Home / Economy / Georgia’s Investment Policy Fails to Justify Public Expectations

Georgia’s Investment Policy Fails to Justify Public Expectations

According to preliminary report, foreign direct investment inflows to Georgia made up 403.3 million USD in the first quarter of 2017, up 3.7% as compared to the first quarter of 2016.

It should be noted that in January-March FDI inflows are lower as compared to the January-March indicators in 2007-2008. Over the past decade annual FDI inflows exceeded 1 billion USD.

However, our citizens are waiting for promised economic growth and welfare in vain. In 2003, the Rose Revolution government commenced aggressive privatization policy with the aim to draw as much FDI as possible. It is worth noting that starting 2004-2005 FDI inflows considerably increased in Georgia. Since then the Authorities have been actively talking about key role of FDI inflows in economic upturn.

In 2007-2016 FDI inflows marked 12.990 billion USD, while major volume of FDI inflows was registered in 2007, when the inflows exceeded 2 billion USD (2.014 billion USD). The lowest volume was recorded in 2009 – 658 million USD, when global economic crisis broke out.

In 2007-2008 the ratio of privatization program in FDI inflows made up 17%. In other years FDI inflows declined and over the past years the ratio remains under 1%. In 2006-2007 FDI dynamics was in full correlation with GDP, when in this period the averaged annual growth totaled 11%.

The situation started changing in 2011, despite over the past 3 years, in 2014-2016 FDI inflows slightly exceeded indicators of all other years. However, Georgia’s economic growth in 2014-2016 totaled 3.4% on average.

Ratio of transportation and communication sectors in 2007-2016 FDI inflows (12.9 billion USD) totaled 24% (3.155 billion USD). The lowest figure of 134 million USD was recorded in agriculture sector (1% in total FDI inflows).

If we analyze GDP growth structure, the finance sector has recorded  the highest growth pace over the past 10 years, that exceeds transport and communication sectors twice, where twice more FDI inflows were recorded.

In 2006-2016 Georgia’s economic growth constituted 4.4% on average. In this period the highest indicator was registered in finance sector (Indirect evaluation of financial mediation service + financial activity). Finance sector was growing by annual 25%. Mining industry is second with 8.2% and real estate operations, leasing and consumer services grew by annual 8.1%.

As to the least growing sectors over the past 10 years, Agriculture sector is leader with 1% annual growth. In 2006-2016 annual upturn in Agriculture, Fishing and Forestry made up 0.7%.

According to the 2015 indicators, ratio of agriculture in total employment made up 48%, where averaged salary totaled 578 GEL, while averaged salary accounted for 900 GEL in the country, including the highest salary of 1691 GEL was registered in finance sector, while the finance sector’s ratio in total number of employees was 4.95%.

If we compare FDI inflow dynamics and poverty, then the unemployment, poverty and GINI coefficient recorded highest upturn in 2006-2008, when Georgia recorded a major inflow of FDI and highest GDP growth. For example, in 2007 GINI index rose to 0.40 from 0.38 and this indicator was maintained in the following years. Inequality (GINI) reduction started in 2011, when Georgia did not record high economic upturn and huge foreign investments.

At the same time, in 2007-2008 unemployment index grew to 16.5% from 13.3%, while poverty indicator worsened in 2006-2007 to 37.4% from 34.7%. Over the past three years, when economic growth dropped to one of the lowest points (annual 3.4%), employment, poverty and inequality reduction indicators got improved.

It is interesting what benefits went to regions with major FDI inflows. Ratio of Tbilisi in total FDI inflows over the past 8 years (9.4 billion USD) made up 73.6% (¾ of total FDI). In 2009-2016 the second and third places went to Ajara and Samegrelo-Zemo Svaneti  and Guria Regions with 875 million USD (9%) and 500 million USD (5%) respectively. This signifies the ratio of all other regions in total FDI amounted to only 12%.

Despite Tbilisi absorbs ¾ of total FDI inflows, the capital city registers highest unemployment level (22% in 2016 according to Geostat). After Tbilisi, employment problem is sharpest in Ajara with 13%. It is worth noting that in these two regions, which are the most attractive directions for investors, unemployment records highest figure and exceeds Kakheti Region twice and three times, where the lowest FDI inflows was registered after Shida Kartli Region (52 million USD), that is 0.5% in total FDI. The 2016 tendency is met in the previous years too in terms of employment indicator.

If we analyze economies that are analogical to Georgian economy in terms of FDI inflows, our country has better FDI  indicators, but results are less efficient. For example, FDI inflows to Armenia marked 5.8 billion USD in 2006-2016. In this period, FDI ratio in GDP was around 1%-9%. Armenia’s economic growth totaled 3.9% on average. In 2006-2007 Georgia drew a major volume of FDI and GDP growth hit historical figure (11% on average). Armenia’s economic growth in 2006-2007 rose by 13.5% on average, while in those years FDI inflows made up only 1.15 billion USD, while Georgia drew 3.2 billion USD in the same period.

Research works prove that FDI make positive affect on economic development, but our experience over the past 10 years shows that FDI results have not justified public expectations. Georgia has not developed investment policy  and fragmented steps are taken for mobilizing investments. For example, government puts out property for auction when GEL exchange rate drops and plans to mobilize USD resources. In this case absolutely unclear steps are taken, like the case with building of Economy Ministry. Two years have passed since the building privatization and Ministry of Economy has to hire working space. Foreign investors are able to choose any place if they promise to make investments. For example, in Anaklia the Authorities seized land plots from several private entrepreneurs for transmitting the territory to bigger business and the investor had promised to put major investment. This signifies state policy makes focus on drawing as many foreign investments as possible and the Authorities is ready to take any action for the mentioned purpose. Similar policy frequently makes the Government lose more as compared to real value of FDI inflows. Today, the country has not determined what sort of investments we need, which field would bring more profits, whether it is worth to provide additional support into some sectors to arrange domestic production and strengthen exports. The fact is that today Georgia lacks for investment policy. Therefore, the country cannot receive the potential benefits that a country should receive from FDI inflows.