Economic Reforms and the Rose Revolution

1
Economic Reforms and the Rose Revolution

• Robert Christiansen
• IMF Resident Representative in Georgia.
• GIPA, June 17, 2006

2
Overview

• Economics of the Rose Revolution
• Importance of macroeconomic stability
• Challenges ahead.

3
Georgia Before the Rose Revolution

• Corruption was widespread
• Significant arrears were accumulated
• Taxes were unpaid
• Economic institutions did not work.
• Georgia was effectively a failed state before the
  Rose Revolution.

4
Rose Revolution Promises

• Demonstrate progress in fighting corruption
• Deliver tangible and visible results quickly.
• Improving governance was the primary
  post-revolutionary expectation.
• Economic reform was a secondary objective

5
Expectations of the Rose Revolution

• Source Georgian Opinion Research Business
  International April, 2005

6
Overview Economic Growth
2006 is the IMF staff estimate
7
Overview Poverty
8
Overview Inflation
2006 is the IMF staff estimate.
9
Overview Corruption

• Corruption perception index, (Transparency
  International)

1 Most corrupt 10 Least corrupt 0
Least corrupt 1 Most corrupt
10
Economic Agenda after the Rose Revolution

• The priority steps to undertake included
• Fight corruption in revenue collection
• Improve fiscal management and
• Increase expenditures to meet public
  expectations.
• In terms of economic reforms the Rose Revolution
  was a fiscal event

11
Overview Budget
2006 is the IMF staff estimate
12
After the Rose Revolution
2006 is the IMF staff estimate
13
After the Rose Revolution
2006 is the IMF staff estimate
14
After the Rose Revolution
2006 is the IMF staff estimate
15
After the Rose Revolution

• Increase in pensions (from 14 to 33 lari)
• Clearance of arrears (about 2 percent of GDP)
• Energy sector rehabilitation (about 1 percent of
  GDP)
• Launching reconstruction of roads (about 1
  percent of GDP)
• Introduction of a new tax code
• Introduction of a free emergency health care
  system
• Launching education reform.

16
What is Important in 2006-2007

• Economic growth
• Poverty reduction
• Low Inflation
• Macroeconomic stability

17
Economic growth
18
Poverty
19
Inflation
20
Inflation
10.4
10
6.2
21
Inflation
GDP growth
kink at 1-3 for industrial countries
7-11 for developing countries
(Khan and Senhadji)
Other estimates of the kink 2.5 (Ghosh
Phillips, 1998) 8 (Sarel, 1996) 13
(Christoffersen Doyle, 1998,
transition countries)
log(?)
Ref M. Khan A. Senhadji (2000), Threshold
Effects in the Relationship between Inflation and
Growth, IMF WP 00/110.
22
Achieving Macroeconomic Stability in 2006

• Coordinated government policies can ensure
  achieving low inflation and macro stability

23
Macroeconomic Stability

• How economy works

NBG
Money Supply, Lari
Monetary Policy
Fiscal Policy
MACROECONOMY (Private sector spending, government
spending and net inflow from abroad)
Government Taxes-Spending Deficit
Taxes
Spending
M
X
Rest of the World
24
Macroeconomic Stability

• A. Effect of Inflation

NBG
MACROECONOMY
Money Supply, Lari
Monetary Policy
Fiscal Policy
MACROECONOMY (Private sector spending, government
spending and net inflow from abroad)
Government Taxes-Spending Deficit
Taxes
Spending
M
X
Rest of the World
25
Macroeconomic Stability

• B. Recession

NBG
Money Supply, Lari
Monetary Policy
Fiscal Policy
MACROECONOMY (Private sector spending, government
spending and net inflow from abroad)
MACROECONOMY (Private sector spending, government
spending and net inflow from abroad)
Government Taxes-Spending Deficit
Taxes
Spending
M
X
Rest of the World
26
Looking forward

• The most significant risks for 2006-2007 include
• Deterioration of economic relations with Russia
• Increase in energy prices
• Limited and a specific export structure
• Exhausting privatization revenue sources.

27
The challenges

• Deterioration of economic relations with Russia
• Wine and mineral water ban
• Ban on agricultural products
• Speculations on ban on remittances and labor
  migration
• Future implications?

28
The challenges

• Increase in energy prices
• Russian gas import prices increased from 64 to
  110 in 2006.
• The macroeconomic consequences.

29
The challenges

• Limited and a specific export structure

30
The challenges

• Exhausting privatization revenue sources
• Authorities have already spent about 80-85
  percent of privatization revenues.

31
Questions?

• For further information contact us at
• 4 Freedom Square, GMT Plaza.
• Tel [phone]
• Fax [phone]
• www.imf.ge