a well defined “route map” outlining priority tasks, final objectives and step-by-step benchmarking. It is essential to support the “map” with an adequate mechanism of dialogue, including implementation review and monitoring. While relying on the existing PCA framework, one should bear in mind that at some stage of implementation of the initiative the question may arise: is the PCA framework enough for this task? The preparation of such a plan of action ought to be based on the awareness that there exist two different political and legal areas in Europe, which upon certain conditions could be approximated. Paradoxically, that would enable to return to the “pragmatic” policy, based on the clearly defined national long-term interests. It would pave the way for a new status quo in the EU - East Europe relationship, though that would preclude the possibility of considering the third and the most positive scenario. Adequate financial means and human resources are necessary. Increase of TACIS and other EU funds for the new neighbours should be foreseen as a first step. The possibility of launching a new mechanism for technical and financial assistance for the new neighbours could also be considered, a sort of transferring the PHARE experience further to the East. Co-ordination of bilateral and regional assistance programmes should contribute to those efforts. The existing PCA mechanism of political dialogue should be used more effectively. There is a need to show more interest in the political developments of the new neighbour countries, to expand relations with their political parties, as well as the opposition, NGOs, mass media and academia. Economic relations comprise an area where the new neighbours are most likely to profit from greater incentives. At the same time, it will depend on the will of those countries to support a pro-European agenda and economic reforms. A benchmark approach should determine step-by-step tasks. Implementation of the PCA will test in reality how the new neighbours apply the most favoured nation regime. Other tasks will include implementation of IMF programmes, efficient fiscal policy reform, creation of an adequate investment climate, implementation of non-discriminatory measures, trade liberalisation, and adaptation of national legislation to that of EU standards. Having in mind the experience and expertise of the EU accession countries the consideration of “twining” projects between the central authorities and new neighbours is important and will improve administrative capacities. In the area of Justice and Home Affairs, favourable travel arrangements or even opening discussion on the possibility of a visa free regime as a long term objective should be based on the readiness of the new neighbours to provide proof of success in combating illegal migration and organised crime, to



strengthen border control and management, including modernization of border crossing, and to sign and ratify border agreement and co-operation on consular issues. Wider Europe, the European Convention, and new Constitution of Europe are different debates on the future of Europe. Undoubtedly all are a manifestation of ever growing processes of European Integration. But the theoretical analysis indicates that a further development of the relationship between the EU and the East Europe is still not predictable, as so far there is no expression of political will on the part of the EU, nor any reliable answer concerning the direction of the transformation processes in the East Europe. The question arises – does this mean that these countries are written off from the membership perspective? So one can argue that the idea of “neighbour status” is something unclear and vague and it could be thought that the neighbourhood status may not be very attractive, given that the idea is lacking a clear objective diversification and a distinctive approach in connection to each partner. It seems that this is the way for defining the specific place for these countries in the European integration. The concepts of the past – deterrence, containment, isolation and even neighbourhood should be replaced with involvement, partnership, integration and a united Europe as the end of the process - Europe is not just fifteen and even plus ten, Europe is much bigger and the EU is not equal to Europe. Box 8.5: EU PARLIAMENT

European Parliament Resolution P5_TA-PROV(2003)0520 Relations with our neighbours to the east and south European Parliament resolution on “Wider Europe – Neighbourhood: A New Framework for Relations with our Eastern and Southern Neighbours (COM(2003) 104 – 2003/2018(ini)) The European Parliament … C. Whereas all the countries on the EU’s new eastern external frontier are having to tackle structural problems, but a specific analysis for each country seems unavoidable to do justice, for instance, to conflict management in Chechnya, the democratic deficit of Belarus, the regional conflicts surrounding Nagorno-Karabakh or Abkhazia or South Osetia and the problems of Moldova arising from the situation in Transnistria, which are making general political and economic progress more difficult,… Source: European Parliament draft resolution, November, 2003.

CALENDAR OF EVENTS


JANUARY 2003 8 Industry An agreement on establishing of a joint venture for producing explosives on the

territory of Georgia was reached at the meeting of Avtandil Jorbenadze, the State Minister and representatives of Turkish company Oriko-Intro in Tbilisi.

9 Privatisation President Eduard Shevardnadze signed a decree on direct sale of JSC Azoti shares to the international group of companies ITERA. ITERA will buy 90 per cent of Azoti shares for a symbolic price of USD 500.000.

16 Property Rights International companies, conducting business activities in Caucasus, formed informal association “Group for Protecting Intellectual Property of Caucasus”. Esben Emborg, president of the association, and Alexei Kislizin, vice-president, said at the January 16 press-conference, that the organization would intensively cooperate with the representatives of the parliaments, law-enforcement structures of Georgia, Armenia and Azerbaijan for improving legislation and legal practice existing in this sphere.

17 Parliament Parliament approved a draft state budget for 2003.

21 Trade The Georgian Parliament approved introducing changes into the law “On Consumer Rights Protection” concerning Georgian labelling of imported food products, cosmetics and pharmaceutical products to come into force from March 1, 2003. However, importers asked to postpone the term of the changes coming into force, as producers would not manage to introduce relevant changes into the technological process in such a limited period. The meeting, dedicated to this issue, was held on January 21 in the Ministry of Economy, Industry and Trade, which was attended by representatives of Antimonopoly Service and Business-Confederation.

22 Assistance The international conference, dedicated to the tasks of economic development of seven CIS countries with a low level of income, was held in Lucerne, Switzerland, on January 20-22. The conference approved an appeal to the donor organisations to find the way for increasing financial aid for the countries - participants of the “CIS Initiatives-7” – Azerbaijan, Armenia, Georgia, Kyrgyzstan, Moldova, Tajikistan and Uzbekistan.

23 Municipal Services Tbilisi Sakrebulo hosted a presentation of the project on rehabilitation of the central heating system in Tbilisi, prepared by the Ministry of Fuel and Energy. According to the project’s authors estimates, this will require about GEL 140 million.

27 Assistance World Bank regional director for South Caucasus, Donna Dowsett-Coirolo met with Avtandil Jorbenadze, the Georgian State Minister, and other members of the Georgian Government. It was mentioned, that the aim of the present visit of the World Bank representative was to discuss the World Bank financed projects being implemented in Georgia and to work out a new three-year strategy for assisting the country. The document is planned to be submitted for discussion to the World Bank Board of Directors

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in May 2003. Ms. Donna Dowsett-Coirolo mentioned the need to determine major parameters and concrete directions of cooperation, in accordance with which the World Bank could render maximum assistance to Georgia.

FEBRUARY 5 Energy The agreement on export and transit of electricity from Georgia and elaboration

of a joint project on construction of 500 kilowatt electricity transmission line connecting energy systems of Azerbaijan, Russia, Georgia and Turkey was reached between David Mirtskhulava, the Fuel and Energy Minister of Georgia and Giln Guler, the Energy and Natural Resources Minister of Turkey in Istanbul. The agreement also provides for the construction of 200-megawatt Paravan hydro power plant and restoration of Kobuleti-Khobi gas pipeline, as well as elaboration of other joint projects.

8 Pipeline Azeri joint stock company Azerkerpyu was awarded a contract from French-American alliance Spie Capag / Petrofac on construction of temporary objects, preparation of sites for construction and conducting construction works along the entire Georgian section of Chief Export Pipeline (CEP) Baku-Tbilisi-Ceyhan (BTC). The CEP total length is 1,760 kilometers, of which 1,070 km will be laid on the territory of Turkey, 442 km - in Azerbaijan and 248 km - in Georgia.

11 Cooperation Representatives of customs services from four GUUAM member countries – Georgia, the Ukraine, Azerbaijan and Moldova – initialed an agreement on mutual assistance and cooperation in the customs sphere within this organisation in Kiev. The representatives of Uzbekistan did not take part in the meeting. The signed agreement provides for cooperation in the sphere of information exchange, reduction of customs procedures, promotion of trade among GUUAM member-countries.

12 Parliament Parliament re-established 1 per cent tax on entrepreneurship, which would be in effect till January 1, 2004.

27 Parliament Parliament ratified a credit agreement with the International Development Agency, a member of the WB group, on allotting USD 15.7 million (SDR 12.6 million) for forestry development.

27 Trade The Ministry of Environment Protection and Natural Resources issued an official permit on export of the first lot of “lake frogs” to France. The permit was granted to the Georgian company Amora.

27 Pipeline The program of public investment, which is foreseen to be implemented in Georgia within Baku-Tbilisi-Ceyhan chief export oil pipeline and South Caucasian gas pipeline Baku-Tbilisi-Erzrum projects, will be conducted by the two international consortiums - Mercy Corps and CARE International. The programme is to start on March 1 and will continue for three years. USD 5 million are allotted for its financing. The programme provides for the promotion of social and economic development and ensuring ecological security of the regions crossed by the pipelines.

28 Parliament / Labour Code / Minimum Salary At its plenary session, the Parliament

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approved introduction of amendments and changes to the Labour Code on raising the minimum salary from GEL 20 to GEL 115 (minimum subsistence) to come into effect from July 2003.

MARCH 5 Assistance According to the information of the WB representative office in Tbilisi, the

WB Board of Directors approved the allocation of an additional credit in the amount of USD 5 million (SDR 3.7 million) for schools, damaged in the earthquake of April, 2002.

10 Energy The Embassy of Italy to Georgia and the Ministry of Fuel and Energy held a presentation of the Georgian-Italian joint project “Distance Management of Losses in Energy System of Georgia”. The project will be implemented by the tender winners Italian companies Petroltecnica and Eurecos. During the project implementation, the Georgian and Italian specialists will install special devices to determine the exact volume of losse, as well as carry out repair work. The project will last for18 months.

13 Pipeline Charlotte Torpe, a representative of American company AON, announced at a press-conference, that AON carries out insurance of the Baku-Tbilisi-Ceyhan oil pipeline. This will be done in two phases – those of construction and operation. The construction phase provides for insurance against natural conditions and catastrophes and the operation phase – against technical damages and oil leakage. In 2001, a joint company AON-Georgia was founded, together with the Georgian International Oil Corporation (GIOC).

14 Energy On March 13-14 Tbilisi hosted the 2nd international conference “Oil, Gas and Energy – Georgia 2003”. In his speech, President Eduard Shevardnadze mentioned Georgia’s role as one of the main countries of the new “Great Silk Road” in the development of the “Energy Corridor East-West”. 200 delegates from 15 countries attended the conference, dedicated to the development of the project on Chief Export Pipeline Baku-Tbilisi-Ceyhan and South Caucasian gas pipeline Baku-Tbilsi-Erzrum.

20 Minimum Salary / Labour Code President Eduard Shevardnadze vetoed the changes

into the Labor Code on raising the minimum salary from GEL 20 to GEL 115 (minimum subsistence) that were to come into effect from July 2003, approved by the Parliament on February 28.

28 Government The Parliament adopted in the third reading a draft law on abolishing the

Ministry of State Property Management. The process of liquidation will approximately last two months, after which it will be merged with the Ministry of Economy, Trade and Industry as one of departments.

28 Parliament/Tax Code Parliament approved in the first reading a draft Tax Code presented by Entrepreneurs parliamentary faction. It was decided to form a working group, with participation of legislative and executive power representatives, which will solve all the disputable issues before the second hearing. The new Tax Code, proposed to come in effect from January 1 2004, provides for reduction of the number of taxes: instead of 12 state and six local taxes, there should remain three central taxes: VAT,

CALENDAR OF EVENTS


income tax and excise tax and one local - property tax. Parliament / Social Safety Net Parliament passed the drafts law “On Mandatory Insurance Pensions”, “On Mandatory Social Insurance” and “On Introducing Individual (Personalized) Registration and Individual Accounts in the System of Mandatory Social Insurance” in their first reading. In accordance with the draft laws, the reformed social protection of the population, including pension system, is to be based on insurance principles.

APRIL 1 Cooperation State Minister of Georgia Avtandil Jorbenadze met with HE James Shark,

plenipotentiary and Extraordinary Ambassador of Ireland to Georgia. The prospects of future cooperation between the countries were discussed.

2 Economy Giorgi Gachechiladze, the minister of Economy, Industry and Trade, announsed at the governmental session of April 2, that the share of shadow economy in total GDP grew to 34 per cent in 2003 against 32 per cent in 2002. The Minister proposed to the government a programme for the reduction the scale of the shadow economy.

2 Energy The Ministry of Finance arrested the AES-Telasi bank account and withdrew GEL 2.6 million in favour of the budget. Due to this fact the company stopped importing electricity from Armenia

14 Tenders Three Georgian companies, Pronet Co. Georgia, Metal X and B&P, took part in the tender and claimed management of Poti Sea Port terminals for 10 years.

17 Cooperation On 16-17 April Yerevan hosted the 25th session of the Black Sea Economic Cooperation (BSEC) business council board of directors. The issues of business relations among the Black Sea basin countries were discussed during the session.

22 International Relations President Eduard Shevardnadze visited Ukraine and had meetings with the President of Ukraine, Leonid Kuchma. Three important intergovernmental documents were signed during the visit.

23 SMEs The “Memorandum on cooperation between the Georgian Ministry of Economy, Industry and Trade and the Ukrainian State Committee for the Issues of Entrepreneurship and Regulation Policy” was signed in Kiev within the visit of President Shevardnadze. The sides agreed to harmonize a normative-legal base of the two countries, which regulates the small business activities; on exchange of information on the mechanism of financial support to small business. The sides agreed to share experience in the small business promotion sphere. It was also decided to organise joint exhibitions and fairs, consultations, seminars and symposia.

24 Free Economic Zones Parliament of Georgia voted against the draft law on FEZ (free economic or special zones) in Georgia, submitted to the Parliament by the faction “Aghordzineba”.

28 Oil The Georgian-British Oil Company (GBOC) starts horizontal drilling at the Ninotsminda

CALENDAR OF EVENTS


oil deposit in the Kaheti region. It is prospected that the deposit will deliver 200-220 tons of crude oil per 24 hours. The company invested USD 40 million into mastering the deposits in Kaheti.

MAY 2 World Bank Credit of USD 5 million was allotted by the World Bank for rehabilitation of

educational establishments damaged during the earthquake last year. The project is to be implemented in the period of 1 June – 31 December, 2003.

7 Parliament/Minimum salary At the parliamentary plenary session 103 MPs voted for and 34 against the amendments to the Labour Code, providing for a gradual increase in the minimum salary. The project submitted by the President, provides for the increase in the minimum salary from GEL 20 first to GEL 35 from 1st July 2003, then to GEL 60 from 1st July 2004, after that to GEL 100 from 1st January, 2005 and finally to GEL 110 from 1st July, 2005.

8 Exhibition International tourism exhibition was held in Tbilisi at ExpoGeorgia. More than 50 organisations from 7 countries participated.

13 Ministry Abolished Following a presidential decree, the Ministry of State Property Management was abolished, and the Department of Privatisation under the Ministry of Economy, Industry and Trade, and the State Property Management Agency were formed.

23 Pipeline The construction Georgian section of the chief export pipeline Baku-Tbilisi-Ceyhan (BTC) officially started at Tetritskaro. The President and members of parliament attended the ceremony.

23 Banks 25 per cent of shares of the TBC Bank were purchased by the Soros Investment Capital (SIC) at USD4 million. This was the first investment of the SIC in the Caucasus region.

29 World Bank Agreement on allotting USD 15 million to the Social Investment Fund by the World Bank was signed by the Minister of Finance and the World Bank representative in Georgia. The Fund serves to increase living standards of communities with low incomes.

JUNE 1 External Debt As of 1st June Georgia’s external debt made up USD 1.82 billion including the

credits received under the government guarantees (USD 91.9 million). In May, the volume of external debt increased by USD 42.8 million.

19 Railways Tbilisi hosted the 31st session of the Ministerial Meeting of Railways Co-operation Organization (RCO). The meeting was attended by the representatives from the Ministries of Transport and railway services of the RCO member-countries. The session participants discussed a wide range of issues concerning RCO activities, including the transport policy and transport law.

20 Parliament / Social Safety Net A number of laws, providing the necessary legal framework

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for introducing the social insurance system and new pension system based on insurance principles, prepared by the United State Social Insurance Fund and the Ministry of Labour, Healthcare and Social Affairs, in consultation with the World Bank, were passed by the Parliament on 20th July, the last day of its spring session, in their second and third reading. They are: laws “On mandatory Insurance Pensions”, “On Mandatory Social Insurance”, and “On Introducing Individual (Personalized) Registration and Individual Accounts in the System of Mandatory Social Insurance”.

24 GEPLAC Activity / Labour A working session/workshop on Labour was held by GEPLAC in the framework of the Consultation Phase of the National Programme for the Harmonisation of the Georgian Legislation with that of the European Union.

25 GEPLAC Activity / Intellectual Property Rights A workhshop/round table on Intellectual Property Rights (Current Environment and Future Actions) was held by GEPLAC, in the framework of the Consultation Phase of the National Programme for the Harmonisation of the Georgian Legislation with that of the European Union. A wide range of stakeholders participated including representatives of the EU Delegation, Ministry of Foreign Affairs, the National Intellectual Property Centre, Ministry of Justice, Ministry of Interior, Customs Department, Parliament, Supreme Court, representatives of business circles, international organisations and NGO’s.

GEPLAC Activity / Agriculture A workhshop/round table on Agriculture was held by GEPLAC, in the framework of the Consultation Phase of the National Programme for the Harmonisation of the Georgian Legislation with that of the European Union. Representatives of the EU Delegation, Ministry of Foreign Affairs, Ministry of Agriculture and Food Products, the USAID, and the NGO’s participated.

GEPLAC Activity / Competition A working session/workshop on Competition was held by GEPLAC in the framework of the Consultation Phase of the National Programme for the Harmonisation of the Georgian Legislation with that of the European Union.

GEPLAC Activity / Company Law A working session/workshop on Company Law was held by GEPLAC in the framework of the Consultation Phase of the National Programme for the Harmonisation of the Georgian Legislation with that of the European Union.

5 EU Third session of the Committee for Georgia's Cooperation with the European Union was held in Tbilisi, discussing tendencies of economic development of Georgia and the EU, as well as a number of projects implemented in Georgia.

JULY 4 GEPLAC Activity / Environment A workshop/round table on Environment was held by

GEPLAC in the framework of the Consultation Phase of the National Programme for the Harmonisation of the Georgian Legislation with that of the European Union. Among the participants were representatives of the EU Delegation, Ministry of Foreign Affairs, Ministry of Environment and Natural Resources, Ministry of Labour, Healthcare and Social Security, Ministry of Justice, Ministry of Economy, Industry and Trade, Institute of Environmental Protection, Institute of Labour, Hygiene and Occupational Diseases, Sanitation and Hygiene

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Scientific-Research Institute, Supervision inspection of Sanitarian-hygienic Norm, international organisations and NGO’s

4 GEPLAC Activity / Standards and Technical Rules A workshop on Standards and Technical Rules was held by GEPLAC in the framework of the Consultation Phase of the National Programme for the Harmonisation of the Georgian Legislation with that of the European Union. Among the participants were representatives of the EU Delegation, Ministry of Foreign Affairs, Sakstandarti, Ministry of Agriculture, Ministry of Environment, Ministry of Healthcare and Social Affairs, Ministry of Economy, Industy and Trade, State Inspection on Technical Supervision, National Commission for Communications, business circles, international organisations and NGO’s.

