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Tentative Projections Show Positive Outlook

Interview with IMF Resident Representative

Tentative projections set foreign direct investments in Georgia at the level of at least  USD 1.2 billion in 2007, which is “slightly higher” than those of last year, Robert Christiansen, IMF Resident Representative in Tbilisi, said in an interview with Civil.Ge on March 1. But he also said that twelve-month inflation rate rose from 8.78 percent in December to 10.44 in January.

In the interview Christiansen also spoke about a free economic zone, the Georgian authorities plan to set up at Black Sea port of Poti, as well as about property rights, tax administration, planned Revenue Service and the role of Financial Police in this new structure.

Q.: On February 28 IMF Executive Board completed its fifth review of Georgia’s performance under the three-year Poverty Reduction and Growth Facility (PRGF) arrangement and approved the disbursement of USD 21 million. Can you briefly tell us about this meeting? What was an atmosphere at the meeting?

A.: The meeting of the IMF Executive Board was short and support for Georgia was strong. Georgia has a very good track record. We see that it is well-regarded in the international community and the Board was supportive. The fifth review under the program was completed and the tranche will be disbursed.

Q.: In December IMF mission forecasted that Russia’s economic embargo will lead “to moderately slower growth” of 6-7 percent” in 2007. Are there any new projections as for today?

A.: Not yet. There will be a [IMF] mission that comes again in May and they will reconsider projections. It is possible that growth projection is increased, but it depends on performance in the first few months of this year.

Q.: What is your sense of performance for 2007?

A.: The amount of foreign direct investments coming into the economy could well increase and boost growth. There are many informal indications that growth is strong.

I have not seen actual numbers for 2006, but we have estimated that foreign direct investments was between USD 800-900 million in 2006 and it is projected to be somewhat higher in 2007, at least USD 1,2 billion.

But before we revise our projections [when the IMF mission visits Georgia in May] we want to see what the performance looks like for the first few months of the year and then we can give better estimations. It is important to remember that there are also risks. Although the world economy looks strong, it is difficult to forecast the impact on Georgia of the recent turmoil in equity markets.
Q.: In December, when IMF mission visited Georgia, it urged the authorities “to accelerate structural reforms, especially in those areas pertaining to stronger property rights.” What is your assessment of developments in this regard in recent months?

A.: I gave a paper to Cato conference [in Tbilisi] in October on property rights. What is referred to as property rights in Georgia is referring to physical property, like shops or an apartment block. When I talk about property rights, I use a more general concept, specifically the ability of private citizens to protect their property whether it’s financial or physical, whatever kind of property we are talking about.

Experience around the world – and this goes back 200-300 years – is that if you have a system that protects individual property rights and corporate property rights, it serves as a foundation for economic growth.

The information coming out from some of the reports on Georgia, for example the World Bank’s report on Doing Business, highlighted good progress, but identified two weaknesses: tax administration and the  judiciary.

Judiciary is not something that IMF deals with, but tax administration is an area we are familiar with. This January we had a mission here looking into the tax administration and we made number of recommendations for improvement; for example: improving taxpayer services; having some kind of dispute adjudication process; making clear to everyone what the taxpayer’s rights are.

We think that the new Revenue Service, when it is finally established and operational, has a potential to realize a significant progress in tax administration.

Q.: How do you see a role of the Financial Police in this new structure – Revenue Service, which will also unite tax and customs departments?

A.: Well, I think it is evolving. The Financial Police has a legitimate investigatory function. These investigations, typically from international experience, are at the initiative of tax service. Typically it is the tax department, or the new Revenue Service, that would authorize an investigation by the Financial Police.
But there is concern that some of the operations in the Financial Police have not been consistent with strong individual property rights. And that is worrying.

Q.: So we go back to the issue of property rights again…

A.: You want to achieve an environment where an individual investor can invest some amount and know that the investment is safe from arbitrary treatment. For example if the government imposes a tax assessment, saying your tax liability is GEL x, but an investor says: no, it is less than that amount.  How do you resolve that dispute? Typically you want an independent and objective body to hear both sides of the disagreement and make an objective and fair decision. That is what we mean by protecting property rights; the law is clear, the judiciary system operates efficiently. That is the atmosphere that should be created. It is not an easy task.

Q.: Recently President Saakashvili said his administration wants to invite “European judges” to provide professional and unbiased adjudication.   

A.: We have no formal opinion about that other than it is a very interesting idea and one that deserves to be explored.

Q.: What do you think about the authorities’ plans to set up free economic zone in Black Sea port of Poti?
A.: A free economic zone involves a special tax treatment. The history of free economic zones is mixed. Some countries have found that free economic zones can have a corrupting influence on taxes; others have found it very successful in creating employment. They can be difficult to manage. In our view, it is a bit risky; if well-managed they can be useful.

Q.: Do you think it will be riskier especially in Georgia?

A.: No more than in other countries; but it requires a good tax administration, a good tax management.


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