Supporting Inclusive Growth and Development in Georgia
Promoting job creation, gender equity, and poverty reduction for a better tomorrow
April 15, 2014
Georgia is located along a strategic corridor connecting Europe with Asia, and the country has significant renewable hydropower energy resources, a diverse climate and appealing tourist sites, and a broad range of agricultural products that can be produced and processed. In addition to the consequences of the financial crisis, the 2008 conflict created a new wave of displacement that added to an already sizable population of internally displaced persons (IDPs). Over the past 10 years, the country has embarked on a program of deep reforms, significantly reducing corruption, improving the private sector environment, and introducing a targeted social assistance (TSA) program. In the aftermath of the dual crises of 2008, investor confidence weakened and foreign direct investment (FDI) fell sharply, from US$1.7 billion in 2007 to about US$680 million in 2009. Workers’ remittances declined by about 20 percent and exports by about 8 percent in real terms. In addition, commercial banks’ total assets, loans, and deposits fell, while nonperforming loans (NPLs) rose and unemployment reached 17 percent. Poverty and inequality also increased.
For Georgia’s IDPs, every bit of money counts, as does every bit of food and space. When I ran out of places to store what I produced myself from my small plot of land, it was a problem. After getting a separate space to store the fruits, vegetables and other products I preserve for winter, my two-room home is more spacious for myself and my family.
To address these challenges, the joint World Bank/International Finance Corporation (IFC) Country Partnership Strategy (CPS) for Georgia focused on post-conflict and vulnerability needs in the near term, and on strengthened foundations for medium-term competitiveness and growth. During the CPS period, the Bank supported Georgia’s development strategy through a financing envelope of US$823 million from the International Bank for Reconstruction and Development (IBRD) and International Development Association (IDA) (more than twice the original envelope of US$396 million), and the Multilateral Investment Guarantee Agency (MIGA) provided guarantees with a net exposure of US$22.5 million. The program supported reforms and activities that aimed to expand coverage of both the TSA and medical insurance programs (MIP) for the poorest segments of the population by scaling up benefits and reinforcing targeting effectiveness. It also supported reforms and investments aimed at improving the business environment and the country’s overall competitiveness, which were achieved with the support of a highly complementary and balanced mix of investment lending, development policy operations (DPOs), and knowledge and technical assistance products.
These kinds of factories are important for development. Reforms in support of further economic growth are a must, because they create needed jobs for thousands of Georgians, including myself.
Key accomplishments of the CPS cut across both pillars and various sectoral interventions:
- Public resource management improved through the introduction of performance-based budgeting and the establishment of new local government budgetary systems in all municipalities. The overall budget deficit decreased from 9 percent of GDP in 2009 to almost 3 percent in 2012, while the budget share of social services increased to 40 percent in 2012 from 36 percent in 2009.
- Employment supported by Bank-financed labor-intensive projects helped mitigate the social impact of the crises. During FY10–13, Bank-financed transport and regional infrastructure projects generated about 45,000 person/months of temporary jobs (exceeding the CPS target of 30,000), and IFC-supported clients generated over 1,400 permanent jobs.
- Poverty rates in Georgia decreased from 21 percent in 2010 to less than 15 percent in 2012, and extreme poverty decreased from 7 percent in 2010 to 4 percent in 2012.
- Systemic banks weathered the crisis. IFC played a critical role in mobilizing debt and equity financing to support Georgian Banks’ liquidity and capital needs, and helped recapitalize key banks and restore market confidence. The capital adequacy and liquidity ratios, returns on assets and equity, and NPL ratio showed a recovery from the 2009 crisis.
- The share of population in the bottom two income quintiles with access to publicly subsidized health care increased by 21 percent between 2008 and 2011. The population eligible for MIP increased by 117 percent from 0.75 million in 2008 to 1.63 million in 2012, and in 2013, about 800,000 new beneficiaries were effectively covered.
- Regional infrastructure project investments led to tripled daily water production in the targeted areas and improved access to water sources for 181,700 people in urban areas and 181,835 in rural areas. Energy efficiency for water production also doubled, from 0.63 Kwh/m3 in 2008 to 0.30 Kwh/m3 by May 2013.
- The transit time on the Vaziani-Telavi road segment was cut by just under 50 percent from 120 to 55 minutes, and the transit time on the Agaiani-Igoeti-Sveneti-Ruisi route was reduced by 30–38 percent by upgrading a two-lane road to a four-lane highway. Car operating costs decreased by 53 percent and 10–15 percent, respectively, while truck operating costs declined by 38 percent and 5–7 percent. Fatality incidents per 10,000 vehicles declined nationally from 14 in 2008 to 8 in 2012, a 43 percent reduction.