7 Privatisation The President of Georgia has signed the decree on sale of 51 per cent of the shares of joint-stock company Ferro of affiliated company of the Austrian firm DSM - DK Ferro AG for USD 7,1million.

9 Transport According to the agreement between Turkish Airlines and Airzena, Turkish Airlines will resume flights to Tbilisi from September 15th, 2003

14 State Budget The President of Georgia has signed the document elaborated by IMF Mission, recommending sequester (reduction of the budget expenses) of the State budget by GEL 95.5 million. The document was submitted for consideration to the Parliament.

16 Parliament The Parliament of Georgia ratified the agreement on allocation of the World Bank credit (USD 11 million) to Social Investment Fund. The credit is intended on financing of the second project of Fund’s activities in 2003-2007.

17 Government Teimuraz Charkviani was appointed the Minister of Urbanization and Construction of Georgia.

19 Cooperation The International Financial Corporation (IFC) has opened a USD 5 million credit line to the Bank of Georgia. The allocated sum is intended for crediting of SMEs, and also for the construction or purchase of real estate.

20 Cooperation The European Bank of Reconstruction and Development (EBRD) has opened a USD 1.5 million credit line to Tbiluniversalbank of Georgia. The allocated sum is intended for crediting of SMEs.

22 Communications According to the information of a mobile communication operator company Magticom, the number its subscribers reached 275,000.

23 Cooperation The European Bank of Reconstruction and Development (EBRD) has opened a USD 4 million credit line to the Bank of Georgia. The allocated sum is intended for long-term crediting of SMEs.

24 Assistance At the initiative of the Embassy of Japan the business meeting of the Ambassador of Japan in Azerbaijan and Georgia Toshiuki Fudzivara with the representatives of several Georgian NGOs was held in Tbilisi Institute of Asia and Africa. During the meeting the Ambassador has signed the documents on financing six projects, which basically concern social sphere and provide financing for the reconstruction of building in educaiton and public

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health services sectors.

30 Government The Ministry of Finance has submitted to the government the project of sequestering the state budget by GEL 91 million.

31 Cooperation The Chairman of Gazprom Board of Directors Alexei Miller and Minister of Fuel and Energy of Georgia David Mirtskhulava signed an agreement on strategic cooperation concerning gas.

AUGUST 1 Assistance The World Bank credit presentation was held in the Ministry of Labour, Healthcare

and Social Affairs of Georgia. The WB credit is intended for a period of five years for implementing social health care programmes and is to be repaid in 40 years

4 Energy The ad hoc Governmental Commission, chaired by Roland Giligashvili, Minister of Justice, was formed to study the details of selling of assets by the US energy corporation AES in Georgia to the Russian joint stock company UES.

4 Parliament The Georgian government submitted to the Parliament a draft of the state budget sequester signed by the President. The draft provides for the reduction of the state budget expenditure side by GEL 86 million

12 Government Mamuka Nikolaishvili, a former Deputy State Minister, was appointed as Minister of Fuel and Energy of Georgia

12 Government David Mirtskulava, former Minister of Fuel and Energy of Georgia, was appointed as the chairman of Georgian National Energy Regulation Commission (GNERC).

14 GEPLAC Activity / Transport A workshop/roundtable on Transport Sector was held by GEPLAC in the framework of the Consultation Phase of the National Programme of Harmonization of the Georgian Legislation to that of the EU. A wide range of stakeholders participated including representatives of the EU Delegation, Ministry of Foreign Affairs, Ministry of Transport, representatives of business circles, international organisations and NGO’s.

15 Cooperation The Ministry of Economy, Industry and Trade prepared an agreement “On promotion and mutual protection of investment between the Governments of Georgia and People’s Republic of Bangladesh”. In compliance with the draft agreement, the parties express the readiness to ensure favourable terms for the investors of Georgia and Bangladesh on the territories of their countries.

18 Parliament The Georgian Parliament failed to start discussion on a package of amendments to the state budget, an expenditure part of which, according to the proposal of the government, had to be reduced by GEL 86 million, and the revenues had to be increased by GEL 45 million. The state budget correction should be conducted on the basis of the IMF recommendations.

19 Government The Ministry of Economy, Industry and Trade approved “The Concept of

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Georgia’s Economic Security and Methods for Indicatory Planning of Economic and Social Development of Georgia” elaborated by Melkadze Scientific-Research Institute of Socio-economic and Regional Problems.

20 Assistance An agreement was signed in Tbilisi on allocating EUR 26 million to Georgia by the German government. According to the information of the Ministry Finance of Georgia, EUR 19.5 million was allocated as a long-term preferential credit, the rest – free of charge, as a grant. The total sum is designated for restoring the houses damaged during the Tbilisi earthquake in April 2002, rehabilitation of Borjomi – Kharagauli national reserve infrastructure, finishing the work for making land cadastre of Georgia and anti – TB measures.

SEPTEMBER 5 GEPLAC Activity/Customs A workshop/roundtable on Customs Sector was held by GEPLAC

in the framework of the Consultation Phase of the National Programme of Harmonization of Georgian Legislation with that of the EU. A wide range of stakeholders were invited including representatives of the EU Delegation, Ministry of Foreign Affairs, Ministry of Finance and its Customs Department, Ministry of Justice, Parliament, representatives of business circles, international organisations and NGOs.

14 Corruption Georgia is ranked the 124th of 133 countries in the corruption rating list of the international organization Transparency International. Georgia shares this place with Azerbaijan and Tajikistan. Transparency International is an international non-governmental organization engaged in monitoring of corruption levels in the world.

OCTOBER 4 Banking USA magazine “Global Finance” published its annual rating of banks in the world.

TBC Bank of Georgia has been rated as the best Georgian bank in terms of exchange operations.

14 Aid According to the agreement of August 18th between USA and Georgia, in the framework of food assistance, Georgia received a first lot of American humanitarian wheat (19,000 tonnes) out of 50,000 tonnes, and the rest was to be delivered by the end of the month. The money obtained from the sale of the wheat was to be used to finance projects for agribusiness development.

16 Economic Forum Tbilisi hosted the Georgian-Russian economic forum. The Forum was organized by Trade-Industrial Chambers of Georgia and Russia, NGOs Economic Forum of Georgia and Russian Union of Entrepreneurs and Manufacturers.

21 Assistance The IMF board of directors has approved the National Economic Growth andoverty Reduction Programme worked out in Georgia with participation of IMF and World Bank experts.

25 New Technologies During the UN week a laboratory presentation was arranged in Tbilisi to conduct controls of product quality to international standards. The laboratory was formed with

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the financial support of UNDP, German association of technical supervision TUV-Nord and the Georgian Association of Exporters. The total cost of the project was USD 400,000.

28 Business Corporation The Georgian International Water Corporation (GIWC) will reportedly be formed by the end of the year 2003. Its aim is to master resources of underground fresh, mineral and drinking water, to form an infrastructure for their processing, bottling, transportation, selling and, marketing. The formation of this structure is envisaged by a draft presidential decree, according to which the corporation’s authorized capital should make up (by investing the property) GEL 30 million. The corporation shares will be state-owned.

30 International Conference The delegation of the Chamber of Trade and Industy of Georgia participated in an international conference held in Warsaw on “The prospects of economic co-operation among the business circles of Russia, CIS countries and Poland in conditions of intensive contacts with EU countries”. The Conference was launched by the International Union of Commodity Producers and Polish-Russian Trade-Industrial Chamber through the support of the Polish government.

NOVEMBER 7 Assistance Government of Japan allotted USD 2.5 million to Georgia for buying new medical

equipment.

12 BTC Oil Pipeline Board of directors of the European Bank for Reconstruction and Development (EBRD) adopted a decision on allocating USD 125 million for constructing Azeri and Georgian sections of Baku-Tbilisi-Ceyhan (BTC) oil pipeline (total cost USD 3.6 billion, length 1,760 km). The EBRD also syndicates USD 125 million more through some commercial banks.

19 Agriculture The rehabilitation of sapling farms in Georgia started within the framework of a project of the technical assistance of UN International Food and Agriculture Organisation (FAO). It is also envisaged to form new farms for fruit and nut saplings in different regions of the country. The programme, designed for 18 months, will be implemented in three regions. Modern techniques and equipment will be bought, model farms will be formed and training will be conducted. The total cost of the project is USD 283,000.

19 Labour Code Amiran Gamkrelidze, the Minister for Health, Labour and Social Affairs, presented at the November 19th governmental session a new draft Labour Code

25 Transport From November 25th the Georgian airline company AirZena-Georgian Airlines will conduct regular flights between Tbilisi and Istanbul twice a week.

26 Cooperation The IMF and the World Bank expressed their readiness to co-operate with the new authorities of Georgia to assist in improving the living conditions of the population and in regulation of the economic and social problems.

27 Assistance The memorandum on understanding and continuation of World Food Programme (WFP) activities in Georgia, conducted since 1993, was signed in Tbilisi. The document was signed by David Kirvalidze, the Minister for Agriculture and Food and Peep Bradford, director

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of WFP representation in Georgia. In compliance with the agreement’s terms, WFP, over three years from July 2003 through June 2006, will distribute 50,493 tonnes of food among 209,500 socially vulnerable citizens of Georgia. A total budget of the programme makes up

USD 23 million. DECEMBER 1 Assistance Lynn Pascoe, US Deputy Assistant Secretary of State for European and Eurasian

Affairs, informed the Acting President of Georgia, Ms. Nino Burjanadze that the USA are ready to allot USD 5 million to the new authorities of Georgia for solving urgent financial problems and USD 2 million for financing “the heating programme” for socially vulnerable families.

4 Business Conference The sixth annual conference of the American-Georgian business-council was held in Palo Alto, California. Bank of Georgia supported by AmCham was a general sponsor of this Conference. The Conference topic was “Georgia at the crossroads: politics, economics, business”. The conference was attended by a Georgian delegation of more than 40 members and American investors who are already investing their money in Georgia and those American investors who plan to do so.

5 EU- Georgia Relations EC chairman Romano Prodi, after meeting with the Acting President of Georgia Nino Burjanadze in Maastricht, announced that EU will provide Georgia emergency aid in the amount of EUR 7 million from which EUR 2 million are for arranging the upcoming elections and the rest is foreseen for food assistance. EU foreign policy chief, Javier Solana, informed about EU readiness to co-operate with the new authorities of Georgia. After the meeting with Ms. Burjanadze, he stressed the importance of preserving the peaceful character of the evolutional changes in Georgia, expressing hope for searching a constructive decision of regional conflicts on the territory of Georgia, and also for free and honest launching of the January 4th emergency presidential elections.

9 Assistance The Italian government allotted Georgia humanitarian aid of EUR 1 million. The

money will be used for implementing food programmes to buy 2,000 tonnes of wheat and 500 tonnes of sugar. The present projects aim at most needy farmers and their families in the 6 poorest regions of the country.

18 Assistance On December 18th the Georgian Ministry of Finance and the German Government concluded two agreements. The first one foresees allotting to Georgia a EUR 12 million credit, which will be used for purchasing gas and electricity in the winter season. An additional credit of EUR 5.8 million will be allocated for paying experts on the programme of assistance in the energy sector. The other agreement envisages the allocation of a subsidy in the amount of EUR 4.3 million. This sum will be spent on forming a guarantee credit fund, which will provide for mobilization of loans for local commercial banks.

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19 Co-operation Credit agreements were signed on December 19th by Zurab Noghaideli, the Minister for Finance and KfW director Leon Mazioszek. The total sum of the credit is EUR 33 million. The sum will be used for the implementation of four projects – development of social infrastructure, formation of land cadastre, rehabilitation of roads (three sections of 80 km long) and urgent works in the energy sector. The credit is for 40 years with the preferential period of 10 years.

21 Foreign Debt Zurab Noghaideli, the Minister for Finance, hopes that next spring the Paris Club of creditor-countries will once more delay for two years the servicing of debts by Georgia. Thus, the Minister for Finance does not plan to introduce into the draft budget sums for repaying major debts, even more, for servicing indebtedness. The only country, which is against rescheduling Georgia’s indebtedness at Paris Club terms is Turkmenistan. Georgia repays its debts to this country by supplying produce and services.

26 Georgian Wine At Moscow VII International Professional Contest “Best Champagne, Wine and Cognac of the Year” the Georgian wine “Talisman” was named as the best wine of the year for the fourth time already, getting the greatest amount of gold awards

28 NGOs On the initiative of the International Financial Corporation (IFC), which is in the group of WB it is planned to form two new NGOs, the activities of which will be directed at improving corporate management and increase of qualification of companies’ management. A major mission of one of the NGOs will be protection of the rights of shareholders, another to train a qualified and honest directorate for the company.

JANUARY 2004 4 Elections Presidential Elections were held in Georgia. Mikhail Saakashvili has been elected

President of Georgia.

6 USA-Georgia Relations The US Department of State released a statement on January 6th. It calls on Georgia to establish closer co-operation with the International Monetary Fund. “Georgia should agree with the IMF a concrete programme if the country wants the issue on rescheduling the debts be discussed in the Paris Club”, is said in the statement. “We are ready to work with the new authorities of Georgia to assist the country in developing the free market and implementing democratic reforms. Unfortunately the former authorities of Georgia failed to fulfill the IMF criteria on relieving poverty and increasing economic growth”, says the statement.

7 Customs The customs tariff on grain import is abolished in Georgia from January 1, 2004.

11 Banking For the provision of stable and firm functioning of the banking system, National Bank fixed gradual growth of a minimum amount of the authorized capital for the commercial banks and subsidiaries of foreign commercial banks in the amount of GEL 12 million. Thus, by December 31, 2004 the minimum authorized capital should be no less than GEL 6.4 milllion; by December 31, 2005, no less than GEL 7.8 million; by December 31, 2006, no less than GEL 9.2 million; by December 31, 2007, no less than GEL 10.6 million; and by December 31, 2008, no less than GEL 12 million. Growth of authorized capital should be conducted in money form and only in the national currency.

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12 Investment Climate Mikhail Saakashvili, President of Georgia, expressed his intention to fight against corruption in Georgia, against oligarchs and to restore relations with international financial organisations. “We want to form a normal investment climate to assure the investors that Georgia today is a different country. They should know that the Georgian state will protect their investments and their rights and will not rob them”, said Mr. Saakashvili.

14 Parliament Draft law “On the fund for development and reforming” was adopted by the Parliament at the January 14th emergency session unanimously in 3 readings. The document was submitted by Zurab Adeishvili, the Minister for Justice. In his words, after such a fund is founded, the officials can get adequate wages from the fund resources. Mr. Adeishvili says the international donor organisations have already expressed readiness to transfer resources to the Fund. The Fund will also finance preparation of legislative acts, and training of public officials.

13 EU–Georgia Relations The EU Allocates EUR 28 million to Georgia for implementing National Indicative Programme for 2004 -2006. In 1992-2003 the EU assistance to Georgia was EUR 385 million, from which EUR 84 million was allotted in the framework of TACIS national programme. The programme signed in Tbilisi on January 13th, determines the common objectives and methods for conducting assistance to Georgia in 2004-2006. The programme will be fulfilled in the framework of the TACIS programme of the European Union. The indicative programme will be directed at fulfilling the EU strategy which foresees enhancement of Georgia’s independence and its advance to development of democracy and market economy. “National indicative programme of 2004-2006” involves some priority sectors, such as support to institutional, legislative and administrative reform, for which it is foreseen to allot EUR 11.5 million. The budget in the amount of EUR 12.5 million is designed to promote the relief of social aftermaths of the transitional period, firstly in the healthcare sector. EUR 4 million will be allocated for the programme on rehabilitation of conflict zones.

14 Parliament Parliament unanimously approved Irakli Rekhviashvili in the post of the Minister for Economy, Industry and Trade.

14 Parliament The Parliament of Georgia ratified on January 14th a credit agreement between the German Bank for Reconstruction and Development and the government of Georgia on allocating EUR12 million for settling an energy crisis in Georgia.

18 Assistance The German Bank for Reconstruction and Development allocated EUR 8 million to develop the system of cadastre and land registration in Georgia.

27 Transport According to information of the Administration of Air Transport of Georgia, there are 21 airlines operating in Georgia, among them 7 Georgian ones.

28 Anti-Corruption Bureau Anti-Corruption Policy Co-ordination Bureau in the office of the President of Georgia was closed.

29 Tourism Department for Resorts and Tourism of Georgia announced that 313 thousand tourists visited Georgia in 2003, i.e. 15,000 more than last year. In 2003 Georgia’s incomes

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from tourism were GEL 750 million, i.e. GEL 103 million more than in 2002.

29 Tourism In summer 2004 the Bazaleti tourist complex was to start functioning. Construction of this complex on the Lake Bazaleti was started four years ago by the Israeli-American-Georgian Company Nova Management Georgia. Over these years several hotels and a sport-recreation complex were built and the beach was covered by sea sand. The Bazaleti tourist complex has a capcity of 1,600. The cost of construction was USD 25 million.

30 Assistance During a meeting of President Mikhail Saakashvili with FRG Chancellor Gerhard Schroeder the sides discussed the issue of bilateral co-operation, the situation in Georgia and implementation of democratic change in the country along with Germany rendering assistance to Georgia. It was mentioned at the meeting that Germany will allot EUR 12 million to the new government of Georgia to be spent for covering the energy deficit and rehabilitation of the energy system.

February 4 EU-Georgia Relations Hugo Mingarelli, Director of the East Europe, Caucasus and Central

Asia directorate in international relations of the EU, said at a press-conference that the EU is ready to allot EUR 30 million to Georgia for assisting the country in the transitional period. In his words, this assistance will be distributed as follows: EUR 12 million will be allotted as a technical aid in implementing structural reforms, EUR 12 million to support the programme of food security, EUR 4 million to a rehabilitation programme in the zones of conflict and EUR 2 million for the initiative on protecting human rights and democracy.

6 Parliament Parliament of Georgia approved a package of constitutional amendments, according to which President has the right to dissolve parliament, to form government and to combine a part of Constitutional Court functions. Government will be transformed into a Cabinet of Ministers (was abolished in 1995), the work of which will be coordinated by a prime minister. President of Georgia combines the function of head of government. Parliament has the right to dismiss government by three fifths of MPs votes. Cabinet of Ministers, to which parliament may express distrust, has the right in three months’ time to work in the former staffing. A President brings the ministers’ candidacies to parliament.

12 Government Parliament of Georgia on February 12th adopted a law “On the structure, powers and order of the government activities”. The document determines the structure of a new government and the rules of its functioning. According to the law, there will be formed a Cabinet of Ministers, a prime-minister’s post will be determined, the amount of the ministries will be reduced from 17 to 15. All the state departments will be within the ministries. The cabinet of ministries will be headed by a prime-minister who, within the amendments to the Constitution, in agreement with the President has the right to submit to the Parliament the candidacies for future ministers.

13 Ministry of Finance The Finance Ministry prepared and submitted to the Parliament a law with the aim of improving financial-economic condition of the enterprises and to establish a favourable investment environment in the country. According to this law, an enterprise is granted the right to reschedule the indebtedness only once and only in case its solvency is recognized. The term of rescheduling the tax indebtedness does not exceed three years. The

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period of freezing the tax indebtedness does not exceed 12 months and the term of delay is not more than 24 months (from the end of a freezing period). In the period of freezing the tax indebtedness interests and penalties are not charged on it. In the period of delay a monthly rate of 0.5 per cent is charged on the unpaid sum.

