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Azim Sadikov – Resident Representative – IMF Georgia – The American Times
The American Times: How would you describe the IMF’s current strategy in Georgia and with that, do you see the need for a change of strategy based on the new government?
The IMF’s strategy is anchored in assisting Georgia with its efforts to build a globally competitive and dynamic market economy; leading to higher average income and better living standards for all Georgians. Georgia’s key economic challenge is to continue generating sustained broad-based growth that creates jobs and helps reduce poverty. This requires maintaining strong macroeconomic policies, further enhancing business environment, and pursuing structural reforms to improve competitiveness of the Georgian economy.
The IMF typically assists countries in the following ways:
- Financial Assistance
- Advice
- Technical assistance
In reference to the first option above, in April, 2012 the IMF Board approved a 24-month arrangement for Georgia which provides access to around $400 million acting as insurance against downside risks given the challenging external environment. Because Georgia is positioned with a strong balance of payments now, it does not need the money and is treating the arrangement as precautionary.
With respect to the political transition, we have already had talks with the new government. We have worked closely with them and have discussed how the existing arrangement can support their economic and financial policies in 2013 and 2014.Image may be NSFW.
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The American Times: Can you give us a couple of specific milestones that Georgia has achieved with the IMF’s support?
Georgia and the IMF have enjoyed long and fruitful cooperation since Georgia’s independence. To give you few examples: Soon after the August 2008 war, the IMF approved a Stand-By Arrangement that gave Georgia access to about $750 million, catalyzed official support to the country, and provided a strong signal to restore market confidence. Financing under that arrangement was used to cushion the impact of the war and the 2008-09 global financial crises on the economy. A second example is the technical assistance that we have provided Georgia over the years. This assistance has contributed to capacity building in the areas of public financial management, monetary policy, financial sector supervision, regulation and statistics.
The American Times: One interesting thing we’ve noticed from the World Bank, Heritage Foundation and Freedom House is that they’ve all provided impressive indicators of the business friendly environment here in Georgia, some of those indicators ranking Georgia in the Top 10 of best places to conduct business. What sectors do you consider to be key opportunities to invest in here in Georgia?
From the big-picture view of the economy several sectors come to mind. These are tourism, logistics, agriculture, and the energy sector. If I may speak about the tourism sector briefly; Georgia has many natural and historical attractions giving it a potential to become a tourism hub in the region. The sector has already seen strong growth in recent years. For example, this year Georgia experienced a record number of tourists from neighboring countries, including Turkey and Russia. Logistics is another sector that is here to stay and grow thanks to Georgia’s favorable geopolitical position as a key gateway to foreign markets for the countries of the Caucasus and Central Asia. The region has a favorable outlook for the medium-term growth.
The American Times: Out of all the above named promising sectors; which one sector, in your opinion, remains the most un-tapped from an investment perspective?
Probably agriculture and energy. In terms of agriculture, over half of the Georgian population lives in rural areas but contributes to only 8% of GDP. This leaves lots of room for growth, both in production of fresh produce but also development of the processing industry. There is already a sizeable domestic market and scope for substituting expensive imports with domestically produced food products. This is without even mentioning exports opportunities to the regional markets, which will expand if the Georgian government negotiates with Russia to open its market for Georgian goods. To realize its great potential, the sector needs reforms and investment, including irrigation.
With regards to energy, there are vast opportunities in hydro-power thanks to abundant hydro resources. Harnessing that energy can bring excellent long-term returns to investors but also benefits to Georgia and the government has created a favorable environment to facilitate just that. (Editor’s Note: Please see Minister of Energy and Natural Resources interview for more information). Additionally, USAID has funded a very important infrastructure project; the 1-year $17 million ‘Georgia Improved Power Transmission Project’. The high-power voltage transmission line from Georgia to Turkey will connect Georgian electricity producers to the Turkish market. An important development, as the Turkish market is experiencing tremendous economic growth with overall higher electricity prices. The investment opportunities through this are quite obvious. Moreover, since the Turkish grid is connected to broader Europe, by gaining access to the Turkish grid, over time Georgian electricity producers will be able to sell power to European countries.
Also, with the domestic economy growing fast over the last few years, about 7% on average per year, domestic energy consumption has been growing at 8-9% annually. So there is a growing domestic market too.
The American Times: Having said that, do you see the government acting responsibly and efficiently in developing the necessary framework to facilitate that growth?
Absolutely, the policies over the last few years have made Georgia a more business-friendly country. Of course, there is always room for improvement, but the Georgian authorities have been open to listen to businesses and the tax regime is considered favorable.
I have no doubt that the new government will maintain and further enhance this business-friendly environment to attract more FDI. The new government has already expressed its commitment to maintain sound economic policies. This is a prerequisite for private sector-led sustained growth.
The American Times: In regards to Russian market access, there is currently an embargo in place regarding Georgian imports. Do you see that loosening any time soon?
There have already been positive signals from both sides. Some Georgian companies will reportedly be granted access to the Russian market very soon. This is a welcome development as this creates further export opportunities for Georgian businesses and makes the country more attractive to FDI. Some Georgian products, for example, wine and Borjomi mineral water, are very well known in Russia and other former Soviet countries.
The American Times: According to the IMF’s website, Georgia today has a large current account deficit and as we discovered external financing needs which remains a source of vulnerability. Aside from these facts; what other challenges does Georgia face in the upcoming few years and what is the IMF doing to help alleviate these challenges?
The most obvious challenge here, as in many developing countries, is high unemployment. Official unemployment is about 15 percent and there is also substantial underemployment. Statistics shows that unemployment is concentrated among youth and in Tbilisi.
There is no magic-bullet to reduce unemployment. In Georgia, unemployment is mainly structural. Reducing it requires generating sustained broad-based private sector growth and addressing the current mismatch of worker skills with employer demands. This of course calls for vocational training and broader reform of the education system.
The American Times: In regards to overall FDI in 2011, compared to other nations the US has a relatively small share of that figure, anywhere from 3-11%; why do you think that is?
Georgia has been successful in attracting FDI. In 2011, FDI amounted to around $1 billion, which is around 8-9% of GDP. If a country can sustain this level over a prolonged period as Georgia has managed to do, this is a very respectable number.
It is true, FDI from the US is relatively low and I think this mainly reflects two reasons:
- The relatively small level trade historically between the two countries, as FDI tends to follow trade.
- I think it may have to do with the lack of knowledge about Georgia and its investment potential.
The strategy to attract more US FDI should probably be two-pronged. First, is to increase awareness of Georgian market opportunities to potential US investors and second, is to further promote bilateral trade. There are prospects that the US and Georgia could negotiate a Free Trade Agreement. Such an agreement would greatly facilitate trade and investment between the two countries.
The American Times: What is the IMF’s message to the American Investor?
Georgia has an opportunity to become a regional hub, not only for tourism and logistics, but also small- and medium-scale manufacturing. There is a large regional market which foreign companies could target if they establish production in Georgia. Improving access of Georgian goods to the regional markets would strengthen the country’s image as the region’s hub and an attractive place to set up a business.
Overall, I would say Georgia is a country with a great past and even better future. It has created attractive conditions for foreign investors and I would thus tell Americans to take a closer look at the country and opportunities it offers and see what they could be missing out on.