The Economic Policy Research Center (EPRC) has prepared an analytical document with opinions and recommendations to the state on how to exit from the total lockdown regime imposed throughout Georgia amid the spread of the new coronavirus (COVID-19).

The objective of the document is to assist the government in developing measures that will enable it, with help from society, to maintain economic activity at a reasonable level necessary to primarily protect the most vulnerable groups against the virus, to create and maintain a normal psychological and public health climate, and to gradually exit the crisis and restore the normal rhythm of life.  

Recommendations on economic measures have been developed with the following considerations in mind:

• It is necessary to overcome the false dichotomy, whereby human life should not fall victim to economic interests. True, human life is incomparably more valuable than the economy, but the economy, in this particular case, represents an entire spectrum of human relations, which, if totally dismantled, will make it nearly impossible to protect the vulnerable;
• Public pressure largely conditioned an inconsistent response to the problem in Georgia’s large partner countries. Although this problem is not as acute in Georgia, we must understand that if the coronavirus outbreak still occurs, even briefly, the government could be left without the possibility to maneuver. Therefore, the recommendations also aim at alleviating the pressure on the government as much as possible so that it is able to act reasonably and decisively;
• Time must be used for a more accurate assessment of the gravity and scale of the problem, as it is necessary for the implementation of adequate and proportionate measures within the limits the country’s resources allow;
• In the fight against the crisis, it is important to realize that it consists of numerous components that may require different approaches. While some measures produce short-term, others produce long-term results, especially in economic life. Hence, it is necessary to abstain from offering and planning initiatives, the results of which are questionable;
• We must understand that the maintenance of the lockdown for a long period will inevitably trigger negative changes in daily life, economy, social life, etc. Numerous studies have proved that it may lead to a sharp rise in many diseases (including weakening of the immune system, infections), disruption of public order, conflicts and other disturbances. Thus, the “cost” of lockdown will increase over time;
• The global media is dominated by news from those countries where the situation has gone wrong. It should be noted that the experience of countries differs and, in general, the trends that are observed are rather positive. These trends need to be cautiously studied, considered and covered in as academic a style as possible. It should also be noted that several developed countries intend to change lockdown rules in the near future, which must be taken heed of;
• Measures should be planned in light of demographic factors (for example, distribution of the population by region, age structure, etc.). A great deal of attention should be paid to mortality risk and morality ratio. This data is available in Georgia and it is possible to estimate the so-called “excess mortality” rate and to track current statistics of Eurostat and European countries, along with the statistics on deaths from coronavirus, as this is necessary for mobilizing resources for a healthcare system in adequate proportions.

Measures with long-term effects proposed to the government rest on several basic considerations. Based on these considerations, the risks associated with the created situation are assessed from the perspective of GDP, GDP components, impact on households, employment and the state budget. A possible value of negative change in this or that parameter is assessed, for example, a 5% drop, etc. Then the suitability and effectiveness of measures currently proposed by the government is discussed. Finally, specific measures for overcoming the crisis are suggested. 

The document reads:

Stimulus measures proposed by the state

On 1 April, the Government of Georgia took the decision to allocate GEL 2 billion from the budget as direct support to the economy; it will be used to maintain companies, jobs, ongoing operations of companies and businesses. This amount will be allocated from the reserves envisaged in the crisis budget. The amount does not include the funds allocated from the budget directly to healthcare (GEL 351 million). Relevant measures are detailed below:

1) Loans

Banks will individually restructure the loans of those businesses that find them difficult to repay. Conditions of postponement/restructuring are unknown as banks offer conditions to clients and achieve an agreement with them individually. Restructuring (which is often subject also to commission fee) increases the total amount of the loan, because with the repayment term prolongated, the total amount of interest increases. As of February 2020, the total loans in the national currency issued to resident legal persons by commercial banks exceeded GEL 4.5 billion, while the total loans in foreign currency was up to GEL 10.5 billion. The total loans in national currency to the hotels and restaurants sector (the most vulnerable sector as of today) was GEL 226 million, while that in foreign currency exceeded GEL 1.2 billion (the data of the National Bank of Georgia).