13 Georgian wine/ The Georgian wine “Tamada” (producer – GWS company) has been awarded the Grand-Prix in the nomination “The best dry wine of the CIS” at the contest “Prodexpo-2004” in Moscow, held on February 9-13th. Several wines of the company got seven gold medals and certificates of high quality. By today GWS produces wines of 28 designations. The volume of production is 4 million bottles per year, with a share of export production of more than 90 per cent. The company also produces brandy and chacha (grape vodka).

15 Government The Parliament received a programme of activities of the government and a list of ministerial candidates for approval. The government will have four state ministers on special affairs (the so-called “ministers without portfolio”). The state minister for conflict settlement will be Giorgi Khaindrava, for co-ordination of Georgia’s integration in Europe –Tamar Beruchashvili, for SMEs –Jambul Bakuradze and for national consent – Guram Absandze. Zurab Zhvania, the current State Minister will be a prime-minister. Six of the candidates presented for ministerial posts headed these services as acting ministers. They were: Tedo Japaridze, the Foreign Minister; Gela Bezhuashvili, the Defence Minister; Giorgi Baramidze, the Interior Minister; Zurab Noghaideli, the Finance Minister; Irakli Rekhviashvili, the Minister for Economy; and Eter Astemirova, the Minister for Refugees and Accommodation. The State Security Ministry will be headed by Zurab Adeishvili, at acting Justice Minister at that time. The new persons in the government are: Giorgi Papuashvili, the Minister for Justice, David Shervashidze – the Minister for Agriculture and Food, Giorgi Tsereteli – the Minister for Health, Tamar Sulukhia – the Minister for Infrastructure, Nikoloz Gilauri – the Minister for Fuel, Energy and Communication, Kakha Lomaia – the Minister for Education Giorgi Gabashvili – the Minister for Culture and Sport, and Tamar Lebanidze – the Minister for Environment Protection. In compliance with the acting legislation, the candidates for the posts of a prime-minister and three law-enforcement ministers – defence, internal affairs and state security were presented to the Parliament by the President. The prime-minister will present the candidacies to the other ministerial posts.

17 Parliament The Parliament had its extraordinary session and heard a five-year programme of the government activities and approved a composition of the Cabinet of Ministers.

19 Cooperation HE Fabrizio Romano, Extraordinary and Plenipotentiary Ambassador of Italy to Georgia and Tedo Japaridze, Foreign Minister of Georgia, signed in Tbilisi a ratification protocol of the convention “On avoiding double taxation of incomes and capital between the governments of Italian Republic and Georgia”.

20 Taxation President Mikhail Saakashvili put forward an initiative on releasing from criminal responsibility those businessmen, who up to April 1, 2004 will declare in their tax declarations their incomes concealed earlier from the state, and will express readiness to pay taxes from these sums.

APPENDIX I:

PROBLEMS OF INFORMATION AND COMMUNICATION INFRASTRUCTURE DEVELOPMENT IN CAUCASIAN REGION


By Paata J. Kervalishvili, Head of the Centre for Euro-Caucasus Technological Development, Paris

Prosperity is the best protector of principle. Mark Twain

INTRODUCTION It is clear that the advances in telecommunication have radically transformed many aspects of life and business. These advances have led to the emergence of a whole new type of way of living and working. Most people though, working or unemployed, are unaware of the real implications and the range of possibilities that Information and Communication Technologies (ICT) applications and products can offer. Among the barriers that are preventing the broad use of the new technologies, and especially of the Internet, are:

• Low awareness of information and communication technologies’ tools; • Insufficient ICT infrastructure; • Low awareness of Internet’s use and its benefits; • Lack of language training.

In this regard, it is necessary to accelerate the uptake of the Internet and help people from Caucasian Countries to have the necessary skills to use it. It will help building awareness of the benefits from the use of the Internet in life, work, education, entertainment etc. One of the main tasks is information dissemination on the use of the Internet and the latest information and communication technologies in the whole Caucasian region, and at providing people living in the Newly Independent States (NIS) a better understanding of the new means of work, education, business and leisure. It means stimulating the use of the Internet, in providing the potential for increasing in those areas the use of new technologies in both the public and private sectors and in demonstrating the advantages of the e-economy. Despite the evidence that the use of the ICT applications and products contributes significantly to employment, to growth, to competitiveness and to a better quality of life, the NIS do not yet have a culture of the digital economy. Thus, the objectives, which should be set, can be summarised as follows: To promote co-operation between Western and Eastern States. This co-operation will create new market opportunities. It will contribute to building bridges between western and eastern institutions, between academic institutions and businesses, between the market and industry. People from the Caucasian region will come closer to the Western way of living and working and thus, social and economic cohesion can be envisaged. To encourage the use of the new technologies’ tools and innovative products, so as to stimulate competition and growth. Within a competitive business environment, it is extremely important to



implement new practices and methods of work, in order to broaden the scope of activities, to have access to the global marketplace, to improve skills, accelerate processes, reduce costs, etc. To stimulate employment. New jobs will be created using high-speed networks and new skills will be used to carry these out. By using e-commerce and e-work, employees, managers, trainers and organisations can learn new ways of working that will support these new jobs and skills, in particular, on-line trade and organisation. The new IT tools and applications will create needs in IT competence and in specific know-how. To improve the quality of life. In addition, working from home can help marginalised persons, such as people with disabilities or people excluded from the labour market, find employment. E-commerce or e-work can reduce commuting time to and from work, gives workers more control over working hours and achieves a better balance between their role as earners and their other roles as members of society outside work. To emphasise trust and security, including information security, privacy, authentication, user rights, etc., and to propose common standards, practices and communication methods, in order to contribute to the harmonisation of regulations and practices and the convergence of infrastructures and architectures. Operating on the Internet should build new ways of living, new methods of learning, new methods of work and business, new ways of collaboration. It will flatten old hierarchical structures and eradicate the barriers between all users. The new working methods will support such changes on a global scale and enable people to work more closely and to exploit fully the opportunities offered by the Internet. STRATEGIC OBJECTIVES OF INFORMATION SOCIETY TECHNOLOGY (IST) DEVELOPMENT It is well known that the strategic objective of the IST development is to accelerate positive changes and bring the benefits of IST within reach of all people. However, ISTs have still to be more widely deployed in homes, businesses, government and general interest services. For Caucasian Newly Independent States, the uptake of IST products and services for private or professional use is critical for employment, growth, industrial competitiveness and for the living standards of their citizens. The organisation of dissemination activities on the use of the Internet seems to be indispensable: it will promote convergence of networking infrastructures, it will stimulate co-operation between Western and Eastern States and it will contribute to social and economic cohesion. The creation of the basis for introducing the Internet to the Caucasian society is one of the necessities for sustainable growth. For managing this task, there is a need to undertake a great deal of organisational work for reaching all interested parties and for obtaining the convergence of technology, industry and the market. The aim of all measures in this direction is to prepare, support and facilitate the rapid adoption of the Internet, of experiences and know-how gained in the framework of the e-economy. It is necessary to support and develop more efficient means of co-operation with the Caucasian region, and will increase access to market opportunities in emerging economies of the developing world. Among the interesting mechanisms for realizing these goals are: the creation of a regional information centre, portals and web sites; an action forum and the organisation of events, such as conferences, workshops and training. The target activities will bring added value for the industrial and research communities and they will promote the real leadership in technology and e-commerce.



ELABORATION OF IST DEVELOPMENT PROGRAMME IN CAUCASIAN COUNTRIES Promotion of IST in Caucasian States means the better understanding of the newest communication practices, of new work and commerce methods and new forms of learning or leisure with the aid of the Internet. The main objective of the proposed measures is to enable people to get informed about new practices, to innovate and to be more productive and efficient in their work, thereby providing the basis for sustainable growth and improving the quality of life. It will bring the benefits of the Information Society within the reach of all people in the Caucasian region, creating a digitally literate society and promoting an entrepreneurial culture. A programme of IST development should provide the Caucasian region with the know-how it needs in order to stimulate its growth. It will enable people to acquire the necessary knowledge of the Internet and the new information technologies. It will broaden or adapt their expertise, it will bridge existing gaps in skills and it will build more competence in IT related disciplines, thus stimulating economic and societal progress on the way to the Information Society. This will be achieved by training and by promoting learning collaborative tools. Programme (Fig.1) should include the studies required, in order to ensure consistent and updated tracking of market conditions, which are essential for the exploitation of the measures’ results. It is necessary to organize studies of the benefits for various target groups from adoption of new methods of work and commerce, which provides an analysis of societal, cultural and economic impact from the use of the Internet. The Programme promotes dialogue and open discussions on new methods of working and living in different countries. The results of these discussions can be valuable for policy-makers and governments and can prepare the pathway for changing outmoded ways of thinking, living and working. It aims at building awareness of ISTs in the Caucasian region and at allowing these areas to overcome the barriers that are still holding back the uptake of digital technologies. It also aims at providing a better understanding of new work and commerce methods and new forms of learning or leisure with the aid of Internet. It will promote the newest communication practices, facilitating at the same time their deployment by citizens, by homes and schools, by independent professionals, by enterprises, by administrations. The Programme would help build strong links with the NIS and ensure interoperability and coherence at a global level. The Programme will assist in creating a digitally literate and entrepreneurial Caucasus. It will promote e-commerce and e-work, which is facilitated by the recent rapid advances in ICT technologies, coupled with a significant reduction in their prices. These technologies include e-mail, ISDN, PCs, high-speed modems and so on. Follow me personal mobile telephone and fax numbers are now available and can be routed through to any other telephone number anywhere in the world - hence, customers and colleagues can reach employees whether they are at the office, at home or in between. Remote Intranet accesses using a simple remote password or other security feature is perfectly viable. These technologies mean that the generation and communication of work content is location independent. It is not dependent upon any particular physical, geographical environment. People should be able to work wherever they can best produce their agreed output, or they can sell their products from their virtual company, avoiding high costs for an office, encouraging an entrepreneurial culture and teaching employees how to deploy the technologies effectively. In



addition, all of the tools and enabling technologies necessary to facilitate effective e-commerce and e-working are increasingly both effective and cost-effective. In this regard, the Programme will attempt to demonstrate the benefits from the use of the Internet at three levels, at a global societal and economic level, at a market level and at the user level, and to show how it affects employment, the quality of life, competitiveness and access to the global market. In detail, the Programme will pursue its goals by conducting market research in the Caucasian region, in order to identify the socio-economic driving forces and the citizens’ and the market’s expectations that affect these areas. The surveys and the market research will explore the market status and legal and financial issues, such as taxation, fiscal barriers, national legislation about e-work, laws in force, trying to contribute to future policy development e.g. in telecommunications, enterprise, e-commerce, e-work and social affairs. The results of most surveys will be made available to the open public through the portal, or the Regional Information Centre of the Caucasian region to be created will diffuse them. More specifically, among the surveys to be conducted are: • Local market research in hardware & software costs and providers in the Caucasian region; the findings of this research will result in producing a list of Internet providers and indicative costs for connection. • Assessment of the human capital in IT related disciplines; this will assist in identifying in the concrete region existing gaps in human capital, in specific competence or needs, and a proposal will be formulated for building additional skills and know-how in these areas. • Networks, compatibility of specifications; this survey aims at promoting the convergence of networking infrastructures and architectures. • Foreign language learning is important for enabling the users to interact successfully in the Internet beyond the strict borders set by language restrictions and to fully benefit the advantages of a global market. • Legislation in force regarding telecommunications, employment issues, etc.; this survey will result in a proposal for regulatory amendments and it will contribute to future policy development. • Financial system; this survey will help users get informed on important matters they must take into account before adopting e-commerce tools or using the Internet for other business purposes. • Transaction security, authentication, privacy, protection; this survey will result in proposing regulations for issues related to the security and the privacy of information. It will also address ethical aspects. An important step for the dissemination of knowledge about the Internet is the establishment of a Regional Information Centre in the Caucasian region (based in Georgia). The uptake of the Internet in Europe remains comparatively low, and even much lower in the developing countries of the newly independent states. Even though there are a lot of Internet Providers (in Georgia alone there are at least 50 Internet providers), mainly academic institutions are connected to it and use it frequently for their communication with institutions abroad. The Regional Information Centre will be a centre for providing information to a broad community of suppliers and users of the ISTs and their applications. It will also be providing information to persons not familiar with the Internet, to citizens, to independent professionals, to small and big businesses, to administrations, to the private and the public sector. It will help them to get familiar with novel concepts of doing business or new forms of leisure or self-learning. The centre will periodically publish newsletters, articles in magazines, etc., and it will organise seminars and training initiation courses on new methods of work and on the applications and tools of electronic commerce.



The Caucasian portal will provide information on ISTs and applications and it will demonstrate the latest work and business practices. It will help to understand better the social, economic, industrial, technological and legal aspects of e-work and e-commerce. It will promote a new way of learning (e-learning), highlighting its socio-economic impact and demonstrate the benefits for the various actors. This will be achieved by a searchable database and with links to existing relevant information networks. A one-stop-shop will be developed for independents and enterprises interested in getting know-how on e-commerce technology and modern e-work facilities. The portal will provide information on all technical aspects of how to build an e-commerce B2B or B2C site and where to get help for that. Also, the portal will present the means for developing an e-work scheme using the Internet. The portal will present e-working methods (working online at office and at home, ‘teleworking’– working from anywhere, ‘mobile working’ working on the move), and it will later provide an e-work opportunities database. It will highlight the issues faced by employers and employees in establishing an e-work process. There will be many items in the portal providing templates with a view to cover the main concerns of teleworkers. In addition, the portal will promote various e-working tools designed to help businesses and independents increase productivity, manage resources, etc., tools for on-line collaboration, project management, invoicing, tools for remote conferencing methods (teleconferences, videoconferences, and "virtual" or Web-based meetings) and etiquette, document sharing, e-mail, chat features, etc. Furthermore and very much important, the portal will assist businesses in building and maintaining customised web pages, in marketing one’s site and receiving statistical reports. The portal will also facilitate learning processes and manage access to relevant third party training materials. This material will help professionals to build more professional competence, to improve existing skills, acquire new ones, or simply self-learn a foreign language. The portal is essential for achieving the goals of the proposed measures, as it will explore the potential of Internet in work, business, education, leisure, etc., and it will provide information both in English and in the Georgian language, thus becoming accessible to a greater mass of citizens and businessmen. The portal will provide links to existent relevant sites and it will help activate people to participate in a global on-line marketplace. The formation of an Action Forum in the Caucasian area is very important for achieving the goals of the proposed measures, and that is to disseminate the usefulness of the advanced technologies (Internet) in life and business. The Internet will help the regions that are secluded from the big urban areas to develop new forms of living (on-line), gain access to cultural and social events and have better business opportunities via an effective and modern communication. It is necessary to prepare the pathway of the new technologies’ achievements to the Caucasian markets, and it will forge strong relationships to academic institutions, from which a great deal of IT graduates are awarded with important prizes for their skills and competence. One major activity of the Action Forum is the organisation of a big conference in the Caucasian region on the information society technologies and their impact on the quality of life and work. It will also set up other smaller events, such as pre-conference meetings and workshops in each region of the consortium for involving major actors of this progress and link them to the communities of the developing countries. The Action Forum will appeal to various interest groups (Trade Unions, Ministry of Enterprises, Trade and Employment, the industry, other business societies, academic institutions, etc.), trying to build



bridges between citizens and professionals on the one hand, and academic institutions and research centres on the other hand. It will encourage different interested parties to join working groups and to participate in workshops, seminars and events, for receiving information on the latest IST achievements, about new methods, applications and innovative products, so as to stimulate employment, competition and growth. The Action Forum will support and develop more efficient means of co-operation; it will increase access to societies of excellence and skills in universities and research centres and to market opportunities in emerging economies of the developing countries. The Action Forum will help strengthen links between World-leading and the Newly Independent States and enhance co-operation among people. Apart from the above-mentioned planned activities, the dissemination will be ensured by electronic means, i.e. by building a Web site and by diffusing printed material. The training will take the form of seminars, lectures on the information and communications technologies, and of more specified training courses on e-commerce, e-work and foreign language-learning, in order to improve specific skills and competencies. These training courses, which will be organised in the premises of the Regional Information Centre based in Georgia, will enable people to share experience and they will provide them with the necessary knowledge of the Internet or they will bridge existing gaps. The training courses will also address separately a series of specific technical and managerial processes and skills essential to the efficient operation of an enterprise. Initiation courses in e-commerce will be offered to businessmen wishing to adopt new commerce practices, and there will be demonstrations of how to integrate e-commerce in a business, and examples of how it will affect work. The Programme includes the studies required, in order to ensure consistent and updated tracking of market conditions, which are essential for the exploitation of the measures’ results after the project’s life. First, it intends to develop market penetration strategies, with a view to create more efficient means of co-operation with the developing countries of the Caucasian region. The information and communication technologies can be very useful to local enterprises, which deal with biological products and become very important in their field, such as wine production, mineral water commercialisation, etc. Internet can provide them with the necessary tools they need, so that they can expand their businesses beyond the strict borders of the Caucasian region. Second, there is the study of benefits for various target groups by the adoption of new methods of work and commerce, and it will provide an analysis of the Internet’s societal and cultural impact. Society will transform dramatically if the ‘net economy’ becomes real. Last, it will record the reactions and effects resulting from the operation of the Regional Information Centre and further on, it will calculate the cost-benefit results from the use of new methods of work and commerce. The Regional Information Centre will operate as Contact Point and as link to societies and businesses. The information and the guidance that it will provide can be fully exploited by local enterprises, which could build more professional competence and improve their competitiveness (Fig.2). Furthermore, the results of the studies performed will be made available to the open public, in order to create awareness about the benefits of the digital economy and to set a basis for further research and for stimulating coherence at a global level.



Figure 1: Graphical Presentation of the Programme Components

Caucasian Action Forum

Regional Information

Centre

WP5

Training

Caucasian portal

Surv

eys

Dissem

ination

Exploitation



Figure 2: Scheme of Working System Configuration

ICP

Metadata

Primary content

Annotations

Discussion

Fora

Database Management

Tools

User Profiling

Advisor Agents

Authorization software

3rd Party Tools

Skills Auditing & Assessment

Discussion Group

Software

Central Server

LAN ISP CD-ROM

PILOT SITES

Pilot Pilot Pilot Pilot

APPENDIX II:

COMPETITION POLICY AND ITS IMPLEMENTATION


By Joseph McArdle, Barrister-at-Law, Dublin, London

It is safe to say that in all market economies, competition is recognised as a good thing. This does not exclude, however, different approaches to competition policy. This article will look briefly at these approaches and the organisational approaches of different countries to the implementation of their competition policies. It will then concentrate on the body which is given the task of implementation and highlight generally accepted guidelines for the effective execution of its task.

The most common objective of competition policy has traditionally been the maintenance of the competitive process or of free competition. Associated with this objective have been: freedom of trade; freedom of choice; and access to markets. In Germany, freedom of individual action is emphasised and, in France, competition policy is seen as a means of securing economic freedom. Competition policy has expanded in the past two decades and now includes the lessening of the adverse effects of governmental interference in the marketplace. In Italy and in Canada, it applies to both public and private firms, to firms supplying public services or to monopolies which are only permitted to “breach” competition law within the limits of their particular aims.

Linked with the above objectives are the goals of preventing abuse of economic power and the achievement of economic efficiency through reduced production costs and technological change and innovation. Alleged economic efficiency cannot, of course, be an end in itself and socio-political concerns have increased the emphasis on matters such as moderating or curbing inflation and protecting small business, preserving the free enterprise system and maintaining fairness and honesty.

