As a former Soviet State satellite, Georgia remains in a large degree of disarray and disillusionment amongst its people as the nation has struggled since achieving independence in 1991. Today, half the population still lives below the poverty line as 20 percent are undernourished as the majority in Georgia live in mediocre living conditions (water quality, electrical shortages, etc.). Further, domestic insurgencies are prevalent in two regions of the country while the government tries to regain credibility after previous regimes are alleged for widepsread financial corruption from looting funds from various public purses for self-interest. Georgia with a new young vibrant leader is actively positioning the country for better times ahead for this fractured country of 4.7 million citizens. Below is a review of BankINTRO.com’s research findings on Georgia and its currency, the lari.
Of great importance, Georgia is strategically located where the Caucasus Mountains meet the Black Sea as Georgia can ultimately prosper as a vibrant tourist destination taking advantage of the semi-tropical climate by the coast to also benifitting from trade relationships between Europe and Asia.
POLITICS: President Mikheil Saakashvili, 37, as part of the ‘Rose Revolution’ symbolizing a peaceful transition to the heated election dispute was elected President in November 2003 in his victory over former President Edward Shevardnadze. President Saakashvili is considered a pro-Western reformer as he is U.S. educated. Immediate challenges for Georgia’s new President include his ambitious goal of reunification of the nation as it is his mandate to bring economic renewal and prosperity to this deeply impoverished nation. President Saakashvili believes that Georgian unification will root out terrorist elements in vulnerable regions of the country that are unstable. Georgia is deeply divided in regions and greatly fragmented. Political risk remains high for Georgia as the country has had a history of assasination attempts and coup attempts that cannot be ruled out. President Saakashvili came to power on a mandate of an anti-corruption platform as Georgia was ranked as one of the world’s most corrupt at time of his taking the oath of power. It has been alleged that many in the former Shevardnadze administration misallocated and re-directed much of the foreign aid monies and military subsidies from countries like the United States for their own personal use. The United States alone has provided Georgia with $1 billion USD in aid monies over the last few years.
As a former state of the Soviet Empire, Russia remains a great influence in regions of the country as evident with Russian military bases from the fallout of the cold war are still in parts of the country although scheduled for closure. Meanwhile, new political forces have Georgia wanting closer relations with the United States and the West. Former President Shevardnadze began the process of moving Georgia politically closer to the United States. In essence, Georgia has become a puppet literally being pulled by two opposing forces from Russia and those ties from the United States. There is much behind the scenes political manouvering from these two powerful countries making their mark on tiny but geographically influential Georgia. It is widely regarded that President Saakashvili and his administration are politically backed and supported by the United States.
Unification Possibility for Abkhazia, South Ossetia and Adzharia
Georgia was part of the former Soviet Union up until it acquired independence on April 9, 1991. A new constitution for Georgia was implemented in 1995 but two regions that rebelled and declared their own so-called independence in 1992 for the Georgian region of Abkhazia and year 1993 for South Ossetia. Abkhazia is a Black Sea region home to a 180 km coastline in northern Georgia that maintains close ties to Russia primarily from geography. The area of South Ossetia is located to the east of Abkahzia in northern Georgia bordering Russia of which the area is greatly influenced and backed by Russia. A final third region that has rebelled but did not declare independence within Georgia is in the Black Sea region of Adzharia. President Saakashvili has stated that it is his government’s policy of bringing both Abkhazia and South Ossetia under central government control from T’bilisi. This goal of regional reclaimation is for real. As of September 2004, upwards of 10,000 Georgian troops were deployed to the Tskhinvali area of South Ossetia after Georgian troops battled with rebels from South Ossetia the month prior.
The final region of separatist movement within Georgia is the Black Sea area of Adzharia that borders Turkey to the south. In Adzharia, it is here that separatist conflicts are perhaps coming to a close with the recent departure of the Adzharia strongman leader, Mr. Abashidze as he fled in the summer 2004. Adzharia separatist movement has acted as opposition to the central government in recent years. Georgian President Saakashvili and the central government has regained control of this breakaway region of Adzharia and its oil shipping port of Batumi has transported upwards of 200,000 bpd for export. Adzharia has been alleged to have held back tax & custom revenues of which this will now change with central Georgian government control in command of Adzharia.
