Georgia – Absolute Bank

A SUPPLEMENT TO EUROMONEY – April 1997

Stabilization and reform

Prior to the breakup of the Soviet Union, Georgia was among the most productive and, probably, the wealthiest of the Republics. So, at independence in April 1991, expectations for the country’s well being were high. Unfortunately, severe political turmoil and economic mismanagement in Georgia coincided with the many disruptions in trade and economic ties within the former Soviet Union. The results, over the next five years, were very large decreases in production, trade and employment. These developments, combined with hyperinflation, resulted in a decline in the standard of living estimated at over 70% during the country’s first five years on its own.

Finally, in 1995, under president Eduard Schevardnadze, who first came to the leadership position in 1992, reasonable degrees of political stability and economic reform began to take hold. Although separatist movements are far from settled, especially in Abkhazia, a beautiful region in northwest Georgia, it seems unlikely that armed conflict will resume. There are some 200,000 refugees from this breakaway autonomous region, primarily in Tbilisi, and that adds to the severe unemployment situation. A shortage of employment opportunities is greatly complicated by the government’s inability to afford a social safety net which even begins to reach minimum subsistence levels. Government finances do, in fact, remain extremely weak and the continuing support of the IMF, The World Bank and other multilateral, bilateral and private donor agencies is essential.

With greatly increased security and stability, economic reform measures introduced in 1994 are clearly having the intended effect. The achievements have, in fact, been remarkable and to observers in Georgia such as ourselves, vigorous economic activity is evident. Growth in GDP is estimated to have been over 8% during 1996. There remain, however, significant hindrances to faster growth. Electricity shortages stifle industrial development and much of the country’s infrastructure needs rebuilding. But much has been accomplished.

Toward a market economy

Georgia began its privatization efforts as early as 1992 when apartments and houses were transferred to their inhabitants. During 1995, a major programme of privatization was carried out which put small businesses and many larger firms in private hands. Other state organizations have been corporatized and will be part of continuing privatization efforts during 1997.

In October 1995, a new currency, the lari, was introduced and since then has been stable and well accepted. The hyperinflation of the early 1990s has been significantly reduced. Inflation during 1996 was around 14%. Tax collection has improved and, from January 1997, corporate and individual income tax rates have been rationalized, with some important reductions, such as a decrease from 35% to 20% in the income tax for banks.

Various laws have been put in place which provide a good framework for economic activity. These include new laws for the central bank and commercial banks, as well as laws covering commercial businesses, foreign exchange, collateral, bankruptcy and, notably, investment. The “Law on Promotion and Guarantees of Investment Activity”, approved just last November, sets forth favourable conditions for investment by Georgians and foreigners. In general it does not discriminate between the two, except with regard to ownership of agricultural land.

The foreigners are coming! the foreigners are coming!

Foreign investment is still modest but the level of interest is high and increasing. At Absolute Bank we frequently meet with foreign company representatives and their investment plans are becoming more focused and more imminent. In a recent interview featured in Euromoney, President Shevardnadze suggested that foreign investors had better hurry.

The new silk road

Georgia plans to be a key part of a new transport corridor linking Europe and Asia. The country’s infrastructure is badly dilapidated. However, oil pipelines, storage depots, Black Sea ports, ships, highways, railways and communications facilities are to be built, modernized, expanded or developed to provide the avenues for increases in trade in the area. Many of the neccessary projects are well underway and the effects could be spectacular. Of course, these projects take time and lots of investment capital, almost all of which must come from abroad.

Abundant Georgia

The avenues of the new transport corridor will pass through a once abundant and beautiful land. Prior to the chaos of the early 1990s, Georgia supplied much of the fruit, nuts, tea, and wine for Russia and nearby countries. That is no longer the case. Economic chaos led to run-down farms and orchards and inoperative food processing plants. There is a great need now to rebuild agricultural and agro-industry and to build new markets. Investment opportunities in agro-industry are as abundant as the land and supported by the lending programmes of The World Bank, Tacis and others.

The Banking sector

As in many countries of the former Soviet Union, far too many banks were authorized in the early 1990s. However, the National Bank of Georgia is dealing effectively with the problem and has reduced the number from over 200 to about 55 through a system of registration which, in effect, is relicensing. Capital requirements are being increased every six months and that should serve to reduce that number further over the next several years. The near term goal is $500,000 by mid 1998. That amount is already the minimum for a new banking license. Three former state banks: United Georgia, Bank of Georgia, and Agroprom, hold nearly 50% of the market. That is down from over 60% a year earlier as new private banks, among them Absolute, are gaining market share rapidly.

Banking services are still fairly basic, but increasingly those services are being delivered by some of the newer banks with efficiency and at reasonable prices. Bank accounts may be held in any currency; most are in dollars or lari. Most individuals and small businesses do not have bank accounts and the domestic money transfer system is inadequate. Thus, most transactions are in cash.

Bank loans continue to be hard to come by and carry high interest rates: 60% per annum is quite normal for both lari and dollar loans. Most loans have to be well collateralized. Often, personal loans are secured by gold jewellery, with value based on the gold content only. The continuing shortage of deposits is the main cause and that shortage will ease only gradually. Monetary assets were virtually wiped out by the hyperinflation which continued well into 1994. It is anticipated, now, that interest rates on loans will decline during 1997 as additional donor lending programmes introduce more funds to the market. Deposits are also difficult to build because, in general, banks are not entirely trusted. That, it should be pointed out, is not because depositors have lost their savings since Georgia became independent. It did, however, occur in the last years of the Soviet system.

Restrictions on the exchange of currencies are virtually non-existent. Most of the banks in the country are licensed to carry out foreign exchange transactions. The foreign exchange market is active and healthy, on both the interbank markets and in cash. At present, registered non-bank money exchange offices are ubiquitous.

Absolute bank

Our bank is unique in Georgia in that it is the only one with significant foreign capital. Four American investment companies hold some 60% if the shares. Although Absolute Bank is small it does have the largest paid-in capital of any private bank in the country.

Absolute Bank is also forward looking. We were the first to arrange for an audit by a “big six” firm. We have developed our technology and became a member of SWIFT as soon as it was possible. We will soon begin to offer debit and credit card services processed by our own credit card servicing company. We have a subsidiary consulting company, Absolute Georgia Consulting, and a project management company, Absolute Howard Energy. The latter will manage large projects, mainly those which will form part of the Europe-Asia corridor.

We are the only bank in all of Transcaucasia and Central Asia which has been granted an unguaranteed credit line by the EBRD. This is a $5 million line for loans to small and medium-sized business projects. We are also involved with the World Bank and TACIS in connection with rural and agricultural programmes.

Absolute Bank specializes in assisting foreign investors and looks forward to the opportunity of working with an ever increasing number of foreigners as they consider the opportunities in this beautiful land.