Above all, competition is not a self-referential ideology. Ultimately, it is a tool to serve the broad public interest and to achieve pluralism, decentralisation of economic decision-making, prevention of abuses of power, promotion of small business (the bedrock of any economy), fairness and equity and other socio-political values. Obviously, the emphasis will shift from country to country, system to system but, in every jurisdiction, organisational and enforcement regimes must be set up which will involve the judiciary (and, if possible in transition economies, specialised courts, preferably including economists), private actions by individuals which will not only supplement and reinforce public enforcement but also free the competition office or authority for other tasks.

BRIEF OVERVIEW OF IMPLEMENTATION BODIES Above all, it is generally accepted that there must be, indeed, a competition office or authority, independent from the government and the political influence of powerful business interests, particularly the successors of the previous state monopolies. Such a body must not merely be reactive. It must also be proactive and have power to make recommendations to government and to intervene when government bodies are in the process of making decisions, which can affect competition policy. It must be able to apply fines and other penalties, prevent wrongful behaviour and to carry out investigations. At the same time, it is obliged to protect the confidentiality of all non-public information which comes to its attention.



The Italian competition authority has adopted an internal Code of Conduct for its staff which forms an integral part of its employees’ employment contract. The staff are required to act with impartiality and confidentiality and behave irreproachably in their dealings with the public. This Code not only lays down general principles but also establishes practical measures in relation to a whole series of matters, particularly, conflicts of interest or acceptance of gifts from the public – “Employees shall refrain from taking part in adopting decisions or performing activities of the Authority which might, directly or indirectly, relate to their own financial or non-financial interests, or those of their relatives up to the fourth degree, or persons living with them” and “The employees shall not accept, for themselves or for others, even on festive occasions, any gifts or other benefits with an economic value from anyone who is affected in any way by the work of the Authority, except for practical gifts of little value.” A special magistrate is appointed in Italy to enforce this code for a period of seven years and may not be re-appointed.

Different countries have different types of competition offices, with different titles, different internal organisation and varying numbers of staff which generally include lawyers and economists. In Ireland, the Irish Competition Authority, has currently twenty seven employees1. It does not deal directly with consumer protection. The Office for Competition and Consumer Protection in Poland some years ago employed 190 persons of whom 145 held university degrees.2 The competition office in Russia, MAP Russia, has a central office which in 1999, employed 417 persons, and regional offices which employed 1,417 staff.3.

In the same period, the Slovak Republic had a staff of 72 employees4 and the Czech Republic 106 employees. There is little doubt that the numbers have increased in all the above offices.

It is worthwhile looking in slightly more detail at France and Great Britain as representatives of the civil law and common law systems operating in accordance with EU legislation.

In France the competition office is called the French Directorate General for Competition, Consumer affairs and Repression of Frauds and has a very detailed breakdown of responsibilities. It is divided into two Sections with 7 sub-directorates and a General Inspectorate of Services.

The First Section, which is primarily proactive, deals with regulations and safety and elaborates global policies and assures the good function of the economy particularly with regard to the balanced relationships between the players in the various markets.5

1 Including 7 economists, 2 legal advisers and 3 assistant legal advisers 2 This includes a special team to deal specifically with State Aids and has, no doubt, been expanded. 3 The breakdown shows: economists - 572; lawyers – 343; officers dealing with antimonopoly legislation control – 863; staff controlling advertising legislation – 128; staff enforcing consumer rights protection – 328. 4 Including 26 economists and 17 lawyers. 5 The sub-directorates deals with (A) studies and organisation/stimulations; (B) competition and juridicial affairs; and (C) protection of the consumer.



The Second Section is responsible for products and markets and elaborates sectoral policies adapted to the different economic activities and supervises their implementation.6 The sub-directorates of the First and Second Sections are divided into divisions.7

There is also an Administrative sub-directorate which handles the quantitive and qualitive administration of personnel, procuring and applying finances, materials and information. Finally, there is a General Directorate evaluates the activities of all the Directorates and sub-directorates and helps them to modernise their work methods.

The UK Competition Authority is the result of the combination of previous legislation on Restrictive Trade Practices and Resale Price and the office of the Director General of Fair Trading with the requirements of EU legislation and involved the use of a transitional period during which the requisite adjustments were made. The result is a body with a Director General, a Director of Competition Policy,8 a Director of Consumer Affairs9, a Legal Division, an Information Branch,10 an Administration Branch and a Resources and Services Division.

Many of these countries many web-sites on which are published details of the current activities, their decisions and information on all initiated administrative proceedings, the decisions issued in the first instance, appeals lodged, decisions issued in the second instance, and finally the decisions of the final court of appeal.

COMMON PRACTICAL GUIDELINES The Members of the European Union and the other states mentioned above have one thing in common, their competition policy is based on a single piece of legislation, a competition law which sets up an implementation body. The size and shape of this body may differ and the manner in which it organises its works and determines it priorities but all such bodies have another thing in common. Broadly speaking, they face similar problems and it is important that they go behind the words of their particular law, identify the forms that anti-competitive behaviour may take, learn how to recognise it and how to deal with it. For these, they need a set of practical guidelines. This brief summary is particularly addressed to competition authorities in transition economies without a strong tradition of competition legislation.

A law such as the Law of Georgia on Monopolistic Activity and Competition deals with agreements which directly or indirectly cause restriction of competition and also with monopolistic positions This

6 Its three sub-directorates deal with (D) agricultural and food products; (E) health, industry and commerce; and (F) services and networks. 7Sub-directorate A’s three divisions are concerned with (A1) economic studies and general information; (A2) general consumer policy and related matters; and (A3) organisation and stimulation of decentralised services. Sub-directorate B has four divisions, (B1) competition policy and anti-competitive practices; (B2) juridical matters and litigation; (B3) concentrations and aids; (B4) public markets and delegation of public services. Sub-directorate C has four divisions, (C1) consumer law; (C2) safety; ( C3) Fidelity to claims; (C4) Laboratories. Sub-directorate D has four divisions, (D1) agricultural and food products; (D2) drinks; (D3) products of animal origin; (D4) products of vegetable origin. Sub-directorate E has four divisions, (E1) health; (E2) equipment, goods and inter-industrial relations; (E3) consumer goods;(E4) commerce and artisanal activity; Sub-directorate F has four divisions, (F1) energy, chemicals and local networks; (F2) transport and communications; (F3) financial services and organised professions;(F4) salaries. Sub-directorate G has four divisions, (G1) personnel ; (G 2) training; (G3) budget; (G 4 ) informatics. 8 Responsible for 7 departments – CB1: Policy co-ordination; CB2: Mergers; CB3: Cartel Investigations; CB4: Sectoral: media, sport & information industries; CB5: Sectoral: service industries; CB6: Sectoral: basic industries, energy & vehicles; CB7: Sectoral: consumer goods industries. 9 Responsible for CA1: Consumer affairs policy & regulation; CA2: Research & financial services; CA3: Trader control including regulation of consumer credit; CA4: Liaison and co-ordination section. 10 Responsible for the production of consumer information, media relations, public liaison and library services to the Authority.



paper shall, therefore, outline briefly the approach taken by other jurisdictions with regard to anti-competitive agreements and to the concepts of domination and dominant position because these constitute the skeleton on which competition policy hands. It will attempt to show how these elements can be recognised and classified and how a competition office such as the State Antimonopolistic Service of Georgia might deal with them.

As stated above, the remarks set out below are particularly geared towards countries with a contractual obligation to harmonise or approximate their legislation with that of the European Union.

I - THE ESTABLISHMENT OF A BODY OF PRECEDENTS Until it has built up its own body of decision and precedents, it is advisable that a competition authority, when considering alleged anti-competitive behaviour, should refer to the relevant rulings of the Competition Directorate-General of the European Commission and to decisions of the Competition Authorities of other states, signatories of Partnership and Cooperation Agreements with the European Union. This body of decisions could be maintained by a Library and Archive division which would regularly update its collection of decisions of the Competition Directorate-General and of the competition authorities of other states.

II - AGREEMENTS Anti-competitive agreements (a) In its interpretation and implementation of competition law, a competition authority should consider the term "agreement" to have a wide meaning and to cover all agreements whether legally enforceable or not, written or oral. It should include so-called "gentleman's agreement" and recommendations. There does not have to be a physical meeting of the parties for an agreement to be reached. An exchange of letters or telephone calls may suffice if a consensus is arrived at as to the action each party will, or will not, take.

(b) When laying down general rules or considering particular cases relating to anti-competitive agreements, a competition authority should inquire as to whether or not these agreements contribute to improving production or distribution or promoting technical progress while allowing consumers a fair share of the resulting benefits and avoid any restrictions which are not indispensable to the attainment of their goal or do not have the possibility of eliminating competition in respect of a substantial part of the products in question.

(c) Examples of improvements in production or distribution include lower costs from long production or delivery runs, or from changes in the methods of production or distribution, improvements in product quality or increases in the range of products produce or services provided. In each case, the nature of the improvement clamed must be clearly identified and justified. Examples of the promotion of technical or economic progress include efficiency gains from economies of scale and specialisation in research and development with the prospect of an enhanced flow or speed of innovation, and technical progress.

(d) If an improvement such as a cost reduction is seen as benefiting only the shareholders of the parties to the agreement, a competition authority should rule that this is not a valid improvement. The competition authority should obtain the views of customers and consumers in this regard.

(e) The resulting benefits are likely to be those, which flow from improvements in production or distribution. An agreement may lead to the faster development of new products or of new markets or



better distribution systems so that the benefits to consumers also lie in the future. The competition authority should take account of the dynamics of market conduct and competition in assessing whether or not this condition is satisfied.

(f) An agreements should contain the least restrictive means of achieving its aims. The competition authority should look carefully for any restrictions beyond those necessary to secure the alleged benefits.

(g) The competition authority's assessment should consider the possibility of competition being eliminated in respect of a substantial part of the products in question. It should carry out an appropriate market analysis and, if it is not satisfied with the result, the agreement should be prohibited. Interested parties must satisfy a competition authority that effective competition will continue in the market or markets for the goods or services with which the agreement is concerned.

In all the above cases, the onus should be on the interested parties to satisfy a competition authority that there are grounds why an agreement should not be prohibited.

Exceptions Unless there are other reasons for doing so, a competition authority should not prohibit agreements which are required in order to comply with, and to the extent that they are a planning obligation; an agreement made by an undertaking entrusted with the operation of services of general economic interest or of a revenue producing monopoly insofar as the prohibition would obstruct the performance of those tasks; an agreement to the extent to which it is made to comply with the legislation of the state; an agreement which is necessary for compelling reasons of public policy and which is also the subject of an order by the relevant government Minister; an agreement which constitutes designated professional rules, imposes obligations arising from such rules or constitutes an agreement to act in accordance with such rules.

Limited participation The fact that a party may have played only a limited part in the setting up of the agreement, or may not be fully committed to its implementation, or has participated only under pressure from other parties should not mean that it is not a party to the agreement (although a competition authority may take the fact into account in deciding on the level of a financial penalty).

Associations Agreements also include decisions by associations of undertakings.

Trade associations are the most common form of associations of undertakings but a competition authority should not limit its actions to any particular type of association. The term " decision of an association" may cover (a) the constitution or rules of an association, (b) decisions which are binding on its members and (c) recommendations.

A decision may be a resolution of the management committee of an association or of the full membership in general meeting, the effect of which is to limit the commercial freedom of action of the members in some respect. It will also cover any coordination of the members' conduct in accordance with its constitution even if that recommendation is not binding on the members, and may not have been fully complied with. It will be a question of fact to be decided by a competition authority whether or not an association of undertakings is itself a party to an agreement.



Concerted practices Agreements may also include "concerted practices". A concerted practice may exist where there is informal cooperation without any formal agreement or decision.

Preliminary research Before making a decision on an alleged anti-competitive agreement, a competition authority should instruct the appropriate divisions to carry out an economic assessment to establish two main elements:

- the existence of positive contacts between the parties; and - whether or not the contact has the object or effect of changing the market behaviour

of the undertaking in a way which may not be dictated by market forces. -

The following factors may be considered by a competition authority in establishing if concerted practice exists:

- whether the parties knowingly entered into practical cooperation; - whether behaviour in the market is influenced as a result of direct or indirect contact

between undertakings; - whether parallel behaviour is a result of contact between undertakings which leads to

conditions of competition which do not correspond to normal conditions of the market; - the structure of the relevant market and the nature of the product involved; - the number of undertakings in the market and, where there are only a few

undertaking, whether they have similar cost structures and outputs.

Discriminatory prices The competition authority should rule that any price which is not dictated by normal market forces is a discriminatory price.

The competition authority should consider the many ways in which prices can be fixed, whether by fixing the components of a price, setting a minimum price below which the prices are not to be reduced, establishing the amount or percentage by which prices are to be increased, or establishing a range outside which prices are not to move.

The competition authority should inquire as to whether an agreement affects the price indirectly, and covers the discounts or allowances to be granted, transport charges. payments for additional services, credit terms or the terms of guarantees.

The competition authority should inquire as to whether an agreement may relate to the charges or allowances quoted themselves or to ranges within which they fall or to the formulae by which ancillary terms are to be calculated. The competition authority may rule that such an agreement has an appreciable effect on competition. This is, in particular, likely to be the case in concentrated markets, with standardised products, where direct price competition may be inhibited.

Agreements to regulate the terms and conditions on which goods or services are to be supplied Agreements to share markets. whether by territory, type or size of customer or in some other way, may be used by undertakings to restrict competition, as well as or instead of the price to be charged, especially where the product is reasonably standardised.



The competition authority should inquire whether or not an agreement which has the effect of sharing the market is no more than a consequence of the main object of the agreement. Parties may agree, for example each to specialise in the manufacture of certain products in a range, or of certain components of a product, in order to be able to produce in longer runs and therefore more efficiently. Provided there is not, or is not likely to be, any appreciable effect on competition, a competition authority should not consider that such agreements restrict competition improperly.

The competition authority should inquire as to whether or not an agreement to limit or control production appreciably hinders competition. Such an agreement may be the way prices are fixed, or it may relate to production levels or quotas or it may be intended to deal with structural overcapacity. Competitive pressures may be reduced if undertakings in an industry agree to limit or at least to coordinate future investment plans. Most agreements to limit or control investment will restrict competition to an appreciable extent.

“Bid-rigging” The competition authority should rule that collusive tendering or "bid-rigging" restricts competition. Tendering procedures are designed to provide competition in areas where it might otherwise be absent. An essential feature of the system is that prospective suppliers prepare and submit tenders or bids independently. Any tender submitted as a result of joint activities are likely to restrict competition to an appreciable extent.

Joint buying or selling The competition authority should rule that any agreement between buyers to fix (directly or indirectly) the price that they are prepared to pay, or to purchase only through agreed arrangements, limits competition between them. An example of the type of agreement which might be made between purchasers is an agreement as to the suppliers with whom they will deal. It is the task of the competition authority to measure the extent to which it limits competition and to determine if it has become illegal.

The competition authority should make the same ruling with regards to agreements between sellers, particularly where sellers agree to boycott certain customers.

Information sharing agreements As a general principle, the more information made publicly available to market participants, the more effective competition will be. In the normal course of business, undertakings exchange information on a variety of matters legitimately and with no risk to the competitive process. However, a competition authority may rule that an exchange of information has an effect on competition where it serves to remove any uncertainties in the market and therefore eliminate any competition between undertakings. It does not matter that the information could have been obtained from other sources. Whether or not the information exchange restricts competitions to an appreciable extent will depend on the circumstances of each individual case: the market characteristics, the type of information and the way in which it is exchanged. The competition authority should, as a general principle, consider that there is more likely to be an appreciable effect on competition the smaller the number of undertakings operating in the market, the more frequent the exchange and the more sensitive and confidential the nature of the information which is exchanged.

The competition authority should operate on the assumption that an exchange of information on prices may lead to price co-ordination and therefore eliminate any competition, which would otherwise be present between the undertakings. This will be the case whether the information relates directly to the



prices charged or to the elements of a pricing policy, for example, including discounts, costs, terms of trade and rates and dates of change.

The competition authority may, on the other hand, consider that the exchange of historical information or the collation of price trends may be less likely to have an appreciable effect on competition. This might occur where such an exchange forms part of a structured scheme of inter-business comparison which is intended to spread best industrial practice, especially if the information is collected, aggregated and disseminated by an independent body.

Exchange of non-price information The competition authority may find that the exchange of information on matters other than price may restrict competition to an appreciable extent depending on the type of information exchanged and the market to which it relates. The exchange of statistical data, market research, and general industry studies are unlikely to have an appreciable effeyt on competition provided that the information relates to "opinion and experience" and does not enable confidential or sensitive business information to be shared.

The competition authority should rule that historical information which cannot influence future market behaviour should, as a general rule, not be regarded as restricting competition illegally but that such information could restrict competition to an appreciable extent if it is possible to disaggregate the information and identify the participants, as may be the case with recent, current or future information.

Advertising The competition authority should rule that restrictions on advertising, whether relating to the amount, nature or form of advertising, restricts competition to some degree Whether the effect is appreciable depends on the purpose and nature of the restriction and on the market in which it is to apply. The competition authority should find that decisions aimed at curbing misleading advertising or at ensuring that advertising is legal truthful and decent are unlikely to restrict competition.

Standardisation agreements The competition authority should accept that an agreement on technical or design standards may lead to an improvement in production by reducing costs or raising quality or it may promote technical or economic progress by reducing waste and consumers' search costs. The competition authority may decide, however, that such an agreement may restrict competition if it includes restrictions on what the parties may produce or is, in effect, a means of limiting competition from other sources, for example, by raising entry barriers.

The competition authority should order examination of aggregated rebate schemes under which a customer obtains better terms the more business he places with all the parties to the scheme as well as of any agreements on specialisation where one party agrees to produce particular products and supply them to the other party or to cooperate in research and development when such agreements are seen to have an appreciable effect on competition.

The competition authority should rule that agreements which contribute to improving production of goods and the distribution of goods or services or promote technical or economic progress while allowing consumers a fair share of the resulting benefit but do not impose on the undertakings concerned restrictions which are not indispensable to the attainment of those objectives or afford the undertakings the possibility of eliminating competition in respect of substantial part of the products or services in question are not illegal.



It is recommended that a competition authority, when reaching general or particular decisions in relation to agreements should consult EU Commission Regulations (EEC) No. 417/85, (EEC) No. 418/85, (EEC) No. 1983/83, (EEC) No. 1984/83, (EEC) No. 4o87/88, (EEC) No. 1475/95, (EEC) No. 240/96 on categories of specialisation agreements, categories of research and development agreements, categories of agreements concerning exclusive distribution agreements, categories of franchise agreements, certain categories of motor vehicle distribution and servicing agreements, certain categories of technology transfer agreements as well as any amendments that are made to such regulations.