ECONOMY: after gaining autonomy in 1991, the Georgian economy imploded resulting in a massive contraction with the loss of Soviet subsidies coupled with domestic wars that further helped to crash the Georgian economy. Today, economic output for Georgia is only 25 percent that of its 1991 economy as living standards have since plummeted. By 1994 the domestic wars ended, Georgia hit bottom economically when inflation reached hyperinflation levels of 15,600 percent. At this time, the IMF stepped into help with the implementation of structural macro-economic reforms in order to overhaul the economy, the Georgian economy accordingly rebounded during the late 1990’s. Today, the economy has stabilized with satisfactory GDP growth rates and modest to low inflation levels although difficulties remain in the fiscal and trade account. Although Georgia historically runs a large trade deficit (year 2001 at 14 percent of GDP), the overall balance of payments position is okay due to surplus capital inflows from abroad for development of multi-billion USD pipelines.
In reflection, it is surprising that Georgia disintegrated financially to the degree it did considering its strategic geographic location but several factors were held to account of which government corruption was a prime complaint for Georgia’s depression. With few resources at its reach, the government has had difficulty collecting tax revenues although this appears to be abating. Positive developments for macro-economic transformation include privatization of industries, increased foreign investment, slashing of government bureaucracies while taking action of mitigating corruption difficulties that have plagued Georgia in the past.
The country itself although largely mountainous is rich in natural resources such as hydropower, iron ore, manganese, copper and oil deposits. Major economic components include agriculture, small light industry, oil & gas transit revenues and tourism. Historically, Black Sea tourism has been a large income earner particularly during Soviet era times. Georgia’s government has plans to return to these profitable times in tourism with a goal of 1 million tourist visits per year bringing in upwards of $1 billion USD/year in tourism revenue mostly from its semi-tropical climate along the Black Sea. Georgia’s fortunate climate allows the country to provide for a healthy agricultural sector with output in fruits & nuts for export as the agricultural sector represents one third of national GDP output.
Oil & Natural Gas Pipelines
The region is petroleum energy rich although Georgia does import the majority of its energy needs. Oil production for Georgia in 2001 reached a tiny 2000 bpd with consumption at 31,500 bpd. The medium term will most likely see Georgia take advantage of its own oil exploration targets for production as the industry evolves. One of the most important economic events that will impact Georgia is the potential for the country to become a major transshipment centre for oil & natural gas from energy reserves in the Caspian region to markets in Western Europe. Georgia’s Black Sea port at Supsa currently services oil from Azerbaijan via the Baku-Supsa pipeline. Development of a transportation corridor through the Black Sea ports of Batumi and Poti is pivotal for Georgia’s future prosperity. Construction is currently taking place on the $3.6 billion USD Baku-T’bilisi-Ceyahn (BTC) oil pipeline where transit fees are expected to begin in 2005.
Economic Statistics
GDP as measured by purchasing power parity stands at 12.2 billion USD (2003) with corresponding GDP/Capita at 2,500 USD. Market GDP was measured at 3.2 billion USD in year 2001. GDP growth for year 2003 was measured at 5.5 percent while year 2004 is estimated to come in at 8.5 percent with year 2005 projected at 6 percent growth. Other GDP growth figures include year 2001 at 3.9 percent, year 2000 at 1.9 percent, 1999 at 3 percent in the aftermath of the Russian financial crisis during year 1998. Inflation figures for year 2004 are projected at 5.8 percent and year 2005 at 4.8 percent. Historical inflation quotes include year 2003 at 4.8 percent, 2002 at 5.4 percent, 2001 at 5.5 percent, 2000 at 3.2 percent, 1999 at 19.1 percent. Projected fiscal deficit for year 2004 is at 2.5 percent of GDP. Trade partners include the United States, Turkey, Greece and Russia. Trade figures for year 2003 have exports at $615 million USD (ie. chemicals, agriculture, metals) and imports at $1.25 billion USD. Current account is in deficit with year 2003 at 8 percent of GDP and year 2002 reporting a 6 percent of GDP shortfall although overall balance of payments account is closer to 3 percent of GDP shortfall. Unemployment is high with some estimates having 17 percent a fair figure. Foreign debt stands at approximately 50 percent of GDP (2001).