2) Postponement of property tax

The state will postpone the payment of property and income taxes for four months (until 1 November) to companies engaged in tourism-related business, such as hotels and restaurants, tour agencies, transportation companies, guide service providers, organizers of cultural and sports events, etc. This measure will affect 18,000 taxpayers and more than 50,000 employees. As calculated by the government, this will enable this sector of the economy to retain more than GEL 100 million.

3) Subsidies on utility fees

During three months (March, April, May) the government will cover utility fees of all those citizens of Georgia who consume up to 200 kWh of electricity and/or up to 200 M³ of natural gas per month; this also includes monthly water supply and cleaning fees. According to the Prime Minister, this measure will affect 1,200,000 electricity and 650,000 natural gas consumers. Apart from the social programs, no concrete economic sectors and businesses have been named yet that will get support from the mentioned funds.

4) Sectoral support

The Enterprise Georgia Agency presented co-financing mechanisms designed to support the guesthouse, small-size and medium-size hotel industry. This mechanism implies co-financing of annual interest on loans of entrepreneurs over a period of six months from 1 March, 2020. Co-financing extends to a maximum 80% of loans in national currency and 70% of loans in foreign currency. The size of a loan must not exceed GEL 1 million, $300,000 or €250,000. Furthermore, the subject of a loan agreement must be the construction/expansion/equipment/repair/reconstruction of the hotel.

Furthermore, to supply financial resources to companies, the government will double VAT refunds, and until the end of the year, the Ministry of Finance will refund GEL 1,200 million instead of GEL 600 million to the companies.

In addition to all the above said, the state will enhance the support of capital projects in the country as an additional stimulus to the economy. Consequently, the capital expenditures envisaged in the 2020 budget will increase by an additional GEL 300 million. The budget assignment plan of 2020 envisages more than GEL 2 billion 221 million of capital expenditures, including around GEL 425 million in the first quarter (Ministry of Finance of Georgia). In parallel to the allocation of amounts, it is important to monitor the spending of already available amounts and to analyze their effectiveness.

5) Subsidies on prices of nine food products

The state will spend GEL 10 million from the budget to ensure nine food products, identified by the decision of the Coordination Council on COVID-19 (rice, spaghetti, buckwheat, vegetable oil, sugar, corn, wheat flour, milk powder and beans), against a price rise. This amount is a subsidy that the state will spend to prevent the prices on particular products from rising due to exchange rate fluctuation. According to the program, from 15 March through 15 May 2020, the difference in expenses that importing companies will incur in foreign currency (USD, Euro) due to exchange rate fluctuations when importing the products, will be covered from this subsidy. Specifically, importers will benefit from the subsidy if the value of USD 1 exceeds GEL 3 and that of € 1 exceeds GEL 3.3 by the National Bank of Georgia’s official exchange rate on the day of conversion. Considering the fluctuation of the exchange rate, the allocated GEL 10 million might prove insufficient and a need might arise to allocate additional sums from the budget.

At the same time, sanctions have been defined if a company fails to fulfill the assumed obligation and after receiving the subsidy, increases the prices on its products. More specifically, if a company fails to fulfill the obligation, it will have to refund the amount of the subsidy and additionally pay a fine in the amount of the subsidy received, but not less than GEL 10,000.

6) Financial sector

Since 31 March, the financial sector has also changed its mode of work. By the decision of the Government of Georgia, the activity of lending entities, currency exchange points, credit unions, tax service providers, independent registrars of securities, asset management companies, central depository, stock exchange, founder of a non-state pension scheme, credit information bureau have been temporarily suspended from their offices. These establishments may perform their activities, if practicable, only through remote channels (except for currency exchange points), without attendence in their offices.

