Institute for War and Peace Reporting | Giving Voice, Driving Change

Georgia in the Black, For Once

The treasury coffers are filling up at last, although it’s hard to say whether quick-fix tax collection methods are legal or sustainable.
By Tamar Khorbaladze

For once, Georgia’s cash-strapped budget is brimming, but questions are already being raised over the legality of how revenues were collected and whether any durable solution to the country’s financial woes has been reached.


Every year since 1997, Georgia’s budget revenues have shrunk by some 100 to 150 million US dollars. The state is so cash-strapped that whole towns, including the capital Tbilisi, are periodically left without electricity, while the sick and elderly can only expect the barest support. Revenue shortfalls last year led to arrears in paying out pensions and public-sector wages.


This year, though, President Mikhael Saakashvili’s government is trumpeting victory: figures for the first six months show the budget in surplus, with revenues eight per cent higher than forecast. Parliament is holding that rarest of Georgian debates, on how to spend the extra money.


The lion’s share of the surplus comes from money extracted from high-ranking officials of former president Eduard Shevardnadaze’s government, which Saakashvili overthrew in November before being elected president in January.


For six months, a string of officials accused of corruption or embezzlement have been arrested, and then effectively allowed to buy back their freedom. Data on budget performance so far this year indicates that more than 103 million lari – over 50 million dollars - was gathered this way.


Critics of the process say there are no legal mechanism whereby a lump-sum contribution paid by a suspects can simply be transferred to the treasury, or whether such a payment means criminal charges can be dropped.


"The transfer to the budget of funds paid by people under investigation, as well as possible exemption of these people from liability after they have paid the sum, is not regulated by Georgian legislation,” said Tinatin Khidasheli, head of the Young Lawyer's Association of Georgia. “It is in fact illegal, especially when these people's guilt has not been established by a court."


The biggest contributor was Shevardnadze’s son in law, Gia Jokhtaberidze, who was arrested as he was about to fly out of Tbilisi airport, and then released after paying approximately 15 million dollars.


Next comes former Georgian railway supreme Akaki Chkhaidze with three million dollars paid, and tax inspection chief Vakhtang Chakhnashvili who handed over about 1.5 million. Former Georgian Football Federation president Merab Zhordania mustered about 370,000 dollars with help from family and friends.


The bonanza for Georgia’s overstretched treasury did not stop at these cash payments. When former parliamentary deputy Bondo Shalikiani paid 140,000 dollars to get out of prison, he also saw his shares in various businesses nationalised. These included shares in electrical engineering and transport plants, a meat-packing plant, Kutaisi television channel, a sanatorium and around 20 petrol stations.


A country residence belonging to former Georgian Control Chamber head Sulkhan Molashvili and other property belonging to Levan Kenchadze, former head of the Anti-Terrorist Centre at the Ministry of State Security, were also nationalised.


For now, Shalikiani's shares have been given to the Agency for State Property Management. The economics ministry got Molashvili's country house, and further residences, including those of former Kvemo Kartli governor Levan Mamaladze, will be added to this list.


The legal grounds for confiscating property are more solid than those for cash fines. Parliament, where the ruling National Movement has a huge majority, has passed a law allowing confiscation in cases where a person cannot prove the property was legally obtained.


And regardless of qualms in some quarters over the niceties of the government’s tactics, they seem to work – not only bringing one-off sums, but scaring businessmen into paying their taxes. For example, oil, tobacco, and alcohol revenues during the two first quarters almost doubled and, in some cases trebled, compared with the same period last year.


How long the momentum can be kept up is another question, since the rise in tax incomes is not founded on real economic growth.


"The administration has become comparatively strict, but the increase in revenues cannot be ascribed to an expansion of economic assets,” said Temur Giorkhelidze, an economics expert and former parliamentarian. “In fact, economic activity has decreased in the current economically unclear situation.


“However, as the shadow sector is very large, part of it is now being legalised, especially as the fear factor is quite strong today and tax inspectors are working more actively now."


He warned, "I think that the pace of the increase in revenues will not be maintained unless the pace of economic activity is stepped up.”


The government has got the green light from the International Monetary Fund to revise its budget projections for the second half of the year to reflect the bigger revenues.


Budget income is also expected to grow thanks to increases in regular tax collection and also a new wave of privatisation. Economy minister Kakha Bendukidze has put a range of assets up for sale, ranging from the Tbilisi aircraft plant to the Intourist hotel in the Black Sea city of Batumi.


Finance Minister Zurab Noghaideli said some of the income will go towards paying debts amounting to some 45 million dollars and covering pensions arrears, unpaid teachers’ wages, energy bills and a number of other areas in which the government has fallen into the red.


At a time of tension with the breakaway republic of South Ossetia, some of the extra money is expected to be ploughed into the security forces, which are currently undergoing major reforms.


Tamar Khorbaladze is a reporter for 24 Hours newspaper in Tbilisi.