III. Economic Trends and Outlook -- Major Trends and Outlook Georgia, as the other former Soviet Union (FSU) republics, has suffered a severe economic downturn since the break-up of the Soviet Union. In 1993, Georgia continued a sharp five-year economic decline. The country's GNP in 1993 was 66.4 percent of 1992 GNP, 37.8 percent of 1991 GNP, and only 30.3 percent of 1990 GNP. (Note: GNP in USD was calculated for 1991 by World Bank experts at USD 1,640 per capita. End note). The main reasons for this decline are industrial underproduction caused by disruptions in traditional economical ties with other FSU countries that were traditional suppliers of raw materials, energy and other industrial input items for Georgia; inability to access traditional FSU markets to sell locally manufactured products; limited possibilities to access foreign markets other than FSU countries because of the non-competitive quality and lack of conformity to international standards; the high level of crime and corruption; and remnants of central planning and bureaucracy. -- Principal Growth Sectors Manufacturing output, which accounts for 42.8 percent of the country's net material product (NMP), is oriented towards the production of light industrial goods and is heavily dependent on imported raw materials, intermediate goods and energy products. During 1992-1993, the country's manufacturing declined by 21 percent and there has been no growth in any sectors over the last five years. However, production of the following few items increased during 1993: alternating current electric motors, agribusiness equipment, synthetic fibers, regular paper, porcelain, margarine, and laundry soap. The principal industries remained tea, alcohol, consumer goods, metallurgy, ferroalloy products, truck assembly, fertilizers, milling machinery and equipment. The network of well-developed mountain rivers produces significant hydroelectric power in the summer and spring. This resource has particular long-term development potential. The agricultural sector accounted for 46.2 percent of NMP. Output was reportedly down a full 54 percent during 1992-1993. This figure does not take into account private production, which by 1993 occupied more than half of agricultural land. The main agricultural products are tea, grapes, fruits including subtropical fruits (oranges, lemons), tobacco, and vegetables. With a long growing season and some areas of sub-tropical climate, citrus, a variety of deciduous fruits, vegetables, vine crops, tea, cereals, sunflower and a wide range of field crops are highly productive. Much of the milk from cattle and sheep is used to make cheese. With Georgia's variety of climates, almost any crop can be raised, giving Georgia one of the most diverse agricultural bases in the FSU. Yields have generally been far below their production potential, due to the failure to use modern technologies. Of the 6.9 million hectares of land in Georgia, 3.2 million are arable. Intensification is very important in future production on available land. Of the 800,000 hectares which are ploughable, 320,000 are perennial crops, primarily fruit trees, vineyards and tea. Of the cultivated land, 60 percent requires irrigation for maximum production. In the past, about 90 percent of fruit and vegetable production went to other parts of the FSU in exchange for various commodities and goods. Like much of the Georgian economy, agriculture has been severely disrupted by the breakdown of the centrally-planned economy. In spite of these difficulties, privatization of farmland and the agribusiness sector is moving forward. More than 50 percent of farmland has been at least informally privatized. It is anticipated that many state farm employees will retain a significant portion of ownership rights. Many of the newly privatized small farms are being intensively cultivated with much diversity. Some new owners are pooling their allotments (about 1 hectare per person) to create moderate-sized farms to increase their production capabilities. The mining industry in Georgia is based on manganese (in Chiatura), non-ferrous, primarily copper ore (in Madneuli), a number of marble, granite and other resources for producing construction materials and large mineral water deposits. Georgia possesses small quantities of oil and coal. The Chiatura region, approximately 80 miles east of the Black Sea, produces approximately one-quarter of the FSU's manganese. Currently, the mining industry is in decline because of electricity, wood and market shortages. In December 1993, the GOG Department of Geology, Geodesy and Cartography published a list of 368 natural resource deposits, subject to licensing upon investigation and mining. The licenses will be awarded through a competitive bidding process. The competition is open to foreign companies and individuals. Deposits for license include non-ferrous metals, ceramics, chemicals, building materials, mineral waters, mud and energy resources. Georgia remains the choke point for land transportation across the Caucasus and to Armenia and Azerbaijan. Georgia is publicly committed to building a functional trans-Georgian transportation infrastructure connecting with the Caucasus and Central Asian neighbors. Georgia's strategic location on the Black Sea is one of the country's foremost natural assets. Its