At the same time, the operation is carried on uninterruptedly, both at offices and remotely, by commercial banks, tax system operators, microfinance organizations, tax service providers and agents who provide service through pay boxes, ATM machines and POS terminals. Providers of the service necessary for the operation of pay boxes, ATM machines, and POS terminals also continue their work uninterrupted.

7) Measures to support the national currency

From the start of the crisis, 9 March till 27 March, the Lari exchange rate against USD devalued from 2.77 to 3.485, though as of 4 April, it has rebounded to 3.2158. Despite fast devaluation observed at the beginning of the period, the Monetary Policy Committee of the National Bank of Georgia, at its meeting on 18 March, 2020, took the decision to maintain the refinancing rate unchanged. As noted in the subsequent press release, it is difficult to determine at this stage as to which factor will influence inflation to a greater degree – the devaluation of the Lari (upward pressure on inflation) or contraction in aggregate domestic demand (downward pressure on inflation). At present, the monetary policy rate is 9.0%. Furthermore, according to the President of the National Bank, a discussion has started with the International Monetary Fund (IMF) on the receipt of financial assistance. Let us recall that in December 2019, Georgia extended the IMF-supported three-year arrangement under the Extended Fund Facility for an additional year and it will be completed in April 2021. The government continues to work with donors in this direction.

On 24 March, an auction of Ministry of Finance Treasury bonds was held which resulted in the sale of securities with the nominal value of GEL 80,000,000 and five-year maturity. Because of the panic on the market, $100 million was spent on strengthening the Lari.

8) Postponement of payment on loans

According to official information, the campaign for postponement of loan payments was the private initiative of commercial banks. The initiative, which envisages three months of so-called grace period, has been offered with similar conditions by all commercial banks:

Customers will be able to postpone loan repayment throughout the grace period to 30 June. The grace period started on 13 March and will continue until 30 June and will not apply to repayments for more than three months. The grace period is extended to all natural and legal persons that currently use the credit products of commercial banks. The grace period also applies to customers with overdue loans. Depending on the number of overdue days, individual discussions will be required with certain customers. The contractual rates of loans will not change. However, monthly payments will increase after the completion of the grace period as banks will redistribute the interest accrued during the grace period over the remaining loan maturity period. The term of the loan will increase for loans with schedules while the mentioned conditions will apply to all borrowers. Those borrowers who do not want to use the grace period will be able to turn down the offer by replying with a corresponding message.

9) Early payment of pensions to pensioners aged 70 and older

Liberty Bank, in cooperation with the Government of Georgia, took the decision and on 23 March announced a GEL 100 million worth program to pay pensions due in April at an earlier date. At this stage, this program applies to people qualified as the most vulnerable group, who are 70 years old or older.

10) Social/tax benefits and assistance

According to the Minister of Finance, work is underway to revise the budget and enact social protection mechanisms, for example, to introduce electricity vouchers for the extremely poor and/or those who have lost a source of income. Partial income tax breaks could also be considered. Decisions on these matters have yet to be taken.

One-time social assistance measures include the free distribution of masks to single people aged over 70, from 23 March.

11) Special measures of the National Bank

To meet the fast-growing demand for the national currency, the National Bank will provide commercial banking institutions and microfinance organizations with liquidity equivalent to $400 million, in total, through swap schemes. This measure, all other things being equal, is timely and reasonable since the whole set of immediate activities may pose a threat of liquidity shortage to banks in the short term. At the same time, the National Bank must necessarily start thinking about the time and the resources for moving the banking sector back to a normal mode of activity as one year defined for the initiative is too long and corresponds to such a scenario of pandemic that it casts doubt on all large-scale economic estimates.

12) Expansion of the spectrum of permitted activities

After issuing the ordinance #181 on 23 March, the government amended it several times to extend the list of permitted activities. These amendments are commendable but they are of a sporadic nature and one needs to think of the effectiveness of this sporadic expansion of permitted spheres of activities against the halt of the remaining economy and, especially, against the restrictions in movement and anxiety in the population.

The analytical document prepared by EPRC further discusses and assesses the expected results of the crisis.