Statement by Pieter Stek at the Board meeting of October 21, 1997

International Bank for Reconstruction and Development 87195 International Development Association International Finance Corporation Multilateral Investment Guarantee Agency FOR OFFICIAL USE ONLY CONFIDENTIAL EDS97-374 October 17, 1997 Board Meeting of October 21, 1997 Statement by Pieter Stek, Executive Director Georgia - Country Assistance Strategy Introduction On behalf of my Georgian authorities I wish to convey their great appreciation for the assistance of the Bank in restoring and reforming the economy. The establishment of a Resident Mission in Tbilisi a year ago is also valued highly. The dialogue with the Bank has been crucial for setting priorities in the aftermath of civil conflict, when every need was urgent, and for harnessing domestic production potential to the creation of a market economy. In fact, the catastrophic decline of income with its disproportional repercussions on government revenue, while an immense and painful challenge, also provides an opportunity that is ordinarily not available: the opportunity to create an efficient, modern governmental apparatus. If this opportunity is seized, Georgia could become exemplary for the region in having a state that is complementary to the private sector rather than a burden. The Georgian Development Agenda and the Bank’s Strategy From the CAS it is clear that there has been a full meeting of minds on the appropriate strategy. 1. Strengthening public finance While much has been achieved, much remains to be done. Raising revenue from 9 1/2% of GDP now to 15 1/2% by 2000 requires continued effort. In the meantime, tight expenditure control based on priority setting remains essential. A crucial trade-off is between reduction of government employment and improvement of pay. So far the number of jobs in the public sector has been almost halved, while pay has been increased roughly sixfold. A bold health sector reform has been implemented, shifting responsibilities to the private sector, while maintaining a state financed package of basic services. These examples demonstrate not only the commitment of the government but also the degree of political consensus on how to cope rationally with the problems of political economy. (An essential concomitant of measures such as these is targeted social support to which I shall turn under paragraph 4.). A law on local government has just been adopted in second reading providing for significant devolution of authority. In the introductory paragraph I spoke of the opportunity  2 to create an efficient modern state. A small state is not necessarily a competent state. The Bank is devoting attention to various qualitative aspects of government (par. 64-66). EDI is also contributing to this effort. I should welcome Management’s comment on whether it recognizes an important part of the challenge as being to help Georgia to acquire the tools for first class government. 2. Deepening and Diversifying Sources of Growth The link between efficient government and a flourishing private sector is obvious. The agenda sketched in par. 42, in all its conciseness, is extremely ambitious. Most countries that are stretched for funds do not devote adequate resources to infrastructure. Public-sector investment in Georgia has undergone a significant recovery, although the level remains low. However, it is government policy to involve the private sector in partnerships to achieve an adequate level. The Bank Group can play an important role in this. A necessary condition for a fruitful relationship with the private sector is an adequate legal and regulatory framework including enforcement ability. This implies a major refocusing of the government and its bodies as well as an educational effort permeating the whole of society. This effort is being supported by IDA and other donors. Over the last two years a lot of necessary groundwork has been carried out: - an essential element is judicial reform, which is being supported by the Bank’s legal department; courses are being held for judges and lawyers; - an amended bankruptcy law has been adopted and is already being implemented; - a foreign investment code, based on FIAS advice, has become operational providing (much) security to investors; - since August measures have been taken to speed up privatization, which after October 1996 had undergone delay due to overpricing; - a systematic approach to combating corruption, based on political consensus between the government, parliament and the judiciary, led forcefully by the President, is underway; earlier this month a high-level anti-corruption seminar was held in Georgia; - a lot of work is ongoing to create a sustainable banking sector; already unsound banks have been closed, tight prudential supervision is in place, including strong inducements to state banks to restructure; foreign competition is welcomed; the absence of restrictions on borrowing and lending rates and of directed lending is a striking achievement; - property rights on the land - as fundamental an issue as any - are to be enforced; already Georgia has the freest agricultural sector of the whole FSU, as is pointed out in the CAS document; - also work on power sector reform shows impressive progress; reliability of supply, has improved while pricing and collection are laying the foundation for financial sustainability. Further work is envisaged on developing the capital market as well as on many other elements making for a strong private sector. Georgia welcomes the strong FIAS involvement and the start-up of IFC activities, of which it has high expectations. MIGA too is already usefully engaged in Georgia.  3 3. Protecting the environment The NEAP, which is being prepared with the support of an IDF grant, may be expected by early 1998. The dialogue with the Bank has helped to raise environmental awareness and create the determination to deal systematically with the mounting problems (par. 18, 19). 4. Poverty reduction The attack on poverty consists of a forceful growth and income recovery strategy and targeted benefits and pension reform as well as policies, particularly in the fields of health, and education, to prevent poverty from becoming structural. The government takes the issues involved extremely seriously and is committed to maintaining social cohesion and the strengthening of democracy. The policies to combat poverty are essential for this purpose. The size of the program and the risks The government is happy to note that the credibility it has built up in its relations with the Bank and the IMF has enabled the Bank to regard the “high case” for assistance as the most likely. It firmly intends to justify this confidence and, external circumstances permitting, to gain the status of creditworthiness required for borrowing from the Bank. As for the risks, these are correctly described. The Georgian government has domestic and regional stability at the top of its list of political priorities. 4