Georgia: Economic Slump Hurting

Once buoyant economy is hit by downturn and war over South Ossetia.

Georgia: Economic Slump Hurting

Once buoyant economy is hit by downturn and war over South Ossetia.

Having enjoyed double-digit economic growth for several years, Georgia is now bracing itself for hard times as it comes to terms with the double blow of the August war and the world financial crisis.

Since October, increasing numbers of people have lost their jobs, property prices have plunged, banks have reduced lending, and the national currency, the lari, has depreciated sharply.

The country’s leadership had put on a cheerful front but acknowledged the gravity of the crisis in November.

“Winter and spring will be very hard for the economy of the country,” said President Mikheil Saakashvili on December 7, visiting a confectionery factory. “We ought to do everything to keep jobs.”

The 2009 draft budget was recalled from parliament only six weeks after it was first submitted on October 1 and a more modest version was introduced to deputies. The revised bill envisages four per cent economic growth in 2009 and has reduced government spending by a billion laris (around 600 million US dollars) compared to 2008.

The population as a whole first felt the impact of the crisis on November 7 when the lari fell sharply against the dollar from 1.45 to 1.65.

The Georgian banking sector, which had been developing rapidly, has suffered badly. Since the August war, the value of bank deposits, which were worth 4.1 billion laris, has shrunk by more than half a billion laris.

The National Bank says the Georgian government has struck deals with international lenders to receive low-interest credit lines, worth one billion dollars, for Georgian commercial banks. But ordinary people are being hit by a squeeze on credit.

In recent years, an increasing number of Georgians have taken bank loans to start a small business, finance repairs to their house, buy a new apartment, car, furniture or household appliance. Now they are finding it hard to get bank loans.

Two months ago, Giorgy Gegechkori, a computer programmer, decided to buy an apartment. At first, he could not find one, even though prices had fallen. A month ago, he found a two-room apartment for 40,000 dollars – a huge reduction in price given that before August the same flat would have cost him 65 – 70,000 dollars.

Now Gegechkori’s problem is that he cannot find a bank to loan him 30,000 dollars. “All the banks say that they will give loans only to clients whose salary is paid into their bank and who have a good credit history. Even though I have used a credit card and have never been late with my payments I was told that the apartment I had found was not sufficient for me to borrow 30,000 dollars,” he said.

With fewer buyers available, the property market has also suffered badly. According to former finance minister Lekso Aleksishili, accumulated debts in the property market amount to 1.5 billion laris. And yet around a quarter of construction has yet to start.

“This indicates that risks are very high in this field, and if a crisis strikes the sector, it will inevitably spill over to other areas,” Aleksishvili told IWPR.

Businessmen right across the economy are reporting problems. At the end of October, the Young Economists Association conducted a poll among 1000 businessmen. Only two per cent of them said the crisis had not affected their businesses, whereas 71 per cent complained about fewer sales.

The sectors that have suffered the greatest loss in sales are tourism, construction, services and retail.

Two weeks ago, the building materials firm Metekhis Keramika sent 210 employees, with salaries averaging 300 laris (around 180 dollars), on unpaid holiday because of a drop in demand.

The company has three million bricks stacked in its warehouse and still says it wants to see them sold by next April.

Georgian exporters also have been struggling to cope with the increasing strain on their finances. Ferro, a plant that produces ferroalloys in the town of Zestaphoni, has been working at half capacity, using only five of its 11 furnaces.

The company’s management says the plant has been losing orders after the world financial crisis hit and may have to cut back on its 6000-strong workforce

Georgian wine exporters, whose main market is now Ukraine following the Russian boycott, are also seeing lower sales, as are firms trading in household equipment.

Arktika, a network of stores selling computers and mobile telephones, used to make 700,000 laris a month, but after the August war its sales have plunged by 70 per cent, mainly because banks have tightened up on issuing consumer loans, which accounted for 87 per cent of Arktika’s sales.

Anna Katamadze, head of the Young Economists Association, said the slowdown in Georgia was the result of the August war as well as the global financial turmoil.

Experts and international organisations made gloomy forecasts for the Georgian economy as far back as early October.

A joint mission of the United Nations, the World Bank and European Commission carried out a Joint Needs Assessment for Georgia. To date, only an abridged and strongly edited version of the JNA has been made public. The non-governmental organisation Transparency International Georgia managed to get hold of the full version of the document and summarises it in a special report.

The report predicts that 100,000 Georgians will lose their jobs and says, “Between now and 2010, poverty levels are projected to rise from 23.6 per cent to 25.9 per cent, and those already poor may slide even deeper into poverty.”

The JNA was the basis for an international donor conference held in Brussels in October, at which donors pledged to give Georgia 4.5 billion dollars over the next three years to help it cope with the crisis. The finance minister Nika Gilauri said that it has so far received 600 million dollars of the promised aid.

Tamar Karosanidze, who is executive director of International Transparency Georgia, is worried that the global crisis will stop donors providing all of the promised aid to Georgia.

“According to the optimistic forecasts set out in the document, it will take two years to get business activities in Georgia back to normal,” said Karosanidze. “Until then the state has to act as the engine of economy, ensuring, above all, that the aid is used effectively.”

Tamar Khorbaladze is a correspondent with 24 Hours newspaper in Tbilisi.

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