VIENNA -- Newly re-elected Georgian President Mikheil Saakashvili wants to slash taxes, speed privatization, ease foreign-investment rules and tap international capital markets as part of a radical plan to shake up the economy of the Black Sea country, his prime minister said in an interview.
"The state will basically do everything to support business and investments instead of standing in the way of it," said Prime Minister Lado Gurgenidze, a 37-year-old former corporate-finance and mergers-and-acquisitions manager with ABN Amro. He spoke to Dow Jones Newswires at a conference in Vienna.
The government last week signed off on a proposal that would cut average income taxes to 15% from 25% over the next five years. Capital-gains taxes, currently at 20%, would be abolished altogether. A tax-free industrial and free-trade zone, modeled on Dubai, would be created on Georgia`s Black Sea coast.
Other proposals contained in the package include requiring the government to run a budget surplus and strengthening the central bank, making it the sole regulator and supervisor of the financial-services sector. Parliament is expected to approve the package when it comes back in session in March.
The central bank`s independence would also be bolstered with an inflation target of no more than 10%, starting in 2009, said David Amaglobeli, the acting head of the National Bank of Georgia, the country`s central bank.
"Single-digit inflation will be the shrine of Georgia`s monetary policy," Prime Minister Gurgenidze said. Inflation in Georgia accelerated to 11% last year, fueled by rising food prices and strengthening domestic credit growth, but it is expected to slow to 8% over this year.
Georgia`s gross domestic product has expanded more than 50% since 2003 and grew 12% last year alone. But job creation and export growth remain weak points, Mr. Gurgenidze acknowledged.
The act would also enable international financial institutions to operate in Georgia without being submitted to local regulations and supervision, provided they didn`t generate more than 10% of their revenue in Georgia.
Mr. Gurgenidze, who was appointed prime minister in November, prepared the package amid a controversial presidential election and following opposition claims of unfair campaigning and fraud before President Saakashvili`s re-election to a second term earlier this month. Mr. Gurgenidze said so far the turmoil hasn`t had a significant impact on the country`s economy.
The process of privatizing the state`s remaining holdings would speed up this year, with about 25% of the state`s industry stakes set to be sold, the prime minister said. Georgia`s railway system, a network of 1,612 kilometers, would be partly privatized, and the Tables Water Supply Co., the country`s largest, would be sold this year.
Mr. Gurgenidze said Tuesday he favors floating 10% of the rail company through an initial public offering and then later an additional 25%. The full 100%, however, would be sold eventually, he said.
Proceeds would go to a new sovereign-wealth fund that could be tapped only in cases of war, natural disaster or reintegrating secessionist Abkhazia, which Mr. Gurgenidze said he expected to happen.
The government also aims to attract foreign investment in developing Georgia`s hydropower capacities. Georgia is self-sufficient in electric power but uses only 18% of its capacity. Mr. Gurgenidze said he expects between $1 billion and $1.5 billion to be invested in the sector in the next few years, on top of "dozens and dozens" of privately owned small-scale plants along the country`s rivers.
"At the moment, we produce just enough power to supply ourselves, but in four to five years time, we aim to have power exports of around $1 billion a year," Mr. Gurgenidze said, noting that neighboring Turkey is starved for energy.
He said that the former Soviet republic may also issue a sovereign bond this year to help local banks obtain wholesale funding on global markets. The bond issue wouldn`t reflect government funding needs but would set a benchmark, allowing lenders to set more efficient prices for Georgian banks, he said.
Jyrki Talvitie, a fund manager for Swedish private-equity company East Capital, one of the largest foreign investors in Georgia, rates the country`s energy sector as the most obvious investment target in the years to come. Mr. Talvitie, whose company has a portfolio of €200 million to €300 million ($297 million to $445 million), also points to real estate and retail trade as good opportunities.
"Foreign investment has only just picked up in the last two to three years," Mr. Talvitie said. "But Georgia is such an easy place to invest, and with the new reforms, it looks to be even easier."
He said he expects the country to maintain its double-digit-percentage growth for at least another three years and points to an early-stage consumption boom in the country as a natural driver.
"The challenge for Georgia is, however, to attract enough foreign investments to keep the economic growth going," Mr. Talvitie said.
(By FLEMMING E. HANSEN and CHRISTOPHER EMSDEN; THE WALL STREET JOURNAL. January 17, 2008)
