EurasiaNet Business & Economics - Georgia Banks on Cheap Credit and Land for Economic, Political Dividends

BUSINESS & ECONOMICS

GEORGIA BANKS ON CHEAP CREDIT AND LAND FOR ECONOMIC, POLITICAL DIVIDENDS
Giorgi Lomsadze 4/15/08

With Georgia’s parliamentary election just over a month away, attention is again focusing on what the government’s economic reform policies have meant for new jobs. Re-elected in January on a promise to defeat poverty, Georgian President Mikheil Saakashvili is focusing on discounted loan and land sale programs to help pick up much of the slack.

Though the number of Georgian businesses has more than doubled since 2003, official unemployment as of 2006 -- the latest year for which figures are available -- stood at a sizeable 13.6 percent. Independent analysts project even higher figures. Popular frustrations with living conditions -- set against aggressive privatization, property development and foreign investment drives -- came into sharp relief during the unrest last November in Tbilisi.

The official response -- and the theme of Saakashvili’s 2008 presidential campaign -- has been a much-touted war on poverty. At the center of the campaign is a so-called Cheap Credit initiative that offers below-market, state-subsidized loans to exporters, agriculture and tourism businesses in a bid to bolster entrepreneurship and to bring employment to poverty-ridden rural areas. The government has earmarked 25 million lari (over $17.3 million) for the program in 2008.

Loans floated by the program carry a maximum interest rate of 12 percent -- a considerable difference from the average 16 percent market rate.

And reimbursement deadlines have been radically lengthened: businesses have 10 years to pay back their loans; two to three years is the standard maturity rate for commercial loans.

While those terms raise the question of how the government plans to cover the long-term cost of the program, officials are reluctant to dig deeply into the topic. Adequate state funding does exist, they insist.

So far, nine firms in fields ranging from potato chip manufacturing to a timber company have been approved for 8 million lari (over $5.54 million) in Cheap Credit loans; as of early April, some 300 loan applications had been received.

The government says that all nine firms borrowed funds at a nine percent interest rate, payable within five to six years.

Commercial banks effectively act as loan brokers for the government -- though, apparently, without a commission. Any bank is free to volunteer to screen and select loan candidates. Approved candidates are then sent on to the ministry of economic development for final approval before a payout is made.

Participating banks are also free to top off the loans with their own money. But, to date, none have chosen to do so, according to Deputy Economic Development Minister Tamar Kovziridze.

With no specific financial incentive for participating banks, enthusiasm for the project could be expected to be sluggish. But observers close to Georgia’s booming banking industry note that competition alone drives commercial banks to use the program to attract fresh customers.

Opposition critics, however, point to the program as fresh proof of the collusion they allege exists between the Saakashvili administration and the country’s most successful banks.

Snafus, however, do exist. One bank official, who asked not to be named, mentioned a Cheap Credit client which has still not received its loan from the government despite the necessary approval. "Why the delay, we don’t know," the official said. "We are probably not going to participate again [in the program], as the program is a little disorganized and we can’t plan around it."

Some Georgian companies, though, which have taken part in the program, say that the lower rate makes a significant difference.

"The best bank rate I was offered was 13 percent, which is more than we could afford," said Nino Kuntsiashvili, manager of a handcrafts company Mtiebi (Mountains), which is based in the east Georgian mountain town of Dusheti.

Kuntsiashvili, who declined to specify the amount she received, said that Mtiebi will use its loan to add another 600 jobs, purchase new looms and set up training centers in the Dusheti area.

But the "cheap" approach doesn’t stop there. Alongside "cheap credit," come cheap tractors and agricultural land, as well.

To give Georgia’s agribusiness a nudge, the government is offering 100 200-hectare lots of farmland for sale to agribusinesses at a whopping 80 percent discount. The land parcels are sprinkled from the eastern region of Kvemo Kartli to Samegrelo in the west.

Buyers have to set up a business on the site within one year or pay the full price of the land, according to the ministry of agriculture, which runs the program in conjunction with the ministry of economic development.

So far, 14 companies have been approved to receive discounted land, according to Deputy Minister of Agriculture Bakur Kvezereli. "Mostly these are local companies that are looking to expand their businesses," Kvezereli said. Citrus harvesting and dairy processing are among the activities, but Kvezereli did not give company names.

Up-to-date tractors are also part of the offerings -- dubbed "Misha tractors" by farmers (in honor of President Mikheil Saakashvili’s commonly used nickname) -- the machines cost 120 lari (just over $83) for each 100-hectare land plot to be cultivated. Use of the 367 tractors handed out to date is open-ended.

The government has launched a media campaign to promote the programs, and to tout the government-assisted opening of new enterprises or plants.

Some economists, though, disapprove of the new programs as inconsistent with the very laissez-faire principles the government claims to espouse.

"While this is a common practice worldwide [to subsidize agriculture], these programs give an unfair competitive edge to a handful of companies," said Vladimir Papava, the deputy chairman of the parliamentary committee for finance and budget and a former minister of economy under ex-President Eduard Shevardnadze.

Paata Sheshelidze, head of the New Economy School, a prominent libertarian group, raises similar concerns about the Cheap Credit bank loan program.

The initiative’s "major flaw," he said, "is that it spends public money on the creation of a whole slew of companies and products that are not necessarily in demand."

"These companies will be making decisions without considering market constraints and, thus, only a handful is actually going to succeed," Sheshelidze said.

Details about criteria for participating companies in either program were not readily available.

Officials counter that such market interventions are but temporary painkillers for correcting Georgia’s longstanding economic malaise.

"The idea is to stimulate business growth and improve the overall health of the economy," commented Deputy Economic Development Minister Vakhtang Lezhava.

The real cure, the government says, will come from cutting taxes; corporate income tax is expected to be slashed to a flat rate of 15 percent, the lowest in the South Caucasus. Various forms of personal income will also be tax-exempt, including money earned overseas by labor migrants.

But with lower tax rates come worries about lower state revenues.

Officials, though, maintain that state revenues for programs like Cheap Credit and the discounted farmland will not be compromised by decreased tax rates. "We have it on good authority that the budgetary revenues will not go down, as subsequent growth in businesses will make up for reduced tax rates," contended Deputy Economic Development Minister Lezhava.

Georgia’s economy expanded by 9.4 percent in 2006; in a recent statement, the International Monetary Fund (IMF) cited real Gross Domestic Product growth for 2007 at over 12 percent.

Although much of that growth was attributed to variable "private capital inflows," the IMF has projected economic growth at 9 percent for 2008. The government has set 7.5 percent as its target.

Editor�s Note: Giorgi Lomsadze is a freelance reporter in Tbilisi.

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