OECD Investment Policy Review of Georgia highlights challengers, offers recommendations
The Investment Policy Review of Georgia discusses why the 'successive structural, regulatory and economic reforms' of the two decades have not facilitated more broad-based economic growth in the country. Photo: Nino Alavidze/Agenda.ge.
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The Organisation for Economic Co-operation and Development (OECD) has presented an overview of investment trends and policies in Georgia today which highlights the progress the country has made and gives recommendations to overcome the challenges Georgia faces today.
The Investment Policy Review of Georgia discusses why the 'successive structural, regulatory and economic reforms' of the two decades have not facilitated more broad-based economic growth in the country.
JUST PUBLISHED @OECD's #investment policy review of ???????? #Georgia examines the business climate and makes proposals for reforms to attract #FDI that supports inclusive, sustainable growth ➡️ https://t.co/DnbRh1KNF0 #OECDrbc pic.twitter.com/MEVmCUEN70
— OECD Business and Finance (@OECD_BizFin) December 15, 2020
Despite important progress, productivity and exports remain low, and unemployment and poverty are still high, particularly in rural areas. Most FDI has gone to non-tradable sectors, including transport infrastructure, real estate, construction and financial services. These sectors are important contributors to economic growth, but have not sufficiently advanced job creation or productivity, and may be limited by Georgia’s relatively small domestic market”, reads the summary of the review.
Non-tradable sectors attract the most FDI. % of total FDI inflows 2007-2019. Image: OECD.
Head of Investment and Sustainable Development Unit of OECD Stephen Thomsen said at a presentation of the review today that Georgia is one of the best performers in the international rankings, but improvements in rankings do not always lead to increased FDIs.
Thomsen said that Georgia's reforms have been impressive but need to be deepened.
Georgia's reform experience is commendable and is in many ways an example to which other countries look for inspiration. But the reforms have not sufficiently facilitated broad-based economic growth. The overall conclusion is that Georgia has removed much of the de jure barriers to FDI and now the task is how to create an investment climate that promotes sustainability and inclusiveness", he said.
When discussing FDI trends in Georgia Thomsen said that the share of re-investment is higher in the total volume of the FDIs than the share of new investments.
That is an equally important investment in terms of the impact it might have on the economy and of course keeping existing investors happy is as important as promoting new investment. But if you do not get new investments you are not contributing into the diversification of the FDI. FDI is likely to further contract in the near-time as a result of the Covid-19 pandemic, global supply and demand disruptions and the pessimistic outlook of economic actors", he said.
Equity investments have been declining. USD millions. Image:OECD
Georgia is now, like much of the world, facing the health and economic consequences of the Covid-19 pandemic. The government took swift monetary and fiscal measures to support healthcare provision and liquidity and assist at-risk firms and individuals. Disruptions to business, travel, remittances and investment are nonetheless likely to have a severe impact on the economy. The review suggests private investment, both foreign and domestic, will be essential for Georgia’s economic recovery.
The government’s unparalleled success in removing many of the obstacles to doing business is commendable. But such reforms by themselves will neither assure a steady inflow of FDI nor maximise the potential gains from investment.
Further reforms will need to address gaps in infrastructure and connectivity within the country, and upgrade the skills of the workforce. Improving not only regulatory constraints but the whole investment climate – including the wider legal framework, investment promotion strategy and institutions, policies to promote responsible business conduct, and impediments to growth of priority sectors – will help Georgia attract FDI that can have a positive impact on productivity and inclusive, sustainable growth", reads the overview.
Georgia attracts FDI primarily from Europe and bordering countries Russia, Turkey, Armenia and Azerbaijan. As % of FDI stock 2018. Image: OECD.
Promoting sustainable investment in Georgia’s agri-food value chain
The Investment Policy Review of Georgia reads that attracting investment in Georgia’s agricultural and food value chain – collectively accounting for 10% of GDP and 44% of employment – has the potential to generate substantial benefits for key sectors.
The review identifies the following challenges:
- FDI inflows are below potential in this sector
- Agri-food exports are highly concentrated in beverages
- The farm structure is highly fragmented, with most food produced by small-scale family farms
- Productivity and wages are low
Here are policy recommendations for the agri-food value chain:
- Introduce an objective on investment promotion and facilitation in the new Agriculture and Rural Development Strategy 2021-2027.
- Provide a clear and predictable framework for prospective investors to submit investment plans and obtain government approvals to obtain agricultural land.
- Ensure full completion of the land registration reform.
- Strengthen the provision of credit guarantees for agri-food SMEs.
- Continue investing in transport and utility infrastructure and improve the quality of logistics services.
- Renovate outdated irrigation infrastructure and drainage systems and improve internet access in rural areas.
- Consider allocating resources to encourage the formation of supply chain linkages, including linking foreign investors with local SMEs.
- Offer targeted incentives to prospective investors, conditional on their engagement with small-scale producers and agricultural co-operatives.
- Develop well-resourced and functioning agricultural training institutes, extension services and vocational training systems.
- Strengthen food safety and quality standards.
In conclusion the review reads that ensuring that investments are targeted strategically in areas that can contribute to Georgia’s sustainable development requires a coherent investment promotion and facilitation strategy and suitable institutional architecture.
Georgian Prime Minister Irakli Garibashvili has today appointed Vazil Hudak, former Vice-President of the European Investment Bank (EIB) and former Minister of Economy of Slovakia, as his special adviser on foreign investments.
Georgian Finance Minister Lasha Khutsishvili on Wednesday discussed a pilot programme for the introduction of tax incentives, and the second stage of digital economy taxation in the country with representatives of the Organisation for Economic Co-operation and Development.