POSITIVE: large merchant marine, good cellular phone coverage, strong ally of the United States. CONCERN: infrastructure in need of an upgrade, pollution, geographical border issues, power outages - electricity, emigration of many of its citizens since independence who are mainly economic refugees, corruption - expensive cars as the wild west of survival take hold, bribes amongst government officials as at times they have not been paid for payroll.
BANKING SYSTEM: bank reforms have been implemented. Reserve assets measured at May 2004 stood equivalent to 1.5 months of imports. The Central Bank for Georgia is the ‘National Bank of Georgia (NBG). Interest rates have T-Bill rates at currently at 13.5 percent with broad money growth running at 19 percent per annum.
REGIONAL ANALYSIS: Russia-Chechnya, Turkey, Azerbaijan, Armenia
The immediate region is politically unstable with conflicts and economic instability. Nearby in Armenia, disputes over land continue at Nagorno-Karabakh on the other side of the Caucasus Mountains. To the north lies Russia which still struggles with the Chechnya conflict where Muslim rebels are known to have taken residence in parts of northern Georgia that border Chechnya. The region is very important to Georgia economically as Georgia is seeking to establish new important trading relationships with Turkey, Iran and Western Europe while moving away from markets in Russia. Political relations with Russians remained strained as it has impacted Georgia’s ability to sell goods within Russia. If relations were to improve, Russia is an important and large market that is growing wealthier.
KNOWLEDGE: Black/Shadow Market Economy
Georgia’s black market economy accounts for 25 percent of GDP output and two-thirds of trade. As structure and soundness return to Georgia starting with a rebirth of new prudent leadership under President Saakashvili, the economy will gradually move from shadow to formal status. This means, more of the economy will come under the tax paying format resulting in greater revenues and enhancing Georgia’s economic well being over the medium term.
CURRENCY: ISO Symbol ‘GEL’, lari. At time of review on November 4, 2004, the lari had an exchange value of 2.08 GEL to the US-dollar ‘USD’. The lari was introduced into circulation in 1995 replacing the then Soviet-era ruble. The exchange rate regime follows that of a float with limited central bank intervention by NBG. Foreign currencies that are widely in use within Georgia include the USD (most popular), EUR, and the Russian ruble. During year 2003, the lari traded in a stable range versus the USD although realized a 9 percent real depreciation when compared to a basket of major currencies. However, back in 1999 the lari crashed in value as the central government cranked open the printing presses in order to pay bills such as unpaid government employees thus this scenario resulted in higher inflation of 19.1 percent for 1999. As of May 2004, the lari was approximately 30 percent undervalued to the then falling USD as measured by purchasing power parity.
CURRENCY HISTORY: historical currency quotes for the lari include: year 2003 at 2.145 GEL to the US-dollar ‘USD’, year 2002 at 2.19, 2001 at 2.073, 2000 at 1.97, 1999 at 2.24, December 1997 at 1.32, December 1996 at 1.28, December 1995 at 1.24.
CURRENCY FORECAST: modest appreciation for the GEL to the USD as the formal Georgian economy absorbs the shadow economy that will allow for increased revenues from increased surveillance & tax collections methods for the central government. A reduction in smuggling of goods from much of the current informal economy to a future formalized economy where the government will realize an increase in tax revenues. A difficult FDI environment may turn to the better as the economy grows and stabilizes with inflation to remain moderate to low. Economic advancement coupled with macroeconomic reforms are taking place but perhaps at not as fast as pace to ease the stress and hardships by the average Georgian citizen. Low wages remain and patience is becoming thin. The risk is for political upheaval in the future that could stagnate economic growth or a return of insurgencies in regions of the country. If President Saakashvili can keep Georgia unified, the country will prosper in time as there are too many good things taking course as Georgia can benefit from its strategic geography as a transit centre for north-south trade and east-west trade. Ultimately in the long term, Georgia might be considered for membership to the European Union and corresponding currency participation with the Euroland euro. Conversely, one of the main risks to the lari is Georgia’s extensive external debt load, without successful debt arrears restructuring the lari will remain under exchange pressure. Currency risk is heightened by internal domestic regional conflicts and Georgia’s sensitive financial position. UPDATED: November 4, 2004
