Wednesday, 15 April 2015

Georgia’s Economic Crisis and Political Brinkmanship

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By Ariela Shapiro (04/15/2015 issue of the CACI Analyst)

Since November 2014, Georgia’s national currency, the lari (GEL), has devalued an estimated 28 percent against the dollar, measuring at 2.23 to 1 dollar as of April 10, 2015. This currency crisis has severely impacted local Georgian consumers and the operating capacity of Georgian businesses while undermining foreign investor confidence. The current crisis was externally catalyzed by falling oil prices, the Russian ruble’s harsh inflation and regional political and economic destabilization due to the Ukrainian conflict. Domestically, the economic crisis has been exacerbated by the Georgian government’s ambiguous, often ad hoc, economic strategy. Amidst the failing economy and falling domestic confidence, the Georgian political landscape remains deeply fractured and no party has demonstrated political willingness to create a multi-partisan solution to the economic crisis.

BACKGROUND: The external factors negatively impacting Georgia’s economy are protracted and will not be resolved in the short-term: the Russia-Ukraine crisis, the deepening recession in Russia, both of which create ripple-effects through the region, and currency devaluations in key trading partner countries. 

Domestically, as of March 15 Georgia’s exports were 26 percent lower than one year ago while remittances from Georgian workers abroad have decreased an estimated 22.4 percent to US$ 157.4 million. In reality, Georgian citizens often do not report received remittances to avoid taxation, and local analysts estimate that the real decrease in remittances is closer to 50 percent. In addition, large asset bank loans are fixed to a dollar value while most Georgian citizens are paid in GEL, which has resulted in many loans increasing in GEL-based value by almost 30 percent. In another instance, export-based businesses, such as grocery stores, are facing critical financial shortfalls as all imported goods are purchased in dollars or euros but sold to local consumers in GEL. While food prices have increased only marginally, many Georgians are struggling not to default on mortgages and small business loans. 

In order to stave off an economic recession, the national government is reportedly reducing administrative spending and focusing on social programs and infrastructural projects, the latter of which are intended to increase employment. In late February, the government announced its decision to privatize key Georgian state owned assets, which aims to raise an estimated US$ 300 to 350 million. Depending on the strategic value of the asset in question, the privatization will either be full or partial, as is the case with 230 MW Combined Cycle Thermal Plant in Gardabani. Additionally, in an effort to stabilize the GEL, the Georgian Central Bank has intervened four times between February and March by auctioning US$ 120 million. 

The international community and donors have been passively supportive and apolitical, and has continually emphasized the need to “implement reforms” as a guaranteed mechanism for economic future growth. Following a recent mission to Georgia, an IMF delegation stated that the “(Georgian) Central Bank was doing a good job … while Georgia is well placed to overcome the current challenges (as long) as it continues to accelerate reform and ease restrictions on foreign businesses.”

IMPLICATIONS: While the government’s tactics may work to stabilize the economy, they are reactive and not integrated into a long-term national and larger economic and governmental operational strategy. Critically, the actions of the ruling Georgian Dream (GD) coalition and relevant ministries are viewed as ineffective by the Georgian business community while the government has lost considerable confidence among the voting public. 

According to a March 31, 2015 International Republican Institute public opinion survey, Georgian confidence in the GD coalition has decreased to 36 percent compared to 50.8 percent in June 2014. Per the survey, two of the ruling government’s greatest failures are inflation and the economic crisis, 64 percent felt the economy was worse compared to June 2014 while economic issues were the most critical for every household polled.

The economic crisis has further polarized the already deeply fractured Georgian political landscape. The United National Movement (UNM), the main opposition party, has worked to exploit the economic crisis to regain voters’ confidence by publicly calling for the ruling coalition’s resignation. On the other hand, the GD coalition has not tried to create a constructive dialogue with members from any of the multiple opposition parties. In addition, former Prime Minister Bidzina Ivanishvili’s statement that the head of the Central Bank and UNM appointee Giorgi Kadagidze’s “wrong actions” which led to the “crisis” may have resonated with voters but did not gain any points with the international community.

On March 21, UNM representatives held a Tbilisi based street rally, which was attended by an estimated 40-50,000 people, calling for the ruling government’s resignation and promising future protests. On March 23, UNM attempted to launch proceedings for a no-confidence vote against the ruling coalition but lacked the necessary votes as Irakli Alasania’s party, Free Democrats, refused its involvement. Adding further fuel to the fire, Ivanishvili in March launched a reality television show called “2030”, which is intended to provide an alternate view on politics to Rustavi and Imedi television stations, both of which Ivanishvili views as supportive to UNM. 

Currently, this political brinkmanship has produced no victor and the country still lacks a clear economic strategy, while no opposition party has recommended constructive tactics for economic growth.  The Central Bank’s decision, on March 25, to keep its key rate at 4.5 percent may encourage public-private-partnerships with foreign investors but the constant GEL fluctuation may be perceived as too high a risk for potential investors. In another example, the ruling government’s decision to privatize key state assets, such as the Partnership Fund’s 49 percent ownership of the Gardabani Combined Cycle Thermal Plant, may potentially be intended to attract funds and a joint operating company. 

However, the ruling coalition has not publicly communicated to the general public, the Georgian business community, foreign investors, and the international community how this activity and other tactics are integral pieces in a countrywide economic plan. As a result, the ruling coalition is facing a voting public with failing confidence in its ability to rule, a wary business community and tentative foreign investors. Currently, none of the opposition parties have enough political support to win a parliamentary election, but voters may change their minds if the ruling coalition does not develop a clear economic plan with tangible results.

CONCLUSIONS: In conclusion, Georgia’s economic crisis and the GEL’s tremendous devaluation are due to protracted external regional factors as well as the dollar’s international appreciation relative to all major currencies. At a domestic level, the GEL devaluation and the resulting economic slowdown negatively impacts the operability of most Georgian businesses as well as many households. At present, the ruling coalition’s statements and tactics have been reactive and have produced no tangible results. The opposition parties have moved quickly to exploit the failing voter confidence and further polarized the Georgian political landscape. At this juncture, it would be wise for the international community, represented by the World Bank and or the IMF, to develop with the Georgian government an immediate mechanism to inject capital into the Georgian economy in the form of active projects, such as further infrastructural development. By publicly supporting the Georgian government at such a critical time, the international community would gain a great deal of trust from the Georgian people and help ensure the country’s transition to a western democracy.

AUTHOR'S BIO: Ariela Shapiro is a international development professional with five years experience working in the Southern Caucasus and Eastern Europe for USAID and World Bank activities supporting democracy and governance, economic growth and energy infrastructural development. Most recently, she is supporting a USAID funded project to develop municipal and national government joint activities in specific energy and economic sectors.

Image Attribution: Wikimedia Commons

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