08TBILISI901, PM GURGENIDZE: GEORGIA BUILDING “IDIOT-PROOF”

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Reference ID Created Released Classification Origin
08TBILISI901 2008-05-30 11:33 2011-08-30 01:44 UNCLASSIFIED//FOR OFFICIAL USE ONLY Embassy Tbilisi

VZCZCXYZ0007
RR RUEHWEB

DE RUEHSI #0901/01 1511133
ZNR UUUUU ZZH
R 301133Z MAY 08
FM AMEMBASSY TBILISI
TO RUEHC/SECSTATE WASHDC 9519
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC

UNCLAS TBILISI 000901 
 
SENSITIVE 
SIPDIS 
 
STATE FOR EUR/CARC AND EEB/CBA 
COMMERCE FOR DANICA STARKS 
 
E.O. 12958: N/A 
TAGS: ECON EINV PGOV GG
SUBJECT: PM GURGENIDZE: GEORGIA BUILDING "IDIOT-PROOF" 
ECONOMIC SYSTEM TO SUSTAIN GROWTH AND ATTRACT NEW INVESTMENT 
 
1.  (U) Summary: Prime Minister Lado Gurgenidze told the 
American Chamber of Commerce on April 30 that Georgia is 
living proof that "supply side economics works".  His speech 
to the group was essentially the same as he presents to 
potential investors at the "Invest in Georgia" conferences 
the government has organized in various American and European 
cities.  Gurgenidze was educated in the United States, lived 
in Florida for some years, and on his return to Georgia 
headed the country's largest commercial bank.  He paints an 
attractive -- and not too exaggerated  -- picture of a 
government with a clear vision of how it wants to revitalize 
Georgia with extremely open and liberal policies that are 
beginning to produce results.  Gurgenidze said the GOG wants 
to "idiot proof" its economic system to make it safe from 
"tax and spend" policies under future governments.  With most 
reform now in place, he said, the next step is to create an 
offshore financial system that will attract USD 10-15 billion 
to Georgia in the next five years.  Such a system will 
feature limited prudential oversight but strong anti-money 
laundering controls.  Gurgenidze admitted the government 
needs to do better to increase "buy-in" from the poor 
population in Georgia for the government's libertarian 
policies.  He estimates that 20 billion dollars of new 
investment is needed to reduce unemployment to manageable 
levels.  Gurgenidze did not address the very real need for 
greater confidence in the rule of law and the judiciary in 
Georgia as a spur to further economic growth.  End Summary. 
 
 
2.  (U) Gurgenidze vowed that the GOG will continue to cut 
taxes and regulations, and proudly pointed to a 500% increase 
in tax revenues over the past five years as tax rates have 
declined.  The result has been a "Shumpeterian" burst of 
entrepreneurship, he said.  Fifty thousand new businesses 
were registered in 2007, and there are now a total of 360,000 
registered, one of the highest rates in the world, Gurgenidze 
said.  He pledged to maintain the liberal legislation the 
Saakashvili government has put into place up to now.  In 
particular, he defended what are often deemed to be 
exceedingly employer-friendly labor laws.  In a private 
conversation with AmCham leaders after his speech, he 
insisted the labor code will only be changed "over my dead 
body". 
 
3.  (U) What Georgia is seeing now, Gurgenidze said, is an 
emerging middle class, more cars, telephones, bank accounts 
and better infrastructure.  He admitted that exports are 
something of a disappointment and too low at 31 percent of 
GDP.  The current account deficit makes the economy 
vulnerable, he said, but not more so than many other 
countries.  The silver lining is that unlike Venezuela and 
some other countries rich with natural resources and strong 
current account surpluses, the GOG cannot afford to make 
political mistakes.  Reducing the current account deficit by 
increasing exports is a government priority, he said, but not 
by means of subsidies.  The appreciating trend of the 
national currency does not concern Gurgenidze, except as 
against the euro, and for the moment that relationship is 
fairly stable.  The lari's appreciation against the dollar 
only makes energy cheaper and does not affect the country's 
export potential.  (Note: Gurgenidze did not mention that 
most Georgians' savings are still dollar-denominated and they 
are quite uncomfortable with the dollar's decline against the 
lari.) 
 
4.  (U) Gurgenidze noted that remittances are 4 percent of 
GDP, which he said is an important source of national income 
but not one on which the economy is over-reliant.  As an 
example of over-reliance, Gurgenidze cited Tajikistan, where 
remittances approach 25 percent of GDP.  Foreign investment 
continues to accelerate, Gurgenidze said, with first quarter 
2008 being the country's best quarter for such inflows in its 
history.  He expects the positive trend to continue over the 
next five years, despite the Russian embargo and worldwide 
financial problems.  Already Georgia is one of the freest 
economies in the world, Gurgenidze said proudly, and the 
benefits are beginning to be felt.  GDP per capita has 
increased to USD 2315.  Gurgenidze expects that Georgia will 
be able to close the gap in GDP per capita on a purchasing 
power parity basis with countries such as Romania and Russia 
within three years, putting Georgia on a par with the poorest 
members of the European Union.  Recent growth has been 
broad-based according to Gurgenidze, with all sectors of the 
economy contributing -- "Georgia is not a monoculture". 
There is strong variance in the sources of foreign 
investment, and in particular, no other country of comparable 
size has such a strong popularity among institutional 
 
investors.  Total capital inflows in 2007 were USD 2.3 
billion.  Those investors who recently bought Georgia's -- 
oversubscribed -- eurobond know and are quite comfortable 
with Georgia's credit risk, Gurgenidze said.  Closer to home,

Gurgenidze said Georgia will welcome Azeri and Armenian 
entrepreneurs to set up businesses in minority areas such as 
Akhaltsikhe and Marneuli in order to take advantage of the 
liberal environment. 
 