largest seaports, Poti and Batumi, have a shipping capacity of 5-6 million mt a year each and can off-load containers. The Georgian airline industry is relatively undeveloped, although there are several flights a week to Europe, Israel, and Egypt. Air transportation deteriorated significantly during 1992 and 1993, chiefly a result of price hikes on fuels and consequent chronic shortages. In the past, tourism was the most important industry in the service sector. More than three million tourists visited Georgia every year, including 250,000 from outside the USSR. Tourist and resort facilities offered about one hundred thousand beds. However, recent conflicts and hostilities in the country have nearly eradicated tourism. Currently, there are few hotels and similar facilities offering acceptable service. A significant part of tourist and resort facilities are temporarily occupied by internally displaced persons, primarily from Abkhazia and the Tskhinvali zone (South Ossetia District). -- Government Role in the Economy The Government role in the economy is still crucial, especially in the industrial sector. State-owned enterprises still account for approximately 75 percent of total industrial output. Meanwhile, private business is rapidly progressing in agribusiness and in trading, currently dominating state activity in those sectors. -- Balance of Payments Situation There is a severe imbalance of payments in Georgia. However, the trade imbalance has been slightly reduced during the last year from USD 377.9 million to USD 363.2 million. This improvement is a result of a 35-percent increase in exports, primarily to non- FSU countries, and a reduction of 70-percent in imports from FSU countries. Imports from the non-FSU has increased by 17 percent. -- Trade and Investment Barriers Identification and Brief Description Outmoded and inadequate infrastructure and the absence of first- class bank guarantees and reliable insurance companies create barriers to trade and investment in Georgia. Most foreign investors prefer to do business with local partners familiar with the peculiarities of the existing business environment. -- Labor Force Georgia's labor force consists of about 2.3 million persons. Georgia has long experience in such fields as agribusiness and the food industry, with an adequately qualified labor force and intellectual potential. The country also possesses more than 40 scientific and production facilities formerly used by the Soviet military, including a microelectronics and aviation plant, and two medical institutes for higher learning. Unemployment was officially estimated a 7 percent in 1993, but is undoubtedly much higher. - Infrastructure Situation Re: Goods/Services Distribution Georgia has the most convenient location in the Transcaucasus (Armenia, Azerbaijan and Georgia) for commodity distribution throughout the region. This is due not only to its Black Sea ports and geographical location, but also to current political hostilities affecting Armenia and Azerbaijan. However, full realization of this advantage will require improvements to transport infrastructure, the banking system, stable energy supply, communications, and business legislation. Despite its imperfect business environment, Georgia remains the only feasible country for commodities distribution in Transcaucasia. Two Georgian ports, Batumi and Poti, handle all sea cargo transshipped through Transcaucasia. The cargo turnover for the ports during 1993 was 954,600 mt for Batumi and 1,335,400 mt for Poti, about 1/5 of their current capacities. Georgia has three international railway connections with Russia through Abkhazia, which remains paralyzed by the Georgian-Abkhazian conflict; with Azerbaijan, which currently is the only route for that country to international railways; and siding to Armenia. There are several airline companies (charter flights), and a significant quantity of irregular (mostly one-time) trucking to/from/through Turkey, Armenia and Azerbaijan by various small trucking companies or organizations that own trucks. Warehouse facilities are owned by transport and trade companies, and state organizations. There are no bonded warehouses in Georgia. Retail facilities are primarily of following types: state-owned department stores (universal shops), agricultural markets/bazaars that are state-owned facilities for private farmers and retailers; open markets for consumer goods; specialized shops (e.g. shoes, medicine, office equipment, food products, children's items, etc.); and small private shops. Retail facilities are found throughout the country. -- Major Infrastructure Project Underway There are several projects underway in Georgia that, while of great importance to the country's infrastructure, are not enough to solve the main problems in this area. A number of port expansion/modernization feasibility studies have been carried out by foreign firms, the United Nations World Food Program (WFP) and the Caucasus Logistic Advisory Unit (CLAU). The EBRD reportedly has authorized financing for the actual work. In addition, the WFP provides technical assistance for railway communication, and the EBRD has slated for approval a power rehabilitation project for ECU 34.5 million. Several German, U.S., Australian and Turkish companies are developing telecommunication businesses.