Economy, Finance Ministers and C.Bank Chief Grilled by MPs at Committee Hearing

• Govt considering scrapping tax on reinvested profit;
• Economy minister: there were ‘some wrong messages to businesses‘;
• Economy minister: ‘system was unprepared’ for new visa, migration rules;
• Finance minister: 5% growth forecast was ‘realistic‘ three months ago; 
• Privatization of Georgian Post, 24.5% shares of Telasi planned;

Parliamentary committee chamber in Tbilisi was packed on March 12 as MPs heard ministers and c.bank chief; attendance, however, dwindled by the time when the hearing entered into its fifth hour. Photo: parliament press office

Economy Minister and deputy PM, Giorgi Kvirikashvili, told lawmakers at a parliamentary committee hearing that lari depreciation and economic slowdown in Georgia was a result of external factors, but he also said the government made some mistakes too.

Kvirikashvili, along with Finance Minister Nodar Khaduri and president of National Bank of Georgia Giorgi Kadagidze appeared on March 12 before a joint hearing of two parliamentary committees for economic policy and finances, which lasted for more than five hours, to discuss the current economic situation in the country.
 
Lawmakers from the opposition Free Democrats party walked out of the committee chamber in protest right after the start of the hearing. MP Zurab Abashidze of FD said that this committee hearing was “just a show” staged by GD to justify its intention not to attend a special parliamentary session next day. He was referring to a controversy over a special session of the Parliament, which was convened for March 13 by the President and which the GD lawmakers are going to boycott. Although UNM lawmakers usually boycott committee meetings in Tbilisi because of their protest against partial relocation of Parliament from Kutaisi to Tbilisi, they attended the March 12 hearing. UNM, which is preparing for a protest rally planned in Tbilisi center for March 21 to demand government’s resignation, also called on the GD not to snub parliament special session and to continue debates on economy on March 13.

Meanwhile outside the parliament pro-UNM group was holding a protest rally; pro-government group, Free Generation, which is frequently holding rallies outside UNM’s offices, also arrived for a counter-demonstration, which grew into scuffles between the two groups in which UNM MP Giorgi Gabashvili and one of UNM leaders Giga Bokeria also became involved.

While UNM opposition lawmakers were grilling ministers, accusing them of not having “any idea” and plan how to tackle “the existing economic crisis”, many GD MPs were questioning central bank chief, suggesting that the National Bank did not intervene sufficiently to stop sharp fall of lari. Such allegations became frequent from the ruling coalition politicians in address of the central bank chief after ex-PM Bidzina Ivanishvili criticized Kadagidze late last month.

Speaking at the committee hearing, Kadagidze reiterated his position and said that aggressive interventions in the currency market to resist long-term shocks, caused by external factors, would be waste of country’s foreign currency reserves.

“Intervention would be the easiest way for me” to avoid attacks on central bank, said Kadagidze, whose term in office expires in February, 2016. “But it’s a wrong policy in this situation and I won’t do that.”

He also said that no further significant “fluctuation” of lari is expected this year – view also shared by economy and finance ministers.

Lari has fallen 25% against U.S. dollar since early November, when it started to depreciate, and is now at 2.19 per dollar. At the peak of its recent depreciation on February 26, GEL had 29% of its value lost against U.S. dollar. 

‘No Tax on Reinvested Profit’

Kvirikashvili said that apart of measures, which will have short-term effect and which involve stepping up of privatization, the government is considering measures aimed at further improvement of business climate, including through tax “liberalisation”. 

“Serious steps are planned in respect of tax liberalisation, details of which will be soon announced,” Kvirikashvili said.

He said that the proposal will involve scrapping of corporate income tax on reinvested profits. He said that details have yet to be elaborated by the government.

Kvirikashvili said that although in a short-term it will have a negative impact on state coffers by loss of about GEL 700-800 million, in longer run it should boost economic growth.

He also said that this move will significantly ease tax administration, which will also be an important relief for businesses.

Finance Minister Nodar Khaduri described government’s planned proposals as “really revolutionary.”

As the most immediate measure, the Economy Minister said, the government will be intensify privatization process from which it expects to raise about USD 300 million, which, he said, will also help to stabilize GEL.

Among the state-owned assets, which will be up for sale, Kvirikashvili listed the Georgian Post and 24.5% of shares in Telasi, electricity distributor company in capital Tbilisi; rest of the 75% of shares is owned by the Netherlands-registered Silk Road Holdings B.V., which is wholly owned by Russia’s state-controlled power trader Inter RAO. He said that privatization of Georgian Post requires “serious preparation”, which is expected to be over in the second half of this year.

‘Wrong Messages to Business’ and ‘Excesses’ in New Visa Rules

Although Kvirikashvili said that slowdown in growth of number of tourists last year and 7.8% year-on-year decline in January-February, 2015 was far from being among the main factors of lower external financing, he acknowledged that mistakes were made in the process of tightening visa and migration regulations, which went into forces from September, 2014.

“As far as visa regime is concerned, there were certain excesses in terms of bureaucracy,” Kvirikashvili said.

He also said without specifying that “system was not ready” in terms of administration of the new regulations. Georgia launched online visa application forms in February, five months after tightening regulations.

Kvirikashvili said that the government would “soon” present to the parliament a bill “liberalizing” visa requirements; he did not elaborate details of the planned changes.

Kvirikashvili also acknowledge that there were also “complications” in respect of issuing residence permits.

According to the Justice Ministry a bill will be introduced designed to ease obtaining of residence permit; one of the proposals, according to the ministry, is to make a foreign national automatically eligible for residence permit if he or she buys a property worth of at least USD 35,000.

The Economy Minister, who was told by opposition MPs during the hearing that government’s policies of imposing various regulations was one of the reasons of economic woes, acknowledged that “some wrong messages” were sent to the business community by introducing business unfriendly bills.

He cited a case of the government-proposed bill on labor migration, which initially included a provision obligating employers to at first seek personnel among local workforce before hiring a foreign citizen. This provision was removed from the bill as a result of lobbying from the business community. Kvirikashvili said that although this provision was eventually dropped, the damage had already been done.

The government said it will revise economic growth forecast from 5% to 2%, which Economy Minister Kvirikashvili said was a conservative estimation.

The state budget, which the Parliament confirmed in late December, is based on 5% growth forecast.

During the committee hearing UNM lawmakers, who in December were warning the government that their estimations and budget parameters were not realistic, told the ministers that the fact they had to revise those figures just few months after the budget was confirmed was demonstrating government’s incompetence; they also said that all the external factors, among them recession in Russia and Ukraine crisis, cited by the government as the main reason behind depreciation of lari and economic slowdown in Georgia, had already been in place three months ago. Downward trend in exports and remittances, started from the second half of last year.

Finance Minister Nodar Khaduri, however, insisted that 5% growth forecast was “realistic” at the time and argued that IMF was also backing that figure.

He said that although there is an economic slowdown, contrary to opposition’s claims, the country is not in economic crisis.

The Finance Minister said that the government will cut administrative spending to limit increase of budgetary deficit; he said that a detailed spending cut scheme would be presented next week.

This post is also available in: ქართული (Georgian) Русский (Russian)