The financial infrastructure of Georgia is underpinned at all levels by the urge to nurture freedom—from meddlesome governance, flippant policies and rigid levies.
Attracting investors to enter an uncharted foreign market and assuring them of a good working environment is not an easy task at the best of times. Georgia, facing the dual challenges of the Russian conflict and the international credit crisis, thus found itself in an unenviable position in the initial years of its post-USSR existence. The writing was on the wall—nothing but aggressive, all-out reforms could hoist up the economy, and the Saakashvili administration has effected just that, enhancing Georgia’s brand equity manifold.
The overhaul of the country’s complex tax system was one of the prime challenges facing the new government. First and foremost, the number of taxes has been reduced from 21 to seven. The Ministry of Finance has also introduced a flat personal income tax of 20%, which will be cut to 18% in the coming year. Corporate profit tax is also a flat 15% from 20% previouly. Tax on dividend and interest income is slated to fall from 10% to 5% (and eventually to nil) as well. The results of these reforms have been quite exemplary. Improved collection and administration of taxes have greatly increased revenues for the government. In four years, from 2003 to 2007, tax collections went up from 13.8% of the GDP to 25%. Riding on this, the government has been able to pay off wage and pension arrears and increase spending on infrastructure such as roads and electricity supply systems. The government’s commitment to making the tax reforms irreversible can be gauged from the historic Liberty Act, which makes altering tax slabs impossible without a nationwide referendum.
Resilient Financial Sector
The economic reforms undertaken in the last five years have greatly boosted the health of banks and financial institutions in Georgia. Banking is now a major economic force and one of the fastest growing sectors in Georgia. In 2007, banking assets accounted for 42% of the GDP. The sector has grown stronger on several fronts: capital adequacy, profitability, asset quality and risk management. Liberal regulations have made investment banking, insurance, credit cards, depository services, mortgages and securitisation attractive areas of business. The development of the banking sector has also led to the diversification of loans and lowering of interest rates, further stimulating investment opportunities. In July 2007, HSBC obtained a licence to operate in Georgia, after Société Générale had acquired controlling stakes in Bank Republic in September 2006. Prior to that, in October 2005, Kazakh banking major Turan Alem acquired controlling stakes in Silk Road Bank. VTB bank of Russia acquired 51% shares in United Georgian Bank, one of the top three banks in Georgia, in January 2005. In addition, commercial banks from Greece, Turkey, Azerbaijan and Germany are also present in Georgia. The progress of the banking sector is chaperoned by the constitutionally autonomous National Bank of Georgia, under which Georgia became one of the first countries to fully liberalise capital account transactions and currency regimes. Georgian residents may open current accounts with banks in foreign countries. Residents and non-residents may also invest in commercial banks based in Georgia on equal terms.
In line with its guiding philosophy that an unobtrusive, professional and unrestrictive approach to governance is the only way to sustainably win investor confidence, Georgia has brought about tremendous bureaucratic changes in its financial setup. As part of this, the government has introduced a new ‘one-window’ system that allows a prospective entrepreneur to submit all documents at one place, with no verification by countless other agencies. The introduction of a ‘silence is consent’ rule for construction purposes has also helped matters greatly, whereby a permit or licence is automatically granted if no government action is taken within statutory time limits. Such has been the impact of these reforms that the approval process for building a warehouse in Georgia is now more efficient than in all EU countries except Denmark! Also, a limited liability company can now be set up in the country within one business day. An area of administration that Georgia has set particularly high standards in is eliminating corruption. According to the Transparency International, Georgia gained 67 places between 2004 and 2009 to rank 66th among 180 countries on its Corruption Perception Index. Transparency International has also applauded the Ministry of Finance in view of its efforts to educate the public about how the significant quantum of international aid flowing into the country is spent on various development projects. Legislative checks and balances like the comprehensive Budget Code— mandating complete transparency, uniformity and accountability—and the Liberty Act have added impetus to redefining governance. The Liberty Act, for instance, recommends tight fiscal discipline by capping the debt-to-GDP ratio at 60%. Notably, as a tribute to allround synergies, Georgia has already achieved a remarkably favourable public debt performace, having more than halved its public debt-to-GDP ratio in 2008.
Free Industrial Zones
The establishment of Free Industrial Zones (FIZ) is another key component of the Finance Ministry’s vision for the future. The Poti FIZ, a trendsetter in the region, has seen foreign investments to the tune of USD1bn and is expected to employ more than 20,000 people. Supported by the government’s policy of simplifying taxes, FIZs are geared to become an entrepreneurial haven.
Intensive deregulation, demystified taxation, a relatively unleveraged economy, stable GDP growth approaching the 4-5% target, flexible labour laws, one of the world’s friendliest customs regimes and close to 30 double-taxation treaties have helped Georgia make rapid strides in the FDI arena. In 2007 alone, the country attracted USD1.7bn in FDI, bringing the total FDI stock to USD5.2bn or 51.1% of the GDP—the second highest FDIto- GDP ratio in the former Soviet Union region. However, more than just the capital gains from these inflows, the country has benefitted tremendously from the introduction of modern production and management systems, thus helping build a business environment in sync with global norms.