Unless there are other reasons for doing so, a competition authority should not consider the following agreements or decisions to be agreements which should be prohibited: Agreements and decisions whose subject matter is: - merely the uniform application of standards and types; - the uniform application of general terms of business, delivery and payment, including cash discounts in so far as they do not relate to price or price elements; - the rationalisation of economic activities through specialization, provided the restraint of competition does not lead to the creation or strengthening of a dominant position; - the rationalisation of economic activities through a form of cooperation among enterprises, provided competition on the market is not substantially impaired and the agreement or the decision serves to improve the competitiveness of small or medium-sized enterprises; - the joint purchasing of goods or the joint procuring of commercial services but which do not, except in individual cases, compel the participating undertaking to purchase from that source. Beneficial agreements Obviously, agreements play a large part in business activity and, as we have seen, all agreements are not automatically anti-competitive. In fact, certain agreements may be classified by a competition authority as beneficial authority. Some examples are listed below.

Unless there are other reasons for doing so, a competition authority should not prohibit agreements or decisions, which:

- serve to rationalise economic activities, provided that they are a suitable means of substantially increasing the efficiency or productivity of the participating undertakings in technical, commercial or organisational respects and of thereby improving the satisfaction of demand. The rationalisation effect should be of sufficient importance when compared with the restraint of competition connected with it. The restraint of competition should not result in the creation or strengthening of a dominant position. This rule will also apply when the agreement or decision aims to achieve the rationalisation in conjunction with price agreements or through the establishment of joint purchasing or selling organisations provided that the rationalisation effect cannot be achieved otherwise;

- are necessary, in the event of a decline in sales due to a lasting change in demand, agreements or decisions. of undertakings engaged in production, manufacturing or processing, to systematically adjust capacity to demand and the arrangement takes into account the conditions of competition in the economic sectors concerned;



- contribute to improving the development, distribution, procurement, taking back or disposal of goods or services, while allowing consumers a fair share of the resulting benefit. provided the improvement cannot be achieved otherwise by the participating undertakings and is of sufficient importance when compared with the restraint of competition connected with it, and the restraint of competition does not result in the creation or strengthening of a dominant position;

- have as their subject matter the rationalisation of economic activities through specialisation or in some other way. the joint purchasing of goods or the joint procurement of commercial services or the uniform application of terms or conditions in relation to small and medium sized enterprises;

- are entered into in situations where the restraint of competition is necessary for prevailing reasons concerning the economy as a whole and the public interest or if there is an immediate danger to the existence of a majority of the undertakings in a sector of the economy, provided that other legislative or economic policy measures cannot be taken, or cannot be taken in time and the restraint of competition is a suitable means of averting the danger and then only in especially serious individual cases11; - are vertical agreements in relation to publications insofar as an undertaking binds the purchasers of its published products by legal or economic means to stipulate certain resale prices or to impose the same commitment on their own purchasers down to the resale to the ultimate consumer except where the resale price maintenance is operated in an abusive manner or the resale price maintenance scheme or its combination with other restraints is likely to increase the price of the bound goods or to prevent their price from decreasing. or to restrict their production or sale; - are related to the sale or licensing of patents or utility models granted or applied for of topographies or protected seed varieties on condition that the restrictions on the acquirer or licensee in its business activities do not go beyond the scope of the protected right. Restrictions pertaining to the nature, extent, technical area of application, quantity, territory or time of exercise of the protected right should not be deemed to go beyond the scope of the protected right; - restrict the right of an acquirer or licensee insofar and as long as they are justified by the seller's or licensor's interest in a technically satisfactory exploitation of the subject matter of the protected right. Such agreements may impose an obligation:

- to exchange experience or to grant non-exclusive licences in respect of inventions relating to improvements or new application. provided such applications correspond to similar obligations on the part of the seller or licensor;

- on the acquirer or licensee not to challenge the licensed protected right, - to make minimum use of the licensed protected right or to pay a minimum fee, - to label the licensed products in a manner which does not exclude a reference to the

manufacturer insofar as such restrictions do not exceed the term of the acquired or licensed right and the competition authority should ask for proof that the commercial freedom of the

11 Where a competition authority is considering recognising a standards and types agreement as competitive, it may

require the comments of an association whose function, as set out in their statute, include the task of carrying out or reviewing standardisation and type defining products while giving the suppliers and purchasers affected by the project an opportunity to participate adequately in the process. The competition authority should consider that artificial alteration of maintenance of process means alteration or maintenance of prices which bear no relation to the current state of the market in relation to a given commodity and should obtain expert economic advice before making any decisions in relation to such matters.



acquirer or licensee or other undertakings is not unfairly restricted and, if competition on the market is not substantially impaired because of the extent of the restrictions.\

- concern the sale or licensing of legally unprotected inventions, manufacturing methods, designs, other achievements furthering technology; - further plant cultivation in the field of plant breeding, insofar as they represent essential business secrets or other agreements of a like nature; - concern the sale or licensing of other property rights such as trademarks. registered designs, copyrights, e.g. to software, insofar as these agreements relate and contribute to the primary purpose of the sale or licensing of industrial property rights or unprotected achievement and to agreements concerning a variety approved officially between a plant breeder and a seed multiplier or an undertaking at the seed multiplication level; - fall under the following categories:

o specialisation agreement covering present and future production, o research and development agreements, o exclusive distribution agreements which involve a supplier agreeing to supply goods for

resale to only one distributor within a given territory, o selective distribution of motor vehicles, o exclusive purchasing agreement which involve a purchaser of goods for resale agreeing

to purchase those goods only from one supplier, o technology transfer agreements applying to both know-how and patent licensing

agreements, o franchising agreements which involve an independent trader (the 'franchisee') licensed

to use a particular format on payment of appropriate royalties.

III - DOMINANCE The essence of dominance is the power to behave independently of competitive pressures.

In assessing whether or not there is dominance, a competition authority should consider whether and to what extent an undertaking will face constraints on its ability to behave independently. The competition authority should look for constraints that might be imposed by:

- existing competitors, according to their strength in the market - this may be shown by market

shares; - potential competitors - this may be shown by a lack of significant entry barriers and the existence

of other undertakings which might easily enter the market; and - other constraints such as strong-buyer power from the undertaking's customers (which may

include distributors, processors and commercial users). The competition authority should not rely on market share alone in order to determine whether or not an undertaking is dominant. It will also be necessary to consider the position of other undertakings operating in the same market and how market shares have changed over time. An undertaking is more likely to be dominant if its competitors enjoy relatively weak positions or if it enjoys both a high, and relatively stable, market share.



The competition authority should also consider whether or not an undertaking faces, or is likely to face, competition from new entrants. An attempt to raise prices may encourage entry to the market and force prices to their original level. The competition authority should look carefully to see whether there are any barriers which will prevent entry into the market. Such barriers exist when incumbent undertakings would have a significant advantage over new entrants, although an advantage created by superior efficiency should not treated as an entry barrier. The competition authority may classify entry barriers in different ways, but should first distinguish between three sources:

- absolute advantages – undertakings may not have equal access to important assets or rights.

For example, there may be regulations which restrict new entry, such as requirements to possess licences or permits. Copyright, patents and other intellectual property rights can be examples of these regulatory barriers, although such rights do not automatically imply that an undertaking is dominant: it may be possible to innovate around these rights or there may be competition between holders of rival rights within the same market. Alternatively, undertakings may have preferential access to important inputs, such as raw materials. For example denial of access to a port might be an absolute barrier to entry if other ports could not serve the same market;

- strategic advantages – advantages which an undertaking enjoys from being already active in

a market (first-mover advantages). They can arise when new entrants would face sunk costs, those which must be incurred when entering a market but which cannot be recovered on exit. The importance of sunk costs in deterring new entry depends on whether new entrants expect to recover them from the revenues that they will earn operating in the market. If new entrants expect to face vigorous competition from existing undertakings in the market, sunk costs are more likely to deter new entry. The importance of sunk costs will therefore depend at least to some extent on the conduct (or expected conduct) of the allegedly dominant undertaking. (If the incumbent itself has incurred sunk costs, that may make it more likely to respond vigorously to new entry.) A strategic advantage might also arise if new entrants find it more difficult to fund the necessary investments than incumbents;

- exclusionary behaviour – an undertaking may build up a reputation for predatory behaviour,

which will deter new entrants. Undertakings can also conclude contracts which tie up distribution: a manufacturer might tie up all the retailers within a market exclusively to its products, for example. Such behaviour can increase the impact of an absolute or strategic advantage.

The competition authority should also take account of the rate of innovation within the market. In markets where high rates of innovation occur, or are expected, barriers to entry may quickly be eroded. It is important that competition policy does not undermine the incentives for such innovation.

The competition authority should also inquire whether there are other factors, apart from existing or potential competition, which will constrain the undertaking’s behaviour. The principal example is strong buyer power, which might arise if customers were large relative to the undertaking - a large retail chain may be able to resist any attempts by a supplier with a high market share to abuse its position on the market, for example. The key issue is whether the buyer will have a stronger bargaining position than the seller. (On the other hand an undertaking with strong buyer-power may itself be dominant. If it exploits its sellers this could itself be an abuse, particularly if the undertaking also enjoys market power in downstream markets.)



Undertakings may also be constrained by government regulations. In this situation the undertaking may still be considered to be dominant although regulation may prevent it abusing that dominant position.

Dominant position Market share In deciding what is market share, a competition authority should take account not only of the market share but also of:

- an enterprise's financial power, - its access to supplies or markets, - its links with other undertakings, - legal or actual barriers to market entry by other undertakings, - actual or potential competition by undertakings established within or outside the jurisdiction, - the enterprise’s ability to shift its supply or demand to other goods or commercial services, - the ability of the opposite side to resort to other undertakings.

The competition authority should presume a group of undertakings to be dominant if it consists of three or fewer undertakings reaching a combined market share of 50 per cent or consists of five or fewer undertakings reaching a combined market share of two thirds unless the undertakings demonstrate that the conditions of competition may be expected to maintain substantial competition between them or that the number of undertakings has no paramount market position in relation to the remaining competitors.

Abuse of dominant position In order to ascertain if abuse of a dominant position has occurred a competition authority should carry out research to see if the undertaking in a dominant position

- has demanded payment or other business terms which differ from those which would very likely arise if effective competition existed and, in this context, the conduct of undertakings in comparable markets where effective competition prevails, should be taken into account; - demands less favourable payment or other business terms than the dominant undertaking itself demands from similar purchasers in comparable markets, unless there is an objective justification for such differentiation; - refuses to allow another undertaking access to its own networks or other infrastructure facilities in return for adequate remuneration, provided that without such concurrent use the other undertaking is unable for legal or practical reasons to operate as a competitor of the dominant undertaking on the upstream or downstream market. This should not apply if the dominant undertaking demonstrates that for operational or other reasons such concurrent use is, impossible or cannot reasonably be expected.

Prohibition of discrimination and unfair hindrance The Commission should prohibit dominant undertakings, associations of undertakings and undertakings which set retail prices that directly or indirectly hinder in an unfair manner another undertaking in business activities which are usually open to similar undertakings nor directly or indirectly treat it differently from similar undertakings without any objective justification. This rule should also apply to undertakings and associations of undertakings insofar as small or medim sized



enterprises as suppliers or purchasers of certain kinds of goods or services are dependent on them in such a way that sufficient or reasonable possibilities of resorting to other undertakings do not exist. A supplier of a certain kinds of goods or services should be presumed to depend on a purchaser who regularly obtains from the supplier, in addition to discounts customary in the trade or other remuneration, special benefits which are not granted to similar purchasers. Dominant undertakings and associations of undertakings should not use their market position to cause other undertakings in business activities to grant them preferential terms without any objective justification.

The competition authority should consider that an unfair hindrance to small and medium sized enterprises occurs when undertakings with superior market power regularly use their market power directly or indirectly to offer goods or services below their cost prices unless there is an objective justification for this practice. If, on the basis of specific facts and in the light of general experience, it appears that an undertaking has used its market power to hinder a small or medium enterprise, the onus should fall on this undertaking to prove that this has not happened and to clarify such circumstances in its field of business on which legal action may be based which cannot be clarified by the competitor concerned or the association concerned but which can be easily clarified and may reasonably be expected to be clarified by the undertaking against which action is taken. The competition authority should forbid:

- trade and industry associations or professional organisations as well as quality-mark

associations to refuse to admit an undertaking if such refusal constitutes an objectively unjustified unequal treatment and would place the applicant undertaking at an unfair competitive advantage.

- undertakings and associations of undertakings to request another undertaking or association to refuse to sell or purchase with the intention of unfairly harming certain undertaking.

- undertakings and associations of undertakings to threaten or cause harm or promise or grant advantages to other undertakings to induce them to engage in conduct which under the Competition Law or according to a decision issued by a competition authority should not be made the subject mater of a contractual commitment.

- undertakings and associations of undertakings to compel other undertakings to accede to an anti-competitive agreement or to merge with other undertakings or to act uniformly in the market with the intention of restraining competition.

- persons or undertakings to cause economic harm to another because he or it has applied for or suggested that action should be taken by a competition authority.

- recommendations which have as their object or effect a circumvention, by way of uniform conduct, of the prohibitions imposed by a competition. law or of decisions taken by a competition authority.

- any recommendations by an undertaking to the purchasers of its goods to demand or offer certain prices when reselling to third parties or to use wrongful methods to determine prices or to observe certain maximum or minimum prices.

The competition authority should not apply the last prohibition in the previous paragraph to recommendations issued by associations of small and medium enterprises made exclusively to its members provided that such recommendations serve to improve the parties' competitiveness in



relation to large enterprises or other forms of large-scale business, and are expressly declared to be non-binding on the addressee of the recommendation and no economic, social or other pressure is applied to help them. The competition authority should not apply the prohibition to recommendations whose subject matter is merely the uniform application of standards and types in relation to the above rules about small and medium enterprises. If the recommendations are made by a rationalisation organization, it is not necessary that they be expressly declared to be non-binding. The competition authority should permit non-binding price recommendations by an undertaking for the resale of its branded goods which are in price competition with similar goods of other manufacturers provided the recommendations are expressly designated as non-binding, only indicate a specific price, and no economic, social or other pressure is applied to enforce them, and they are issued with the expectation that the recommended price will correspond to the price likely to be charged by the majority of the addressees of the recommendation. Branded goods for these purposes are products whose supply in consistent or improved quality is guaranteed by the price-recommending undertaking and which themselves, or whose packaging or presentation as intended for delivery to the customers or whose containers from which they are sold feature a mark indicating their origin (the firm's symbol, word or pictorial symbol). The competition authority should forbid such recommendations if it determines that the recommendation or its combination with other restraints of competition is likely to increase the price of the goods or to prevent their prices from decreasing or to restrict their production or sale or the recommendation is likely to deceive customers as to the price demanded by the majority of the addressees of the recommendation or the recommended price significantly exceeds in the majority of cases the prices actually demanded in the entire area of application of a competition law or in a substantial part thereof or certain undertakings or certain groups of purchasers are excluded from the distribution of the goods by distribution arrangements or other measures taken by the recommending undertaking without any objective justification.12 The competition authority should not recommend interference with conduct which is carried out by an undertaking entrusted with the operation of services of general economic interest or to the extent that it is carried out in order to comply with the legislation of the state or is also the subject of an order by a government minister, where there are compelling reasons of public policy and it is also the subject of an order by a government minister. The competition authority should apply at least two tests in assessing whether there has been an abuse of a dominant position. In order to apply the first test, the competition authority must determine the relevant market, the relevant goods and services, known as the product market; the geographic extent of the market, known as the geographic market. The boundaries of the market should be determined by taking the products or services relevant to the decision and looking at the closest substitute products. The closest substitute products should be included in the market by a competition authority if substitution by consumers would prevent prices of

12 The word “undertaking”, as used in this paper, includes not only companies but the full range of business entities

including sole traders, partnerships, trade associations and non-profit making associations.



the products relevant to the decision from rising above competitive levels. These alternative products do not need to be perfect substitutes, but alternatives which would fill a similar role to the goods or services in question, and to which customers would be prepared to switch in the event of a price increase. If such similar goods or services would prevent price-setting above competitive levels, they should be included in the definition of the relevant product market. In addition to this substitution by customers - "demand-side substitution" - prices can also be constrained by the potential behaviour of suppliers producing other products - "supply-side substitution". Businesses that are not currently supplying a particular product might switch some of their existing facilities to supplying that product (or close substitutes) if prices rose significantly. The competition authority should use similar methods to define the geographic boundaries of a market. The geographic market will sometimes be the area supplied by a complainant, or the party or parties to the conduct concerned, but a competition authority should also consider whether customers could easily obtain similar products from suppliers in other areas on reasonable terms. If so, these other areas may form part of the geographic market. The geographic market may be a part of the state, for example, the Republic of Georgia, the whole of it, or it may extend beyond the borders of the state. In particular cases, a market may have been defined by a competition authority. Although this previous determination may guide a competition authority in subsequent cases, it is not of necessity the correct one to use in subsequent cases.

Joint dominance The competition authority should prohibit conduct on the part of one or more undertakings which amounts to the abuse of a dominant position (a collective dominant position). This means that the behaviour of undertakings within the same corporate group may be dealt with together even if they are not considered to operate as a single economic unit.

In this context, a dominant position may be collective when two or more legally independent undertakings are linked in such a way that they adopt the same conduct in the market. The European Court has held that

‘There is nothing, in principle, to prevent two or more independent economic entities from being, on a specific market, united by such economic links that, by virtue of that fact, together they hold a dominant position vis-à-vis the other operators on the same market.’

The links may be structural or they may be such that the undertakings adopt the same conduct on the market.

The likelihood of abuse The competition authority should examine certain broad categories of business behaviour within which particular examples of abusive conduct are most likely to be found rather than specifically prohibited business practices. Conduct may be abusive when, through the effects of conduct on the competitive process, it adversely affects consumers directly (through the prices charged, for example) or indirectly (for example, conduct which raises or enhances entry barriers or increases competitors’ costs).



The competition authority should consider that conduct, for which there is an objective justification, is not regarded as an abuse even if it does restrict competition. For example a refusal to supply might be justified by the poor creditworthiness of the customer. It will still be necessary for a dominant undertaking to show that the behaviour is proportionate to the justification. Conduct which stems from the superior efficiency of an undertaking is not an abuse – the purpose of competition policy is to encourage, not to penalise, efficiency. The competition authority should not consider that the exclusive rights provided by an intellectual property right (IPR) necessarily give rise to a dominant position (depending on the nature of the protected right and the extent of the relevant product market). In addition, even where an undertaking is dominant, the legitimate exercise of an IPR is not an abuse. The role of IPRs in encouraging creative and innovative activity should be recognised. It is, however, possible that the way in which an IPR is exercised may give rise to concern if it goes beyond the legitimate exploitation of the IPR – if it is used to leverage market power from one market to another. Categories of abusive behaviour The competition authority should examine the following categories of abusive conduct: - conduct which exploits customers or suppliers through, for example. excessively high prices; or discriminatory prices, or other terms or conditions; or - conduct which is anti-competitive (sometimes called ‘exclusionary behaviour’), because it removes or limits competition from existing competitors, or because it excludes new undertakings from entering the market by, for example:

- predatory behaviour; - vertical restraints; or - refusing to supply existing or potential competitors.

Excessively high prices The European Court has held that:

‘charging a price which is excessive because it has no reasonable relation to the economic value of the product supplied is ... an abuse.’ 13

The essential issue is when does a price become excessively high: in general, to be excessively high the price must be higher than it would normally be in a competitive market. Clearly all companies must earn some level of profits in order to finance investments. The profits of a dominant undertaking in the relevant market consistently exceeding its relevant cost of capital (the return which could be earned from investing elsewhere having regard to the risks incurred by investing in the particular company) might, however, indicate that its prices were excessive.

