Posted: 10 months ago

Despite Real Attractiveness as an Investment Destination, Georgia Fails to Make Full Use of this Opportunity because of Political Turmoil

What is the economic reality of Georgia? Why are FDI inflows declining? What is the future of the national currency? What challenges exist, in terms of employment and inclusive development? – Professor Giorgi Ghaghanidze, TSU Economics and Business Faculty Dean, has talked about these issues for the TV Program Business Partner.

According to the official statistics, in the second quarter of 2019, FDI inflows recorded a 53.7% year on year contraction.

There is nothing alarming in FDI contraction, and the inflows will increase in the third and fourth quarters. FDI does not represent an economic category that should be compared quarter on quarter, because the nature of investments differ from the external trade of certain commodity groups, where exports and imports are carried out in the same period every year, Giorgi Ghaghanidze noted. 

“Naturally, there is nothing good and pleasant about this process, but, anyway, this is not a catastrophe. If we analyze the existing practices in our country, as a rule, investment inflows grow in the third and fourth quarters”, Ghaghanidze noted. 

The contraction in FDI inflows means that there are certain gaps, including that the country lacks a modern industrial policy. which determines a competitive advantage. In Georgia, investments are affixed to exports, as a rule. Regretfully, over the past 20 years, the country has not created a new export. We have not taken steps in this direction.  We were oriented mainly towards opening foreign markets for our exports, and we have fulfilled this task quite successfully, because there are few countries in the world that have free trade simultaneously with the EU, China, the CIS space, and a generalized system of preferences with the USA. However, it turned out that we have markets, but not products, he noted. 

“And now we have reached the most important and complicated phase that was outlined at the beginning of the 21st  century – we need a modern industrial policy to determine Georgia’s competitive advantages, and take the necessary steps,” Girgo Ghaghanidze noted. 

In the current market of globalization, the country has no prospects without a modern industrial policy. According to Ghaghanidze, in this globalized environment, everybody competes with everybody, and it is impossible to attain an advantage through one decision. All decisions are complex, and they include legal, educational, technical and output aspects. Otherwise, no competitive advantage is available. The modern world is based on other dimensions. 

The country needs a modern industrial policy to determine its advantage on the global market in order to increase FDI inflows, he noted. 

As for the national currency, its depreciation may be halted, but in turn economic growth will be suspended. At the same time, it is unclear whether the country was ready for the  strengthening trend of USD since 2011, Giorgi Ghaghanidze noted. 

FDI contraction has a negative impact on the national currency exchange rate. and the business sector cites this factor as the number one challenge. and asks that this problem should be resolved. The currency exchange rate of an imports-dependent country generates huge challenges to the business sector, but the use of financial instruments for GEL strengthening will damage the whole economy, Ghaghanidze said. 

“The GEL seems to have found its new balance point – 2.95. Our citizens frequently ask whether it is possible to strengthen the GEL. This is possible, but economic growth will stop. If the National Bank of Georgia (NBG) dramatically raises the refinancing rate, the money mass will decline, and the GEL will easily return to the starting point, but how would this decision affect the other parts of our economy?” Giorgi Ghaghanidze noted. 

It is important to know whether the country is ready to tackle the problems accompanying the strengthening of USD, because this tendency began in 2011, he said. 

Another issue is how ready we were for problems that started in 2013. Starting in 2011, it was clear  that USD would strengthen. The point is, the then-administration concluded an agreement with the Congress to reduce the scale of USD printing amid a growing upper margin in the debt. Therefore, it was clear that the USD exchange rate would strengthen all over the world, Ghaghanidze pointed out. 

To use investment to our advantage, the country needs political stability. Georgia genuinely has an attraction for  investment, but it cannot make good use of this advantage because of challenges in terms of political stability. Our geostrategic location is one of our competitive advantages, and hydro resources is the second factor. We have huge investment potential in everything related to these two sectors, Ghaghanidze said. 

“Naturally, the development of deepwater seaports is one of the key mechanisms for making use of our geostrategic advantage. Political stability is required, first of all. A country with 20% of its territory occupied by an aggressive armed neighbor faces serious difficulties in this respect. If we analyze investments growth chart of Central and Eastern European countries, we will see that  investments grow from some point. This growing point emerged after these countries obtained MAP, that is, when they obtained a physical security guarantees. As a result, investment inflows started growing”, Giorgi Ghaghanidze said.