PROSPECTS FOR RAPID GROWTH HINGE ON FOREIGN INVESTMENT.

To return to pre-August 1998 growth rates, Georgia must attract greater foreign investment. Unfortunately, Georgia’s relations with the IMF and World Bank deteriorated last year, as Tbilisi failed to meet targets for improved tax collection and other structural indicators. The World Bank froze US$33 million in credits in December 1999, while the IMF, which began negotiations with Georgia on a new loan agreement in September 1999, has placed talks on hold pending passage of the 2000 budget. This may not occur until March. Prospects for foreign direct investment (FDI) don’t look much better. Most of the US$570 million in foreign direct investment that Georgia had attracted by the end of 1998 went into the reconstruction of the Baku-Supsa pipeline. With the pipeline’s completion, however, FDI inflows slowed, dropping from US$265 million in 1998 to some US$122 million last year. This fall in FDI has played a major role in reducing imports, especially of the capital goods needed to modernize Georgia’s antiquated industrial base and transport infrastructure.

The victory of the Shevardnadze-led Union of Citizens of Georgia’s (UCG) in the October 1999 parliamentary elections was seen by many observers as an important step in turning Georgia’s investment prospects around. The hopeful combination of a pro-Western government and parliament, a completed Baku-Supsa pipeline, rising oil prices, and the partial privatization of Georgia’s energy and telecommunications sector scheduled for 2000 was touted by Georgian officials as further proof that the economy was on the right track. Unfortunately, the long shadows cast by Moscow’s search for a military solution to its Chechen problem, as well as continuing uncertainty in the run-up to the Georgian presidential elections in April, seem to have nullified whatever economic bounce the parliamentary elections may have provided. An improvement in Georgia’s economic prospects may therefore require Shevardnadze’s re-election and a quick end to the war in Chechnya.

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