There may, however, be many objective justifications for prices which are apparently ‘excessively high’. First, in competitive markets, prices and costs vary over time and there are likely to be periods when high profits can be earned. This is an important part of the competitive process since it can encourage increased output or entry to a market. Secondly, undertakings in competitive markets may be able to sustain high profits for a period of time if they are more efficient than their competitors. This

13 Authority for the principle that charging unfairly high prices is an abuse is found in the General Motors case (Case 26/75, General

Motors Continental NV v Commission, [1975] ECR 1367; [1976] 1 CMLR 95), in which the European Commission found the pricing strategy of the dominant undertaking to be excessive and imposed a fine. The Commission's decision was annulled by the European Court on the basis of the facts, but the principle was upheld.



might occur if an undertaking has developed lower-cost techniques of production, supplies higher quality products or is more effective at identifying market opportunities. (Exclusive access to low-cost inputs, such as exclusive rights to certain raw materials, is not, however, the same thing as superior efficiency.) To be an abuse, prices would have to be persistently excessive without stimulating new entry or innovation.

Given the uncertainties in estimating what an undertaking’s cost of capital should be, prices would have to allow profits which significantly and persistently exceeded its cost of capital before an abuse could be established.

Individual agreements and conduct In markets where there is a high rate of innovation it may be natural to see high prices for a period of time. Persistently high profits which result from successive innovations will provide both a return on previous innovations and incentives for further innovation. In these circumstances high profits will not indicate an abuse. The competition authority should, therefore, not interfere in natural market mechanisms where high prices will encourage new entry or innovation and thereby serve to increase competition. Excessive prices are likely to be regarded as an abuse only in markets where an undertaking is so dominant, and new entry so unlikely, that it is clear that high profits will not stimulate successful new entry or innovation within a reasonable period. Where joint dominance exists, undertakings might engage in some form of tacit collusion – failing to compete on price even though there is no agreement between them. In some cases this type of behaviour may be prohibited as a concerted practice, but if the level of collusion falls short of a concerted practice, it might in principle be considered under the abuse of a dominant position prohibition if the undertakings were jointly dominant. The fact that different undertakings charge the same price is not, of itself, however, an abuse: in competitive markets. Undertakings which sell similar products and incur similar costs will tend to charge the same price. To show that tacit collusion was an abuse of joint dominance would usually require other evidence – that opportunities to cut prices following a significant fall in input costs were deliberately ignored, or that prices were excessive (as defined above), for example.

Price discrimination Price discrimination involves applying different conditions (normally different prices) to equivalent transactions. It can take two basic forms:

- the charging of different prices to different customers, or categories of customers, for the same product – where the differences in prices do not reflect the quantity, quality or any other characteristics of the items supplied. The pricing structure would not be considered discriminatory, however, where there were objective and proportionate reasons for an undertaking charging different prices to different customers – for instance, where there were different transport costs; or - the charging of the same price to different customers, or categories of customers, even though the costs of supplying the product were very different. A policy of uniform delivered prices throughout the country could be discriminatory if differences in transport costs were significant. Price discrimination raises complex economic issues and is not automatically an abuse. It might be objectively justified in industries where there are large fixed costs and low marginal costs (the cost of



supplying each additional unit of output is very small compared to the initial investment to set up the business). In industries with high fixed costs an undertaking which did so might never be able to recover its fixed costs. It may be more efficient to set higher prices to customers with a higher willingness to pay. In general, price discrimination will not be an abuse in such industries if it leads to higher levels of output.

The offering of discounts to certain customers is a form of price competition and is generally to be encouraged. As with price discrimination, discounts will infringe competition rules only if they are anti-competitive: if prices are set at predatory levels, or if they are used to foreclose a market, for example. Foreclosure can occur when discounts are conditional on customers buying all or a large proportion of their purchases from the dominant undertaking (fidelity discounts), or where they are conditional on the purchase of tied products.

Predatory behaviour Predatory behaviour is a class of anti-competitive behaviour where prices are set so low as to eliminate some undertakings and threaten the competitive process itself. In these circumstances consumers may benefit in the short run from lower prices, but, in the longer term, weakened competition will lead to higher prices, reduced quality and less choice. Distinguishing predatory behaviour from legitimate competition is difficult. Since the main objective of competition policy is to create conditions where consumers benefit from effective competition, the distinction must be drawn between low prices which result from predatory behaviour, and low prices which result from legitimate competitive behaviour.

This is not an easy distinction to make and there have been relatively few European cases where predation has been proved. The European Court has stated that where prices are below the average variable cost of production (variable costs are costs which vary with the amount of output produced), predation should be presumed. The Court held also that if prices are above average variable costs but below average total costs, conduct is to be regarded as predatory where it can be established that the purpose of the conduct was to eliminate a competitor14. In these cases a key issue was whether the dominant undertakings were covering their costs, but evidence on the undertakings’ intentions was also relevant. Both issues are considered below.

Costs In the normal course of business, selling at below average variable costs is unlikely to be rational and could be taken as conclusive proof of predation. An undertaking failing to cover its variable costs (or pricing below its average variable costs) is, on average, making losses on each unit of output it supplies. The undertaking could increase its profitability by reducing its output, increasing its price, or ceasing supply altogether. The competition authority should consider any evidence that the undertaking’s behaviour was objectively justified. For example, a policy of loss leading might be objectively justified and would not therefore normally be predatory.

Where prices are above average variable costs but below average total costs a competition authority may consider other evidence on costs. For example it might consider whether the undertaking is covering its long-run avoidable costs, which are costs which could be avoided if the undertaking were to cease the activity in question (the activity being the part of the business accused of predating). They include both fixed costs and variable costs, but do not include sunk costs, although sunk costs 14 Case C62/86 AKZO Chemie BV v. Commission[1993] 5 CMLR 215, and Tetra Pak II[1997] 4 CMLR 662



may be included in avoidable costs if they are incurred as part of the alleged predatory strategy, since the undertaking could then have avoided them by not incurring them.

Prices below average avoidable costs might be evidence of predation (although not as strong as where price is below average variable costs).

Intentions Evidence on the intentions of the undertaking may be relevant. The fact that undertakings set prices below average variable costs has been considered evidence of an intent to remove competitors. In addition to the evidence on costs explained above, the following areas of evidence on the undertakings’ intentions may be relevant:

- whether there is evidence of incremental losses – predation is strategic behaviour where an undertaking accepts short run losses in order to eliminate a competitor so as to charge higher prices in the future. The alleged predatory strategy should therefore lead to incremental losses for the undertaking in the short run; - the assessment of whether an action has resulted in higher or lower profits can be very complicated. Where the action is a straightforward price cut the best comparison is between the undertaking’s profits before and after the price cut. Where the price cut occurs at the same time as a new entrant enters the market, however, the incumbent undertaking’s profitability prior to the price cut is less useful, as its profitability would have been reduced by the new entrant in any case; - in some cases the behaviour of the undertaking will indicate whether there is intent to predate against a rival. The actions of an undertaking which targeted its price cuts against a new entrant, while maintaining its prices elsewhere, would be consistent with predation.. Other evidence might include the timing of the action, whether the action follows a pattern of aggressive pricing or is a one-off, whether the undertaking engages in dirty tricks, or any other relevant evidence; - documentary evidence – in some instances documentary evidence may determine whether an undertaking intended to predate. Feasibility of recouping losses Predation involves undertakings incurring short run losses so that they can increase profits in the long run. Predation is an abuse only if it is practised by a dominant undertaking, possessing a substantial level of market power which allows it to act independently of competitors and customers.

Vertical restraints Vertical restraints are arrangements between suppliers and purchasers which restrict the commercial freedom of one or more party. They differ from horizontal agreements because they are agreements between undertakings at different stages in the economic process. We are talking here of agreements between a manufacturer and a retailer, but the same principles apply to agreements between any two parties operating at different stages in the supply chain. The same principles apply in the supply of services or property rights.



Vertical restraints can produce anti-competitive effects but they may also produce benefits which can outweigh any anti-competitive effects they produce. Any assessment of the effects of a vertical restraint needs to take account of both its potential anti-competitive effects and of any countervailing benefits.. The majority of vertical agreements do not raise competition concerns, however, but vertical restraints involving dominant undertakings may still be prohibited.

A vertical restraint imposed by a dominant undertaking may be an abuse is the following circumstances.

There is a wide range of restrictions that may constitute vertical restraints and which potentially reduce competition; the following non-exhaustive list covers the main types:

- resale price maintenance (RPM) – where the manufacturer specifies the resale price of the product. Commonly the manufacturer will specify only a minimum or a maximum price; - selective distribution – where a manufacturer supplies only a limited number of retailers who are restricted in their ability to re-sell products. They may, for example, have to meet certain standards of service; - exclusive distribution – a particular form of selective distribution where the manufacturer supplies only one retailer in a particular territory. Alternatively, the manufacturer might allow only one retailer to supply a particular class of customer, such as wholesale or retail customers; - exclusive purchasing or dealing – where the retailer agrees to purchase, or ‘deal’ in, goods from only one manufacturer; - tie-in sales and bundling – where the manufacturer makes the purchase of one product (the tying product) conditional on the purchase of a second (tied) product. A set of tied products is sometimes called a bundle; - full-line forcing – an extreme form of tie-in sale where the retailer must stock the full range of the manufacturer’s product range. This may be an absolute requirement, or the manufacturer may charge higher prices if only part of the range is stocked; - quantity forcing – where the retailer is required to purchase a minimum quantity of a certain product; - ‘fidelity’ discounts – where the retailer receives discounts based on the proportion of its sales which come from the manufacturer; and - non-linear pricing: – where, for example, the retailer must pay a franchise fee in addition to the price of each unit sold, or the manufacturer may be required to pay the retailer a ‘slotting’ fee in order to get its products stocked. These arrangements are common business practices and will be an abuse only if they lead to a reduction in competition.

The key issues in establishing whether vertical restraints infringe competition prohibitions will be the extent to which the restraint forecloses a market, raises rivals’ costs or dampens competition between existing competitors.

Refusal to supply customers Refusal to supply an existing customer by a dominant undertaking can be an abuse if no objective justification for the behaviour can be provided. Obvious justifications for a refusal to supply might be that the customer had poor creditworthiness, or that supplies were cut for a temporary period due to capacity constraints. Refusal to supply might also be used to impose a vertical restraint: a



manufacturer imposing a selective distribution system is, by definition, refusing to supply outlets outside the system, in which case the principles explained above would apply. In other cases, refusal to supply may be used to exclude certain competitors, particularly in upstream or down-stream markets.

In some limited circumstances the refusal to supply a new customer might be an abuse, for example, the refusal to license copyright. In general, refusal to license an intellectual property right is not an abuse.

Two tests may be applied: whether an undertaking is dominant, and whether it is abusing that dominant position. It is not necessary to show that the abuse was committed in the market which the undertaking dominates.

APPENDIX III:

COMPLIANCE OF SECURITIES INDUSTRY OPERATION IN GEORGIA WITH INTERNATIONAL NORMS


By Tengiz Akhobadze, Commissioner, National Securities Commission of Georgia I. CONDITIONS OF SECURITIES INDUSTRY IN GEORGIA In Georgia securities legislation (the Law of Georgia on Securities Market created with the support ofthe USAID, and regulations/normative acts) is oriented to the experience of leading world countries. According to assessments produced by different experts, it is one of the most perfect legislations not only among the CIS countries but in the entire Post-Soviet area. Moreover, securities market infrastructure institutes were properly created and continue operation.

These institutes are: JSC Georgian Stock Exchange (hereinafter Stock Exchange), a member of Federation of Eurasian Stock Exchanges; Georgian Securities Central Depositary Ltd. (hereinafter Depositary); 35 brokerage companies, member-owners of the Stock Exchange and members of the Depositary; eight securities registrars – legal persons out of which seven are located in Tbilisi and one in Batumi. As of December 31, 2000, 125 physical persons had a brokerage license.

Independent agency – National Securities Commission of Georgia (hereinafter NSCG) was created in 1999 in compliance with Georgian legislation to regulate the stock market.

During 2002, 1,343 transactions outstanding were made at the Stock Exchange involving 11,418,196 shares, the total volume of trade equalled GEL 8,401,206. Since the beginning of trade (March 23, 2000) there have been 3,945 transactions recorded at the Stock Exchange involving 27,645,241 securities.,. The total value of transactions equalled GEL 27,840,762.78.

By the end of 2002, the capitalization of the market amounted to GEL 218 million that is 2.99 per cent of Gross Domestic Products (GDP) (it is ≥ 4 per cent according to the European Union data), while the total volume of trade amounted to 0.115 per cent of the total GDP. (it is ≥1,5 per cent according to the European Union data). II. COMPLIANCE OF SECURITIES LEGISLATION AND CURRENT SECURITIES ACTIVITIES WITH INTERNATIONAL NORMS In highly developed countries, historic stages of securities industry development and achievement of the twentieth century allowed individual and institutional experts to elaborate theoretical, legal and practical provisions based on their analysis and generalization of the world civilization achievements in this regard. These provisions have become the model orientation to international norms on the brink of the 21st century. In 1998, the International Organization of Securities Commissions (IOSCO) designed 30 principles based on the experience of two centuries of securities industry operation and seven decades of regulation.



• In 1998-99 Organization of Economic Cooperation and Development (OECD) designed 48 principles unified in five groups of corporate governance based on implementation of corporate law norms and best practice of corporate governance;

• Over the past three decades, for the purpose of achieving legislative harmonization and

compliance among the European Union member countries, European Union Directives are under constant elaboration and perfection, which include all kinds of financial services (banking, insurance, investment) aimed at rational and harmonic development;

• In 1989, 30 representatives of 8 highly developed counties - authorized financiers –

prepared the G30 report that contains 9 recommendations for complete (safe, secure and efficient clearance and settlement) transactions of securities. The new edition of that version was accepted at the Zurich Meeting, in 1995;

• In order to provide the maximum transparency and disclosure of information regarding an

issuer, to reach the high level of their audited Financial Statement, the International Accounting Standards (IAS) and International Auditing Principles (IAP) are prepared and they are under constant perfection. The IASC and IOSCO are co-ordinatng the establishment of steps of agreed graphics. On USA markets, the financial statements of resident issuers are prepared and audited in compliance with the requirements of Generally Accepted Accounting Principles and Generally Accepted Auditing Standards. The SEC strictly requires from issuers to be fully in compliance and to explain the reasons of being in non-compliance with the norms of GAAP and GAAS. For the year 2007, on the basis of proper agreement, the harmonization of IAS and GAAP is planned.

We have to completely learn, analyze and generalize the reasons of world acquirement and corporate collapses, afterwards it should be used for establishing the safe, secure and effective stock market and its regulation systems. This process has already begun and some steps are passed.

In order to form stock market in Georgia, for its normal functioning, rational development, compliance with developed stock markets of the world and afterwards for integration and complete involvement in global markets, the process of being in compliance with the best practices of market infrastructure institutions and harmonization of international norms with Georgian Legislation on Securities Market has started.

Mainly, the activity is realized in five directions and provides:

1. Being in compliance with the regulation principles of IOSCO: In the scope of FSAP, the joint mission of the World Bank and International Monetary Fund has evaluated the situation of being in compliance with IOSCO’s regulation principles.. The NSCG has maintained preliminary research on the questionnaire and then they worked with the mission representatives. The result is the following: among 30 principles – 7 are in compliance (23 per cent), 18 – are partly in compliance (60 per cent), 1 – practically is not in compliance (3 per cent), 4 – are in non-compliance (14 per cent). The NSCG has addressed the IOSCO regarding the membership. The General Secretary Office of IOSCO in Madrid sent the membership procedures and description of terms. In addition to yearly membership payment and other formalities, it requires the organization to recognize the regulations and resolutions adopted by IOSCO and its committees. Preparation work is under elaboration.



The regulatory system of securities industry of each country is the post of the national market. So, in all countries of great importance there are both the establishment of real regulatory principles, effective methods and the perfection forms of regulation institutional organisation. The NSCG has business relations with analogous bodies of foreign countries: USA (SEC), the Great Britain (FSA), Germany (BAWE), Greece (CMC), Turkey (CMB), Italy (CONSOB), France (COB), Bulgaria (BNSC), Ukraine (Securities and Stock Market State Commission), Russia (Securities Market Federal Commission), Kyrgyzstan (Securities Market State Commission under the Government of Kyrgyz Republic), Kazakhstan (Financial Controlling Department), Azerbaijan (Securities State Committee under the President). Usually, for the time being the stock market regulatory bodies make agreements on co-operation and information sharing through mutual or sometimes many-sided MOUs (Memorandum of Understanding). On the basis of introduction and discussion of mutual or many-sided MOUs made by the Commissions of USA, Russia, Germany, Ukraine, China and Moldova, the NSCG took into consideration existing practice and started preparing works on co-operation or mutual and possible many-sided agreements. 2. Compliance with the OECD Corporate Governance Principles Preliminary study was done by the WB and IMF united mission and it estimated observance with OECD corporation governance principles within the FSAP program. Results of observance with the 13 enlarged principles are following: 1- Observed (8 per cent), 3 – largely observed (23 per cent), 9 – materially non observed (69 per cent). WB observed compliance with the Separate Full Principles List. Result, among 48 principles: 12 – are largely observed (25 per cent), 29 – materially non-observed (60 per cent), 7 – non-observed (15 per cent). In order to improve corporate governance, the Parliament adopted (June 26, 1998 and June 9, 1999) changes and amendments to the Law “On Entrepreneurs”. For the same reason the NSCG prepared and the President submitted to the Parliament changes and amendments to the Laws “On Securities Market” and “On Entrepreneurs”. World Bank and International Financial Corporation started the project financed by Canadian International Development Agency (CIDA) and one important component of it will be corporate governance. It is planned to realize the effective and important activities in its scope. 3. Compliance with European Union Directives The harmonization strategy of Georgian legislation with the European Union Legislation was prepared and approved on the basis of agreement on co-operation and partnership between Georgia and European Union. In accordance with this the Georgian Legislation on Securities Market is mainly in compliance with the European Union Directives. According to the “strategy”, a national harmonization programme is being prepared. The Commission collaborates closely with the Ministry of Foreign Affairs of Georgia, and GEPLAC has considered Georgian Legislation compliance with investment business directives that were accepted by the European Union. Final assessemnt is done by combined co-operation. 13 sub-groups, co-ordinated by GEPLAC expert each, among which the NSCG actively and intensively co-operates in two groups, are working on the National Programme of Harmonization of Georgian Legislation to that of the EU: “Corporate” sub-group and “Financial Service” sub-group (securities section). 4. Compliance with G30 recommendations

No special study was done. According to different experts’ estimation compliance with G30 recommendations varies between 45-65 per cent.