5.  (U) Gurgenidze said Georgia has largely done all that is 
needed in economic reform.  He said the GOG is designing its 
economic system to be "idiot-proof" and safe from 
encroachment by possible future "social democratic" 
governments.  The government's idea is to build inertia in 
economic thinking into the legislative framework, making it 
hard to return to "tax and spend".  He referred to recent 
legislation mandating a small annual budget surplus and 
explicit inflation targets for the central bank.  Under the 
latter law, the central bank's inflation target must be 10 
percent or less and the central bank president loses his job 
if that limit is exceeded for more than a year.  Gurgenidze 
said the government has reduced its debt load to 23 percent 
of GDP from 56 percent, and external debt is only 15 percent 
of GDP.  Debt service is only 5 percent of revenues, he said, 
and this modest level of indebtedness promotes resilience to 
external shocks.  Budget revenues have increased from 16 
percent to 29.7 percent of GDP.  Expenditures are too high at 
30 percent of GDP, he said.  Gurgenidze would like them to be 
20 percent of GDP, but will settle for 23-24 percent. 
Inflation is more than Gurgenidze likes, and he said it will 
go higher before it comes down.  Still, he said, it is less 
than that in Ukraine, Kazakhstan or Russia.  The central bank 
has increased interest rates by 500 basis points since early 
2007, and is ready to increase them more if required, he 
added. 
 
6.  (U) Gurgenidze, said the domestic banking sector is 
"plenty competitive" but also healthy.  He is satisfied with 
the commercial banks' ratio of loans to deposits of 1.3, but 
would not want to see it any higher.  He said he was sure the 
bankers are aware of that.   Not surprisingly for a former 
banker, Gurgenidze is an advocate for regulation of the 
banking sector "with a light touch".  He opposes 
"rules-based" regulation, which he contends would cost the 
country a couple of percent of GDP growth. 
 
7.  (U) Now, Gurgenidze said, the government wants to create 
an attractive offshore financial system for foreign 
investors.  He wants Georgia to be a clean but low tax 
jurisdiction.  The government's experts have to draft more 
than 60 new laws to put the project in place, but Gurgenidze 
expects the task to be completed by the end of the year. 
Under the new laws, "international financial companies" will 
be easy to set up, but will be permitted to hold only 10 
percent in Georgia-sourced capital.  They will be completely 
free not only of Georgian taxes, but also Georgian prudential 
supervision.  The system is to be designed for sophisticated 
investors, and the rule will be "caveat emptor".  However, 
Gurgenidze said, as the GOG liberalizes it will tighten money 
laundering controls, because "once a jurisdiction gets the 
stigma it can't get rid of it."  The new system will draw on 
the best of Gibraltar and Singapore, he said.  Georgians 
speak Russian and English, and can learn Turkish and Arabic 
to serve clients, Gurgenidze said.  Georgia will have the 
most liberal regime in the region, and with Lebanon gone, 
Dubai too expensive and Cyprus now under EU legislation, he 
expects Georgia will be successful in attracting as much as 
USD 10-15 billion in the next five years, employing 6000 
people in new jobs, half of them expatriates.  He does not 
find this goal unrealistic, especially since he intends to 
"market the hell out of it." 
 
8.  (U) At the end of his speech, Gurgenidze addressed the 
political implications of the government's liberal economic 
philosophy.  The fact is, he said, the economic glass is 
three-quarters full and one-quarter empty.  The government 
needs better communication to explain that.  Talking about 
the ease of doing business is largely irrelevant to the 
country's poor population, he said.  The government is 
libertarian, but doesn't want reform to be a "dirty word." 
It wants social cohesion and buy-in even from the very poor, 
who must understand the connection between investment and job 
creation.  For five years, Gurgenidze said, the country has 
had jobless growth, with the total number of jobs stuck at 
1.75 million as the public sector sheds jobs as fast as the 
private sector creates them.  He contended that the quality 
of jobs and wages has increased, however, even ahead of 
 
productivity growth.  He said the country needs USD 20 
billion in investment to reduce unemployment to manageable 
levels.  In the meantime, Gurgenidze said, the government is 
doing what it can to increase social payments.  However, the 
goal is means-tested payments instead of giving a little to 
everyone.  There are close to one million poor people in the 
country, Gurgenidze said, and the government wastes 
assistance on people who don't need it.  In the long term, he 
is convinced that growth will take care of the problem. 
 
9.  (SBU) Comment: Gurgenidze's vision of a very free and 
competitive economy, is well on its way to reality, certainly 
on paper.  He revealed that his enthusiasm for libertarianism 
carries with it some insensitivity when he asked the AmCham 
audience how many of their parents "really needed" the small 
pension payments they receive.  Although they understood his 
point about the need for means-testing, most of his listeners 
were taken aback as they imagined their parent's reaction to 
giving up the pensions they had earned.  The National 
Movement's sweeping victory in the recent elections gives 
them the power to continue on the path Gurgenidze mapped out. 
 This points up the one real worry in many business owner's 
minds, which was voiced by a businessman to Econoff.  He 
asked whether with an overwhelming victory, Saakashvili will 
take it as a mandate to "do whatever he wants and ignore 
process and property rights whenever it suits him".  The 
question gets to the heart of the need for strengthening rule 
of law and particularly the court system -- issues which 
Gurgenidze understandably based on his logic did not address. 
 In the long run, more confidence in the judiciary will do as 
much as any of Gurgenidze's other plans to ensure that 
investment and economic growth reach their full potential. 
End Comment. 
TEFFT

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