- Georgia’s Global Competitiveness and Doing Business rankings in 2012–13 improved.
Housing and living conditions for IDPs improved. The Regional & Municipal Infrastructure Development Project and the Bank-executed European Union (EU) Trust Fund for IDPs Emergency Rehabilitation and Construction in Georgia financed the construction of over 780 new houses and the rehabilitation of over 1,480 existing houses, benefiting 3,600 IDPs.
Targeted Social Assistance (TSA) coverage and efficiency improved, significantly contributing to the poverty reduction. A range of measures were implemented to improve effectiveness of the TSA. In 2012 the TSA budget reached GEL279 million, compared to GEL124.5 million in 2008. The number of TSA beneficiaries increased by about 19 percent, and leakages were reduced. The share of the population in the bottom decile of consumption per adult equivalent receiving TSA benefits increased from 39 percent in 2009 to 54 percent in 2012, compared to 32 percent in 2007.
Bank Group Contribution
The above results were supported by the Bank’s financing envelope of US$823 million (of which US$414 million was from IDA funding). IFC provided US$251 million of direct financing and mobilized an additional US$36 million. MIGA provided guarantees with a net exposure of US$22.5 million. Bank funding was channeled to maximize comparative advantage, technical knowledge, and complementarities. The selectivity in the Bank’s program strengthened the effectiveness of public expenditure and administration through analytical and advisory (AAA) services and DPO policy reforms, together with targeting specific investments in infrastructure and regional development programs. This complemented IFC support, which focused on strengthening the financial system and supporting enterprises in agribusiness. More recently, the energy sector has become an area of concerted World Bank Group focus, which will be consolidated into the program going forward.
As of February 25, 2014, Georgia’s IDA/IBRD portfolio consisted of eight active investment projects, including one fully disbursed DPO, with total commitments of US$600 million (of which US$229.5 million is IDA). The undisbursed portfolio amounts to US$159 million (of which US$77.5 is IDA). Infrastructure is the main focus of the investment program, which also includes a relatively small Trust Fund portfolio of five recipient-executed Trust Funds amounting to US$10.6 million, mainly supporting sustainable wastewater management and institutional-capacity building in selected public institutions.
The Bank has played an active role in donor coordination, which has been particularly strong at the sector level and in the area of capacity building, as evidenced by the mobilization of Trust Funds. For example, the Regional and Municipal Infrastructure Development Project had a catalytic effect through its financing of the preparation of a National Strategy for Wastewater Management, which helped Georgia mobilize a US$10 million Swedish International Development Cooperation Agency (SIDA) grant to promote sustainable wastewater management and pilot the implementation of wastewater treatment plans. In the education sector, the World Bank provided technical support to the Millennium Challenge Corporation (MCC) during its preparation of a US$122 million education project, and the World Bank and MCC subsequently collaborated and jointly funded a tracer study on vocational education graduates in 2013. In the transport sector, the World Bank has taken the lead in convening annual donor meetings to exchange ideas and strengthen coordination on overall transport sector policy and road sector financing plans. In addition to the World Bank, key donors in the transport sector include the Asian Development Bank (ADB), the Japan International Cooperation Agency (JICA), and the European Investment Bank (EIB). The Bank closely coordinated with the International Monetary Fund (IMF) during the preparation and supervision of the DPOs and on analytical activities of common interest. IFC also made numerous co-investments alongside other partners such as the European Bank for Reconstruction and Development (EBRD), the German Investment Corporation (DEG), the (Dutch) Entrepreneurial Development Bank (FMO), and the Overseas Private Investment Corporation (OPIC).
The key challenge facing Georgia is to implement an inclusive growth strategy with a deeper focus on job creation, gender equity, and poverty reduction. These objectives are fully aligned with the Government’s Socioeconomic Development Strategy and with the World Bank’s twin goals of promoting inclusion and private sector–led growth.
Georgia will graduate from IDA by the end of FY14. The Government has confirmed its interest in maximizing IBRD borrowing. The World Bank’s program will continue to be selective and complement and leverage other donor programs, and will include a series of annual DPOs and investment projects mainly focused on transport, regional infrastructure, energy, and agriculture.
Subject to market demand and the availability of viable investments, IFC is planning investments between US$350 and US$450 million, with the goal of mobilizing additional financing from the private sector and international financial institutions (IFIs), including through public-private partnerships (PPPs). In addition to ongoing financial sector support, IFC will aim to grow its real sector portfolio through investments in sustainable energy, and continue to seek opportunities to
invest in competitive manufacturing, agribusiness, and services companies, particularly those with strong links to the rural economy and to small and medium-sized enterprises (SMEs).