5. Compliance with IAS and IAP The most important part of an annual report of a public company (reporting company – term of the Law) is an audited financial statement that should be prepared by IAS in accordance with the Law of Georgia “On Bookkeeping and Accounting Regulation” and the rules of the NSCG. In the year 2002, 294 companies submitted annual reports to the NSCG. Among them the financial statements of 166 companies are prepared formally in accordance with IAS and all the others – by traditional, old balance form. The analysis shows, that 24 per cent of submitted reports do not have an audit conclusion, 15.8 per cent of submitted audit conclusions are not in compliance with IAP and 11.5 per cent of audit conclusions are not in compliance with the financial statement. III. NECESSARY TERMS AND RECOMMENDATIONS FOR ESTABLISHING MAIN DIRECTION OF STOCK DEVELOPMENT 1. Winning of confidence and faith of the population suffered from the so-called trust unfair subject and unredeemed government bonds by the real affairs from the side of public and private corporate issues bodies. 2. Bringing the concept of investment, based on the general and fair principles to the broad masses. Introduction of the institution of consulting or investment on the ground of analysis of experts and with respect to the whole range of risk factors. 3. Availability of real investment possibilities, interest and will of individual (of broad masses) and institutional investors, investors’ responsibility to themselves for their own decisions. 4. Sufficiency of financial means of financial and investment institutions and professional skill of their experts as well as professional and financial responsibility before their customers. 5. The representatives of securities market participant institutions and the specialists of its regulations should raise qualifications and the public should have a general awareness (among them schools and institutions should establish proper disciplines, also specialized information should be published by mass-media). 6. Perfection of legal base of market regulation: • To harmonize the legislation on capital markets, privatisation and corporate law; • To create the legislation on investment funds (companies); • To create/complete the legislation on private pension system; • To prepare the package of necessary legislative amendments on issuance and circulation of Municipal Debt Obligations. 7. Maximal compliance of corporate governance norms of the country with OECD corporate governance principles and the best practice; 8. Creation of the Corporate Behaviour Code and its recognition and acceptance on State level. 9. Provision of maximal compliance of legislation and acting practice with the above-mentioned (chapter II) international norms in order to be completely integrated in the system of global market. Preparation of the plan and action programme in order to provide the required compliance.



10. Answering the question – securities market in Georgia – chaos or order? There is only order and nothing but order on the basis of liquidity, transparency, disclosure, competition, non-admittance of manipulation and endangering transactions. Hence, we are looking forward to that day when between New York and Tokyo and side by side to London and Frankfurt on the world stock map the Georgian national stock market will find its place as well. During working on the future thesis, on the basis of given focus, the detailed analysis of existed compliance is supposed. As for the incompliance position, it is planned to prepare definite suggestions and recommendations.

STATISTICAL APPENDIX


CONTENTS *

Table A3.1: Consolidated Revenues, 2003 Table A3.2: State Budget Expenditures by Economic and Functional Breakdown, 2003 Table A4.1: Accounts of the National Bank of Georgia Table A4.2: Summary Accounts of Commercial Banks Table A4.3: Monetary Survey Table A4.4: Urban Consumer Price Index and Inflation Table A5.1.1: Registered Foreign Trade Balance, 2003 Table A5.1.2: Registered Foreign Trade Balance, 2003 Table A5.2.1: Georgia’s Registered Exports and Imports by

Harmonized Tariff Schedule (HTS) Chapters, 2003

Table A5.2.2: Georgia’s Registered Exports and Imports by Harmonized Tariff Schedule (HTS) Chapters, 2003

Table A6.1: Small Privatisation by Region, as of 1st January, 2004 Table A7.1: Economic Status, Q1 1998 – Q3 2003

* Note: First digit in the number of an appendix table indicates the number of the chapter to which it belongs.

Table A3.1: Consolidated Revenues, 2003(GEL million)

Year target

Actual revenues

The difference


Actual compared

to previous year

Actual compared to

GDP

Total ravenues and grants 1482.1762 1320.251 -161.9252 89 114.0 15.6Tax revenues 1284.2559 1186.336 -97.9199 92 113.0 14.0Central budget tax revenues 1055.0 959.5 -95.4968 90.9 11.3

income tax 163.654 152.954 -10.7 93 107.0 1.8Profit tax 96.554 101.109 4.555 105 123.0 1.2VAT 471.608 406.896 -64.712 86 101.0 4.8

On domestic products 241.454 221.572 -19.882 92 108.0 2.6On imports 230.154 185.325 -44.829 81 93.0 2.2

Excise duty 115.2998 100.14 -15.1598 87 115.0 1.2On domestic products 30.0999 21.9 -8.1659 73 102.0 0.3On imports 85.1999 78.206 -6.9939 92 120.0 0.9

Customs duty 70.4 70.3 -0.094 100 119.0 0.8Other taxes 137.44 128.054 -9.386 93 112.0 1.5

Non-tax revenues 102.52 86.16 -16.36 84 107.0 1.0

Revenues of Special State Funds 239.5 227.61 -11.89 95 138.0 2.7Social security Fund 190 180.4 -9.61 95 141.0 2.1Roads Fund 49.5 47.22 -2.28 95 128.0 0.6Grants 95.4003 47.755 -47.6453 50 219.0 0.6

Source: Ministry of Finance

Table A 3.2: State Budget Expenditures by Ecomomic and Functional Breakdown, 2003(GEL million)

Total Salaries Business trips

Social Contributions

Other goods

and services

Interest payments

Subsidies and current

transfers

Capital expenditures

Target programs

Net lending

General Government 221.230 18.8 2.9 7.6 28.2 2.1 0.1 161.6Defence 55.428 29.0 1.0 0.3 16.0 9.1 0.1Law and Order 81.976 32.4 0.5 3.6 23.4 21.7 0.4Education 37.815 19.8 0.1 7.9 7.3 2.7 0.1Health care 7.086 1.1 0.0 0.3 3.9 1.8 0.0Social Security 288.360 0.1 0.0 200.3 87.9Housing 3.110 0.0 0.0 0.0 1.7 1.4Culture sports and religion 23.555 1.2 0.1 0.6 3.5 18.0 0.2Energy 36.564 0.1 0.1 0.0 36.3Agriculture 10.990 4.4 0.1 1.3 4.7 0.4Construction and mining 0.447 0.3 0.1 0.0Transport and communications 53.769 0.1 0.0 0.2 53.4Other economic activities 2.136 1.1 0.0 0.5 0.2 0.2 0.0Other expenses 296.067 0.2 0.0 0.1 3.3 168.5 71.5 52.5Total 1118.5330 108.6630 4.8 22.387 292.755 168.501 252.640 54.690 214.115Source: Ministry of Finance

Table A4.1: Accounts of the National Bank of Georgia(GEL thousand)

2002ANNUAL Jan-03 Feb-03 Mar-03 Apr-03 May-03 Jun-03 Jul-03 Aug-03 Sep-03 Oct-03 Nov-03 Dec-03

NET INTERNATIONAL RESERVES -323,717 -356,971 -357,451 -341,529 -346,632 -362,180 -335,189 -328,521 -294,043 -308,520 -308,211 -326,339 -311,009Gold 1,330 1,330 1,330 1,323 1,323 1,323 1,294 1,294 1,294 1,509 1,509 1,509 1,604Foreign Exchange 413,243 419,258 415,506 400,843 386,593 400,730 395,411 397,999 414,876 412,597 398,736 415,618 396,032Use of IMF Resourses -641,328 -672,497 -669,841 -642,229 -629,759 -650,787 -624,414 -619,727 -607,482 -615,239 -598,899 -627,248 -593,162Other Foreign Liabilities -96,962 -105,062 -104,447 -101,466 -104,790 -113,446 -107,481 -108,087 -102,731 -107,387 -109,557 -116,218 -115,483

NET DOMESTIC ASSETS 832,686 849,512 843,908 832,088 858,748 872,367 840,372 862,603 855,450 858,801 878,477 891,545 890,921 Net Claims on General Government 753,319 757,835 754,974 743,489 757,811 761,315 756,900 769,627 775,645 769,795 777,869 779,628 782,605 Net Claims on Republican Government 766,681 769,355 768,469 758,876 769,784 772,080 769,985 786,516 788,508 786,886 794,761 792,353 795,572 Loans to Republican Government 777,149 791,663 793,663 791,663 789,663 790,663 790,663 807,463 804,049 805,449 808,836 809,651 817,149 Net Claims on Unified Social Security Fund -133 -347 -214 -313 -1 -588 -110 -248 -635 -68 -370 -170 -90 Other Extrabudgetary Funds (net) -13,228 -11,173 -13,282 -15,074 -11,972 -10,178 -12,975 -16,640 -12,229 -17,022 -16,522 -12,555 -12,877 Claims on the Rest of Economy 93,943 101,720 101,111 98,337 101,535 109,731 104,232 104,806 99,735 104,247 106,301 112,670 112,005 Net Claims on Banks 14 -6,990 -5,090 -4,770 -490 2,011 11 1,501 987 1,500 5,500 2,400 6,320 Other Assets (net) -14,589 -3,054 -7,087 -4,967 -109 -688 -20,771 -13,330 -20,916 -16,742 -11,194 -3,153 -10,009

RESERVE MONEY (M1) 508,931 492,542 486,457 490,559 512,116 510,188 505,182 534,082 561,406 550,281 570,266 565,206 579,912 Currency in Circulation 417,178 394,827 400,296 398,630 421,089 408,194 407,709 426,916 450,956 445,283 470,206 459,656 473,242 Banks' Deposit 91,753 97,714 86,161 91,930 91,027 101,993 97,473 107,167 110,450 104,998 100,060 105,549 106,669 Required Reserves 72,228 78,156 79,125 74,104 79,891 81,536 84,646 79,937 84,153 83,477 85,074 86,516 81,405 Balances on the Correspondent Account 19,525 19,559 7,036 17,826 11,137 20,457 12,827 27,230 26,298 21,521 14,986 19,034 25,264Source: the National Bank of Georgia(1) Annualised by the NBG since 1998

Table A4.2: Summary Accounts of Commercial Banks(GEL thousand)


NET FOREIGN ASSETS 25,040 46,898 33,352 16,080 14,315 619 11,889 44,186 72,926 79,285 52,200 31,553 42,456 Gold 3 3 3 3 3 3 3 3 3 3 3 3 3 Foreign Exchange 207,049 235,051 225,610 204,986 200,868 193,898 200,831 228,996 263,516 273,670 248,717 239,309 242,456 Foreign Liabilities -182,012 -188,156 -192,260 -188,909 -186,555 -193,282 -188,944 -184,812 -190,592 -194,388 -196,519 -207,758 -200,002

NET DOMESTIC ASSETS 447,739 466,082 484,084 497,199 508,031 545,113 539,322 537,537 540,197 563,214 581,212 585,921 576,396 Domestic Credit 577,657 588,321 628,759 635,532 650,345 682,738 676,673 681,861 673,246 707,529 739,277 763,691 747,413 Net Claims on General Government -42,191 -33,884 -25,821 -33,668 -38,652 -32,063 -34,072 -42,952 -61,222 -40,605 -45,274 -43,417 -16,527 Net Claims on Republican Government 21,698 30,118 37,490 37,222 39,888 40,465 37,722 30,466 21,846 27,090 17,262 20,133 31,675 Claims on the Rest of Economy 619,848 622,205 654,580 669,200 688,997 714,802 710,745 724,813 734,468 748,135 784,551 807,108 763,940 Other Assets (net) -129,919 -122,239 -144,675 -138,333 -142,315 -137,625 -137,351 -144,324 -133,049 -144,316 -158,065 -177,770 -171,017

DEPOSIT LIABILITIES 472,779 512,980 517,436 513,278 522,346 545,732 551,210 581,724 613,123 642,499 633,412 617,474 618,852 Domestic Currency Deposits 71,478 84,369 80,708 75,264 73,507 78,121 75,515 84,439 87,488 93,001 90,710 83,171 85,863 Foreign Currency Deposits 401,301 428,610 436,729 438,014 448,839 467,612 475,695 497,285 525,635 549,498 542,702 534,303 532,989Source:National Bank of Georgia

(1) Annualised by the NBG since 1998

Table A4.3: Monetary Survey(GEL thousand)


NET FOREIGN ASSETS -298,677 -310,073 -324,099 -325,449 -332,317 -361,561 -323,301 -284,335 -221,117 -229,235 -256,011 -294,786 -268,553 Gold 1,333 1,333 1,333 1,326 1,326 1,326 1,297 1,297 1,297 1,511 1,511 1,511 1,606 Foreign Exchange 620,292 654,310 641,115 605,829 587,461 594,629 596,242 626,995 678,391 686,267 647,453 654,927 638,488 Foreign Liabilities -920,301 -965,715 -966,547 -932,604 -921,103 -957,515 -920,839 -912,626 -900,805 -917,014 -904,975 -951,224 -908,647

NET DOMESTIC ASSETS 1,162,281 1,188,109 1,217,932 1,211,562 1,244,926 1,289,585 1,249,396 1,264,143 1,250,689 1,283,469 1,324,046 1,342,795 1,328,941 Domestic Credit 1,424,920 1,447,877 1,484,844 1,477,357 1,509,692 1,553,784 1,537,805 1,556,294 1,548,625 1,581,572 1,623,447 1,655,989 1,642,023 Net Claims on General Government 711,129 723,952 729,153 709,820 719,160 729,251 722,828 726,676 714,422 729,190 732,595 736,211 766,078 Net Claims on Republican Government 788,378 799,473 805,959 796,098 809,671 812,545 807,707 816,982 810,354 813,976 812,023 812,486 827,247 Treasury Obligations 32,271 43,979 51,626 51,009 53,337 53,200 49,851 44,301 38,019 40,812 33,893 39,396 44,750 Net Claims on Local Government -56,630 -56,816 -58,342 -60,704 -71,122 -63,577 -64,432 -64,745 -67,356 -58,684 -53,357 -56,848 -43,918 Net Claims on Pension Fund -133 -347 -214 -313 -1 -588 -110 -248 -635 -68 -370 -170 -90 Other Extrabudgetary Funds -20,487 -18,358 -18,251 -25,260 -19,389 -19,129 -20,336 -25,313 -27,941 -26,033 -25,701 -19,257 -17,161 Claims on the Rest of Economy 713,791 723,925 755,691 767,537 790,532 824,532 814,977 829,619 834,203 852,382 890,851 919,778 875,944 Other Items (net) -262,639 -259,768 -266,912 -265,795 -264,766 -264,199 -288,409 -292,152 -297,936 -298,103 -299,401 -313,195 -313,082

BROAD MONEY (M3) 863,566 878,036 893,833 886,113 912,609 928,025 926,095 979,808 1,029,572 1,054,234 1,068,035 1,048,008 1,060,388 Broad Money, excluding foreign currency deposits (M2) 462,265 449,426 457,104 448,098 463,770 460,413 450,400 482,523 503,936 504,736 525,333 513,705 527,398 Currency Outside Banks (M0) 390,787 365,057 376,396 372,834 390,263 382,292 374,885 398,085 416,449 411,735 434,622 430,534 441,536 Currency in Circulation 417,178 394,827 400,296 398,630 421,089 408,194 407,709 426,916 450,956 445,283 470,206 459,656 473,242 Currency in Commercial Banks -26,391 -29,771 -23,899 -25,795 -30,826 -25,902 -32,825 -28,831 -34,507 -33,548 -35,584 -29,122 -31,707 Deposit Liabilities (GEL) 71,478 84,369 80,708 75,264 73,507 78,121 75,515 84,439 87,488 93,001 90,710 83,171 85,863 Foreign Currency Deposits 401,301 428,610 436,729 438,014 448,839 467,612 475,695 497,285 525,635 549,498 542,702 534,303 532,989Source:National Bank of Georgia

(1) Annualised by the NBG since 1998

Table A4.4: Urban Consumer Price Index and Inflation

PeriodPrice index

Inflation Rate (per cent)

(i)from

previousperiod

Monthly2000 Dec 100.00

2001 Jan 100.70 0.7Feb 101.30 0.6Mar 101.30 0.0Apr 102.32 1.0May 101.29 -1.0June 100.89 -0.4Jul 100.18 -0.7Aug 100.48 0.3Sep 99.88 -0.6Oct 100.58 0.7Nov 101.99 1.4Dec 100.00 103.42 1.4

2002 Jan 102.00 105.48 2.0Feb 103.22 106.75 1.2Mar 103.64 107.18 0.4Apr 105.50 109.11 1.8May 105.50 109.11 0.0June 103.08 106.60 -2.3Jul 101.94 105.42 -1.1Aug 101.84 105.32 -0.1Sep 102.25 105.74 0.4Oct 102.66 106.16 0.4Nov 103.79 107.33 1.1Dec 105.55 109.15 1.7

2003 Jan 107.77 111.45 2.1Feb 107.23 110.89 -0.5Mar 107.23 110.89 0.0Apr 107.76 111.44 0.5May 107.98 111.67 0.2June 108.09 111.78 0.1Jul 107.11 110.77 -0.9Aug 107.01 110.66 -0.1Sep 107.54 111.22 0.5Oct 107.54 111.22 0.0Nov 112.70 116.55 4.8Dec 112.93 116.79 0.2

Source: GET calculations based on data provided by State Department for Statistics

Table A5.1.1: Registered Foreign Trade Balance, 2003(USD thousands)

CountriesImport Export

Total foreign trade 1,057,790.8 444,087 CIS 358,417.9 214,990 Armenia 11,985.0 31,250.0 Azerbaijan 92,802.8 15,995.9 Belarus 1,941.0 1,833.6 Kazakhstan 9,564.4 4,168.9 Kyrgizstan 291.0 521.6 Moldova 957.1 153.1 Russia 149,848.0 75,579 Tajikistan 20.4 559.8 Turkmenistan 8,472.3 56,644.2 Ukraine 80,689.9 27,161.0 Uzbekistan 845.5 1,122.9

EU 380,358.0 76,040.3 Austria 10,672.3 471.4 Belgium 9,464.4 3,033.7 Denmark 8,431.1 465.4 Finland 2,621.6 1.5 France 51,368.0 4,942.7 Germany 80,472.4 10,340.8 Greece 8,418.6 5,151.4 Ireland 1,302.1 56.2 Italy 32,908.2 9,292.6 Luxembourg 367.7 - Netherlands 22,627.4 9,428.3 Portugal 1,121.5 248.6 Spain 3,419.2 6,883.6 Sweden 6,357.6 46.4 UK 140,805.9 25,677.7 Source: State Department for Statistics

2003

Table A5.1.2: Registred Foreign Trade Balance, 2003(USD thousands)

CountriesImport Export

Other countries 319,421 153,650Afganistan - 27

Albania - 9

Andora 132 -

Argentina 16 -

Australia 407 25

Bahama Islands - 8

Bangladesh 15 199

Barbados 6 -

Belize 28 550

Bosnia and Hercegovina 91 -

Brazil 10,630 -

Bulgaria 28 550

Butane - 93

Cameroon 17,958 219

Canada 1,375 205

China 22,731 1,110

Columbia 41 5

Congo - 3

Corea PDR 54 35

Corea Rep. 795 340

Croatia 690 -

Cuba 58 -

Cyprus 1,478 533

Czech Rep. 4,843 819

Dominica 28 -

Dominican Rep. 477 -

Ecuador 1,516 4

Egypt 85 55

Estonia 3 45

Folkland Islands 4 -

Gambia 2 -

Gaza Sector 453 1,752

Ghana - 64

Hong-Kong (China) 247 612

Hungary 7,315 537

Honduras 20 -

India 5,468 5,929

Indonesia 431 3

Iran 6,714 3,359

Iraq 110 263

Island 1,515 -

Israel 1,662 873

Japan 2,459 192

Jordan 8 4

Latvia 4,480 656

Lebanon 262 1

Liechtenstein 141 -

Lithuania 1,779 570

Macedonia 52 5

Malaysia 98 1

Malta 2 -

Mauricia 1 -

Mexico 132 -

Monaco 40 -

Mongolia - 501

Namibia 14 -

New Zealand 420 1

Newer 2,526 -

Normand islands 420 1

Norway 575 17

Oman 367 -

Pakistan - 42

Panama 186 1,064

Peru 27 38

Philippines 29 -

Poland 3,539 214

Romania 10,220 972

Qatar - 2

Salvador 89 -

San-Marino 10 -

Saudi Arabia 175 5

Seishel's islands 39 -

Serbia and Montenegro 843 449

Singapore 1,036 1,074

Slovakia 910 106

Slovenia 2,861 18

South Africa 327 -

Sri-lanka 73 -

Switzerland 12,637 32,607

Syria 419 3

Taiwan (China) 430 5

Trinidad and Tobago - 1,976

Thailand 889 83

Turkey 107,529 78,851

Uganda - 22

United Arab Emirates 19,585 1,021

Uruguay 54 1

USA 52,951 14,646

Venesuella - 3

Vietnam 177 250

Virgin Islands (GB) 3,187 25

Zimbabwe - 2

Source: State Department for Statistics

2003

Table A5.2.1: Georgia's Registred Exports and Imports by Harmonized Tariff Schedule (HTS) Chapters, 2003(USD thousands)

