09TBILISI907, GEORGIAN ECONOMY WORSENS, BUDGET CRISIS POSSIBLE

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Reference ID Created Released Classification Origin
09TBILISI907 2009-05-12 15:11 2011-08-30 01:44 CONFIDENTIAL Embassy Tbilisi

VZCZCXRO2263
OO RUEHDBU RUEHFL RUEHKW RUEHLA RUEHNP RUEHROV RUEHSR
DE RUEHSI #0907/01 1321511
ZNY CCCCC ZZH
O 121511Z MAY 09
FM AMEMBASSY TBILISI
TO RUEHC/SECSTATE WASHDC IMMEDIATE 1552
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE PRIORITY
RUEHLO/AMEMBASSY LONDON PRIORITY 0820
RUEHML/AMEMBASSY MANILA PRIORITY 0023
RUEKJCS/OSD WASHINGTON DC PRIORITY
RUEATRS/DEPT OF TREASURY WASHINGTON DC PRIORITY

C O N F I D E N T I A L SECTION 01 OF 02 TBILISI 000907 
 
SIPDIS 
 
LONDON PLEASE PASS TO EBRD K. PEEL, MANILA PLEASE PASS TO 
EBRD C. CHIN 
 
E.O. 12958: DECL: 05/11/2019 
TAGS: ECON ENRG PGOV PREL GG
SUBJECT: GEORGIAN ECONOMY WORSENS, BUDGET CRISIS POSSIBLE 
 
Classified By: Ambassador John F. Tefft for reasons 1.4 (b) and (d). 
 
1.  (C) SUMMARY:  Buffeted by the global economic crisis and 
domestic political instability, the Georgian economy is in 
decline.  The economy constricted 6.5 percent in the first 
quarter of 2009, and initial April numbers are not promising. 
 Remittances from abroad, especially Russia, have declined 
considerably.  According to experts at the Ministry of 
Finance and National Bank, tax revenues in April decreased 60 
percent in comparison with April 2008.  The Ministry of 
Finance reports that overall tax revenues have decreased 20 
percent on the year in comparison with 2008 figures.  Prices 
for Georgian exports continue to decline as well.  END 
SUMMARY. 
 
2.  (C) COMMENT: While official numbers for April are not yet 
available, early indications are that the speed of the 
decline that has taken place since the August 2008 war with 
Russia is increasing.  At this point, it is unlikely that the 
government will be able to make up for the revenue lost in 
the first half of 2009 by year's end.  We understand that the 
Ministry of Finance is preparing a budget amendment to 
further cut government expenditures, in hopes of stemming a 
budget crisis.  END COMMENT. 
 
GDP SHRINKING MORE THAN PROJECTED 
 
3.  (C) In light of worse than expected economic statistics 
from the first quarter, the government has adjusted its 
expected GDP growth downward from two to one percent.  While 
the Georgian economy constricted 6.5 percent in the first 
quarter, it is difficult to extrapolate this number for 
quarters two and three, as historically the Georgian economy 
has been stronger during the second and third quarters. 
However, initial figures for April reported by the Ministry 
of Finance and National Bank indicate that the economic 
decline is continuing and perhaps even accelerating. 
 
GOVERNMENT REVENUE, CENTRAL ACCOUNT BALANCE DROPPING 
 
4.  (C) According to U.S. Treasury advisors at the National 
Bank and Ministry of Finance, the Central Treasury Account at 
the National Bank has fallen to approximately 600 million GEL 
(361 million USD); a decrease of 200 million GEL (120.5 
million USD) from March.  This account is used as the funding 
mechanism for government expenditures.  Lower than expected 
tax and customs revenue have contributed significantly to 
this decrease.  In addition to the 20 percent decrease in tax 
revenues year to date, the Minister of Finance reported that 
VAT collections have also dropped precipitously due to a 
significant decrease in imports.  Remittances from Russia and 
Ukraine have fallen 57 percent and 43 respectively in 2009, 
also affecting the budget. 
 
GOVERNMENT ADJUSTS BUDGET PROJECTIONS . . . 
 
5.  (C) The government initially announced it did not plan to 
amend the 2009 budget in light of higher than anticipated 
economic constrictions.  (Embassy note.  In past years, 
budget amendments were introduced due to higher-than-forecast 
revenues.  End note.)  However, on May 7 the Ministry of 
Finance said it was working on a budget amendment that would 
redistribute funds.  We expect the amendment to be issued in 
the next few days, perhaps as early as May 13, and to contain 
budget cuts for government agencies.  Most, if not all, of 
the fat in the 2009 Georgian budget was removed last fall, as 
Qthe fat in the 2009 Georgian budget was removed last fall, as 
the government expected growth to fall due to the August 2008 
invasion and the global financial crisis.  Unfortunately, 
this means if the government is to cut expenditures, it will 
likely be forced to decrease funding to key areas of the 
budget, possibly including social programs. 
 
... AND LOOKS FOR CASH 
 
6.  (C) In addition to cutting the budget, the government is 
looking for any way possible to increase government revenues. 
 There have been efforts to work with the World Bank (WB) and 
Asian Development Bank (ADB) to turn additional pledges of 
assistance into budget support.  The government has also 
asked several of the international financial institutions 
(IFIs) to advance 2010 payments to help them make it through 
this tough stretch.  The Ministry of Finance also recently 
issued a tender announcement to reintroduce a state lottery. 
Funds collected from the lottery would go directly into the 
state budget. 
 
 
TBILISI 00000907  002 OF 002 
 
 
COMMENT:  IT COULD GET WORSE BEFORE IT GETS BETTER 
 
7.  (C) The government is looking for any possible source of 
funding for the state budget, and recognizes that on its 
current trajectory the Ministry of Finance could run out of 
funds before the end of 2009.  Better-than-expected March 
economic figures emboldened th
e government, as GDP grew 
during the month.  However, with the opposition protests 
beginning April 9 and continuing to date, stability in 
Georgia has once again become a question in the international 
media.  This has negatively affected Georgia's economy at a 
time when the country desperately needs to attract 
international investors. 
TEFFT

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