HTS Category Import Export01 - Live Animals 951 4502 - Meat and edible meat offal 13,319 41203 - Fish and crustaceans, molluscs and other aquatic invertebrates 1,812 31704 - Dairy produce; birds eggs; natural honey; edible products of animal origin, not elsewhere specified or included 6,235 158

05 -Products of animal origin, not elsewhere specified or included 50 006 -Live trees and other plants; bulbs, roots and the like; cut flowers and ornamental foliage 174 21507 -Edible vegetables and certain roots and tubers 2,521 30008 -Edible fruit and nuts; peel of citrus fruit or melons 2,768 13,77109 -Coffee, tea, maté and spices 2,165 4,52710 -Cereals 16,857 10,671

11 -Products of the milling industry; malt; starches; inulin; wheat gluten 13,448 7812 -Oil seeds and oleaginous fruits; miscellaneous grains, seeds and fruits; industrial or medicinal plants; straw and fodder 335 71413 -Lac; gums, resins and other vegetable saps and extracts 349 108

14 -Vegetable plaiting materials; vegetable products not elsewhere specified or included 38 12

15 -Animal or vegetable fats and oils and their cleavage products prepared edible fats; animal or vegetable waxes 7,599 150

16 -Preparations of meat, of fish or of crustaceans, molluscs or other aquatic invertebrates 2,873 5417 -Sugars and sugar confectionery 54,635 31,28918 -Cocoa and cocoa preparations 10,121 84519 -Preparations of cereals, flour, starch or milk; bakers' wares 5,208 82420 -Preparations of vegetables, fruit, nuts or other parts of plants 3,303 1,82321 -Miscellaneous edible preparations 4,412 50822 -Beverages, spirits and vinegar 7,434 79,11623 -Residues and waste from the food industries; prepared animal feed 1,945 16324 -Tobacco and manufactured tobacco substitutes 24,520 1,48625 -Salt; sulfur; earths and stone; plastering materials, lime and cement 6,539 99126 -Ores, slag and ash 346 31,02527 -Mineral fuels, mineral oils and products of their distillation; bituminous substances; mineral waxes 198,515 23,17528 -Inorganic chemicals; organic or inorganic compounds of precious metals, of rare earth metals, of radioactive elements or of isotopes 4,049 3,61629 -Organic chemicals 2,830 81730 -Pharmaceutical products 54,950 2,86431 -Fertilizers 166 18,466

32 -Tanning or dyeing extracts; tannins and their derivatives; dyes, pigments and other coloring matter; paints and varnishes; putty and other mastics; inks 3,638 503

33 -Essential oils and resinoids; perfumery, cosmetic or toilet preparations 12,286 1,22534 -Soap, organic surface-active agents, washing preparations, lubricating preparations, artificial waxes, prepared waxes, polishing or scouring preparations, candles and similar articles, modeling pastes, "dental waxes" and dental preparations with a bas 6,956 102

35 -Albuminoidal substances; modified starches; glues; enzymes 760 6

36 -Explosives; pyrotechnic products; matches; pyrophoric alloys; certain combustible preparations 3,054 037 -Photographic or cinematographic goods 441 4738 -Miscellaneous chemical products 8,111 18439 -Plastics and articles thereof 19,196 1,11040 -Rubber and articles thereof 8,256 28641 -Raw hides and skins (other than furskins) and leather 345 1,38242 -Articles of leather; saddlery and harness; travel goods, handbags and similar containers; articles of animal gut (other than silkworm gut) 636 48Source: State Department for Statistics

Table A5.2.2: Georgia's Registred Exports and Imports by Harmonized Tariff Schedule (HTS) Chapters, 2003(USD thousands)

HTS Category Import Export44 -Wood and articles of wood; wood charcoal 4,187 9,94845 -Cork and articles of cork 1,840 2846 -Manufactures of straw, of esparto or of other plaiting materials; basketware and wickerwork 9 047 -Pulp of wood or of other fibrous cellulosic material; waste and scrap of paper or paperboard 60 87

48 -Paper and paperboard; articles of paper pulp, of paper or of paperboard 22,371 45749 -Printed books, newspapers, pictures and other products of the printing industry; manuscripts, typescripts and plans 6,936 672

50 -Silk 16 051 -Wool, fine or coarse animal hair; horsehair yarn and woven fabric 445 1352 -Cotton 268 0

53 -Other vegetable textile fibers; paper yarn and woven fabric of paper yarn 30 054 -Man-made filaments 1,489 3655 -Man-made staple fibers 1,679 60

56 -Wadding, felt and nonwovens; special yarns, twine, cordage, ropes and cables and articles thereof 753 1957 -Carpets and other textile floor coverings 511 158 -Special woven fabrics; tufted textile fabrics; lace, tapestries; trimmings; embroidery 141 11659 -Impregnated, coated, covered or laminated textile fabrics; textile articles of a kind suitable for industrial use 509 1860 -Knitted or crocheted fabrics 422 861 -Articles of apparel and clothing accessories, knitted or crocheted 1,736 2,19862 -Articles of apparel and clothing accessories, not knitted or crocheted 3,967 80463 -Other made up textile articles; sets; worn clothing and worn textile articles; rags 4,189 84064 -Footwear, gaiters and the like; parts of such articles 5,397 8265 -Headgear and parts thereof 111 5566 -Umbrellas, sun umbrellas, walking sticks, seatsticks, whips, riding-crops and parts thereof 71 367 -Prepared feathers and down and articles made of feathers or of down; artificial flowers; articles of human hair 5 068 -Articles of stone, plaster, cement, asbestos, mica or similar materials 3,293 6669 -Ceramic products 6,569 29270 -Glass and glassware 8,830 88071 -Natural or cultured pearls, precious or semi-precious stones,precious metals, metals clad with precious metal and articles thereof; imitation jewelry; coin 1,813 18,67872 -Iron and steel 20,658 83,58773 -Articles of iron or steel 115,828 3,51474 -Copper and articles thereof 1,177 8,05475 -Nickel and articles thereof 8 076 -Aluminum and articles thereof 2,405 13,20078 -Lead and articles thereof 57 15279 -Zinc and articles thereof 32 5980 - Tin and articles thereof 12 081 -Other base metals; cermets; articles thereof 51 4582 -Tools, implements, cutlery, spoons and forks, of base metal; parts thereof of base metal 1,877 42

83 -Miscellaneous articles of base metal 3,507 64

84 -Nuclear reactors, boilers, machinery and mechanical appliances; parts thereof 114,509 8,02485 -Electrical machinery and equipment and parts thereof; sound recorders and reproducers, television image and sound recorders and reproducers, and parts and accessories of such articles 72,495 3,53786 -Railway or tramway locomotives, rolling-stock and parts thereof; railway or tramway track fixtures and fittings and parts thereof; mechanical (including electro-mechanical) traffic signalling equipment 4,647 7,97687 -Vehicles other than railway or tramway rolling stock, and parts and accessories thereof 64,094 6,85388 -Aircraft, spacecraft, and parts thereof 18,640 37,44189 -Ships, boats and floating structures 6,536 99

90 -Optical, photographic, cinematographic, measuring, checking, precision, medical or surgical instruments and apparatus; parts and accessories thereof 14,167 1,699

91 -Clocks and watches and parts thereof 336 2992 -instruments; parts and accessories of such articles 142 693 -Arms and ammunition; parts and accessories thereof 2,006 259stuffed furnishings; lamps and lighting fittings, not elsewhere specified or included; 19,132 354

95 -Toys, games and sports requisites; parts and accessories thereof 1,755 13196 -Miscellaneous manufactured articles 844 15697- Works of art, collectors' pieces and antiques 1,080 13Source: State Department for Statistics

Table A6.1: Small Privatisation by Region, as of 1st January, 2004(Number of enterprises)

Region Approved for privatisation

Total privatised or liquidated

Privatised in 2003

Abkhazia 8 - - Achara 397 171 - Tbilisi 4,689 5,454 170

Guria 321 490 18 Lanchkhuti 64 110 - Ozurgeti 200 279 18 Chokhatauri 57 101 -

Racha-Lechkhumi and lower Svaneti 171 282 3

Ambrolauri 60 98 2 Lentekhi 32 47 - Oni 48 73 - Tsageri 31 64 1

Samegrelo and upper Svaneti 1,122 1,554 9

Abasha 88 98 - Zugdidi 216 288 3 Martvili 55 60 2 Mestia 12 24 - Senaki 250 429 1 Chkhorotsku 39 65 - Tsalenjikha 52 70 2 Khobi 146 141 1 Poti 264 379 - Imereti 2,785 3,416 235 Kutaisi 636 967 137 Tkibuli 224 206 6 Tskaltubo 276 317 13 Chiatura 273 360 10 Bagdati 73 118 5 Vani 68 106 - Zestafoni 425 455 29 Terjola 132 154 - Samtredia 448 474 14 Sachkhere 95 101 14 Kharagauli 71 75 - Khoni 64 83 7 Kakheti 1,106 1,438 103 Akhmeta 179 207 25 Gurjaani 141 176 6 Dedoplistskaro 92 170 38 Telavi 222 286 14 Lagodekhi 74 74 8 Sagarejo 132 130 1 Signagi 140 229 - Kvareli 126 166 11 Mtsketa-Tianeti 327 422 11 Akhalgori 18 19 1 Dusheti 89 140 8 Tianeti 58 69 1 Mtslheta 133 158 - Kazbegi 29 36 1 Samtskhe-Javakheti 613 978 47 Adigeni 82 115 - Aspindza 30 49 - Akhalkalaki 66 113 9 Akhaltsikhe 247 384 15 Borjomi 160 266 16 Ninotsminda 28 51 7 Kvemo Kartli 1,157 1,693 61 Rustavi 358 489 17 Bolnisi 65 159 21 Gardabani 276 292 3 Dmanisi 21 73 - Tetritskaro 115 243 2 Marneuli 287 398 16 Tsalka 35 39 2 Shida Kartli 897 1,089 44 Tskhinvali - 5 - Gori 318 385 9 Kaspi 203 215 12 Kareli 141 188 5 Khashuri 235 296 18 Java - - - MSPM 524 584 60

Total 14,117 17,571 761

Source: Ministry of State Property Management

Note: Number of enterprises actually privatised can exceed those approved for privatisation since some

are split up during corporatisation.

Table A7.1: Economic Status, Q 1 1998 - Q3 2003(Thousand)

Q I Q II Q III Q IV Q I Q II Q III Q IV Q I Q II Q III Q IV Q I Q II Q III Q IV Q I Q II Q III Q IV Q I Q II Q III

Total population over 15 years old 3, 099 3, 136 3, 194 3, 008 3, 032 3, 049 3, 092 3, 018 3, 123 3, 151 3, 133 3, 199 3, 277 3, 269 3, 139 3, 083 3, 016 3, 033 3, 021 2, 971 3, 082 3, 060 3, 132Total economically active population (labour force) (1) 2,332 2,462 2,146 1,990 2, 018 2, 052 2, 058 1, 917 1, 951 2, 102 2, 064 2, 095 2, 066 2, 197 2, 144 2, 048 1, 912 1, 983 2, 003 1, 945 1, 941 2, 037 2, 120Total economically active population (labour force) (2) 2,457 2,555 2,195 2,042 2, 058 2, 093 2, 106 1, 975 2, 087 2, 199 2, 181 2, 215 2, 195 2, 314 2, 246 2, 165 1, 983 2, 036 2, 063 2, 015 2, 025 2, 095 2, 170 Employed 2, 101 2,283 1,887 1,741 1, 725 1, 784 1, 792 1, 633 1, 705 1, 890 1, 890 1, 878 1, 818 1, 944 1, 913 1, 838 1, 659 1, 742 1, 768 1, 713 1, 679 1, 805 1, 897 Hired 714 737 786 741 737 743 741 710 679 695 675 691 681 672 636 630 625 598 597 607 594 604 640 Self-employed 1,387 1,546 1,092 990 973 1, 023 1, 030 905 912 1, 087 1, 095 1, 080 1, 034 1, 189 1, 194 1, 127 1, 028 1, 141 1, 168 1, 102 1, 083 1, 200 1, 255 Unemployed (1) 231 179 260 249 292 268 266 284 246 212 174 217 248 253 231 210 254 241 236 232 262 233 223 Unemployed (2) 356 272 309 301 333 308 314 342 382 309 292 337 377 370 333 327 324 294 296 303 345 290 273Total population outside the labour force (1) 1,162 1,054 975 1,039 1,110 1,078 1,049 1,158 1,172 1,048 1,069 1,104 1,210 1,072 995 1,034 1,103 1,050 1,017 1,026 1,141 1,023 1,002Total population outsde the labour force (2) 1,108 1,019 937 980 1,000 997 962 1,044 1,035 952 952 985 1,082 955 893 918 1,033 997 957 956 1,057 965 952Unemployment rate (per cent) (1) 9.9 7.3 12.1 12.5 14.5 13.0 12.9 14.8 12.6 10.1 8.4 10.4 12.0 11.5 10.8 10.3 13.3 12.1 11.8 11.9 13.5 11.4 10.5Unemployment rate (per cent) (2) 14.5 10.6 14.1 14.7 16.2 14.7 14.9 17.3 18.3 14.0 13.4 15.2 17.2 16.0 14.8 15.1 16.3 14.4 14.3 15.0 17.1 13.9 12.9

Labour force participation rate (1) 75.3 78.5 67.2 66.2 66.6 67.3 66.6 63.5 62.5 66.7 65.9 65.5 63.1 67.2 68.3 66.4 63.4 65.4 66.3 65.5 63.0 66.6 67.7Labour force participation rate (2) 79.3 81.5 68.7 67.9 67.9 68.6 68.1 65.4 66.8 69.8 69.6 69.2 67.0 70.8 71.5 70.2 65.7 67.1 68.3 67.8 65.7 68.5 69.3Self-employment share in total labour force 59.5 62.8 50.9 49.7 48.2 49.8 50.1 47.2 46.7 51.7 53.0 51.6 50.1 54.1 55.7 55.0 53.7 57.5 58.3 56.6 55.8 58.9 59.2Self-employment share in total employment 66.0 67.7 57.9 56.9 56.4 57.3 57.5 55.4 53.5 57.5 57.9 57.5 56.9 61.2 62.4 61.3 62.0 65.5 66.1 64.3 64.5 66.5 66.2Source: The State Department for Statistics, Labour Force Survey, Household SurveyNote: (1) ILO Standard (or “strict” methodology) (2) ILO “Loose” Methodology

200320021998 1999 2000 2001

ABBREVIATIONS


ACDI Agricultural Co-operative Development International BSEC Black Sea Economic Co-operation CAP Common Agricultural Policy CASE Centre for Social and Economic Research CEFTA Central European Free Trade Agreement CHF Swiss Frank CIS Commonwealth of Independent States CPI Consumer Price Index DB Defined Benefit DC Defined Contribution DMB Deposit Money Bank (Commercial Bank) EBRD European Bank for Reconstruction and Development ECB European Central Bank ECCC European Community Custom Code ECU European Currency Unit EFSA European Food Safety Authority EFTA European Free Trade Agreement EGPRP Economic Growth and Poverty Reduction Programme EMI European Monetary Institute EMS European Monetary System EMU Economic and Monetary Union ERM Exchange Rate Mechanism ESAF IMF Enhanced Structural Adjustment Facility EU European Union EUR Euro FAO Food and Agricultural Organisation FDI Foreign Direct Investment FSU Former Soviet Union FTA Free Trade Agreement FXB Foreign Exchange Bureau (x) GATS General Agreement on Trade in Services GATT General Agreement on Tariffs and Trade GCT General Customs Tariff GDP Gross Domestic Product GEL Georgian Lari GEDI Georgian Economic Development Institute GEPA Georgian Export Promotion Agency GEPLAC Georgian-European Policy and Legal Advice Centre GET Georgian Economic Trends GNP Gross National Product GSP Generalised System of Preferences GUUAM Regional organisation founded in 1997 as a political, economic and

strategic alliance (Georgia, Ukraine, Uzbekistan, Azerbaijan and Moldova)

H Half year ha hectares HS Harmonised Commodity Description HTS Harmonised Tariff Schedule ICC International Chamber of Commerce IDP Internally Displaced Person

ABBREVIATIONS


IFAD International Fund for Agricultural Development ILO International Labour Organisation IMF International Monetary Fund INOGATE Interstate Oil and Gas Transport to Europe ISIC International Standard Industrial Classification JPY Japanese Yen JSC Joint Stock Company KWD Kuwait Dinar KWh Kilowatt hour LDC Least Developed Countries LFS Labour Force Survey LIBOR London Inter-bank Offered Rate MFA Multi-fiber Agreement MFN Most Favoured Nations status MoF Ministry of Finance MoHSS Ministry of Healthcare and Social Safety MRAs Mutual Recognition Agreements MSPM Ministry of State Property Management MWh Megawatt hour NBG National Bank of Georgia NDA Net Domestic Assets NDC Notional Defined Contribution NFA Net Foreign Assets NMP Net Material Product NTB Non-tariff Barriers NTR Normal Trade Relations OECD Organisation for Economic Co-operation and Development PAYE Pay-as-you-earn pension system PAYG Pay-as-you-go pension system PCA Partnership and Co-operation Agreement PPI Producer Price Index PREGP Poverty Reduction and Economic Growth Program PRGF Poverty Reduction and Growth Facility (IMF) PSI Pre-shipment inspection Q Quarter year RM Reserve Money RUR Russian Ruble SAC World Bank Structural Adjustment Credit SCD State Customs Department SDR Special Drawing Rights SDS State Department for Statistics SFr Swiss Frank SIS State Institute of Statistics of Turkey STI State Tax Inspectorate TBT Technical Barriers on Trade agreement TEN Trans-European Networks TICEX Tbilisi Interbank Currency Exchange TRACECA Transport Corridor Europe-Caucasus-Asia TRI Trade Restrictiveness Index TRIMs Trade-Related Investment Measures TRIPS Trade-Related Intellectual Property Rights TRL Turkish Lira UNCTAC United Nations Conference on Trade and Development

ABBREVIATIONS


UNCITRAL United Nations Comission on International Trade Law UNDP United Nations Development Program USAID United States Agency for International Development USD United States Dollar USITC United States International Trade Commission USSSF United State Social Safety Fund USTR United States Trade Representative VAT Value Added Tax WP Working Party WTO World Trade Organisation

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