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Policy Brief Impact of DCFTA implementation on SMEs sector In GEORGIA Prepared by: International Business Development and Investment Promotion Center (IBDIPC)

December, 2015

   

   

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The DCFTA between Georgia and the EU was signed in June 2014 as part of the AA. Georgian Parliament ratified the agreement in July 2014 and the European Parliament in December 2014. The majority of EU Member States (26) finalized ratification procedure of the agreement in their national legislative bodies. As soon as all EU member states ratify the AA, the agreement will enter into force. However, since 1st of September 2014, Georgia is benefiting from the provisional application of the DCFTA as a part of the AA.

In the long-term perspective, the DCFTA is expected to have economic benefits for Georgia, as it will result in the gradual integration of the Georgian economy into the EU internal market. In the short to medium-term, the DCFTA seems to be associated with substantial regulatory costs connected to EU approximation process. In the short-to medium-term, its economic impact is supposed to be rather limited, but it will definitely have great political significance, especially because it is an important breakthrough in Georgia’s EU integration course.

Benefits of DCFTA for the ordinary Georgians are - higher quality locally-grown food and other goods; better business opportunities for all, including small and medium sized companies; more European investment into Georgian manufacturing; increased average salaries; better access to improved health services; and energy savings due to more efficient use of energy resources and the development of renewable energy sources. Independent studies suggest that Georgia’s export to the EU could rise by 12% and Georgia’s GDP could increase by 4.3%, or €292 million in the long term. There are challenges ahead for Georgia to complete the agreed reforms and correctly implement the DCFTA. It will take time for improvements to be noticed. But with commitment and patience these benefits will become reality.

The DCFTA may give an impetus for EU–Georgian economic ties by prompting companies to search for prospective niches in both markets. For European exporters, opportunities may emerge in such areas as machines agricultural, equipment for processing and food storage, chemical products or pharmaceuticals. Moreover, transport vessels, electrical and home appliances and furniture may successfully compete in the Georgian market. The main focus in the context of DFTA implementation is given to the readiness of the Georgian economy and its private sector (SMEs) for the implementation of the new Georgian trade-related regulations approximated with the EU aqcuis. With regard to the DCFTA, the agricultural sector and the associated obligations, is one of the most sensitive areas when it comes to analyzing the preparedness of Georgia’s private sector. Georgia’s agricultural sector employs a large number of people – 55% of the total employed population. More specifically, a large percentage of socially vulnerable population is employed in this sector.

Since starting application of the DCFTA, Georgia pays particular attention to promotion of private sector development and its competitiveness with special emphasis on SMEs as this segment of business sector is still very vulnerable, having comparatively small share in the country’s GDP (around 20%). In addition, SMEs have great potential for development and hence contribute to economic development and inclusive growth. Supporting SMEs is rather important in the scope of effective implementation of the Georgia-EU Deep and Comprehensive Free Trade Area (DCFTA), as together with new opportunities the DCFTA opens to Georgia, there are also challenges for business sector such as compliance with the EU regulations.

The main challenge Georgia is facing in the context of DCFTA seems to be the law awareness of wider public about the DCFTA related matters. Local SMEs are less informed about benefits of the DCFTA and the trade requirements of the EU. Therefore low awareness is considered to be the major obstacle for the practical application of the DCFTA by the SMEs. Therefore Government has to facilitate interaction with the SMEs providing necessary information through organization of different awareness rising events (Seminars, info days, conferences) in order to deliver necessary information regarding the EU trade regulations, food safety standards and the preferences the DCFTA proposes. In this respect, support of EU expertise and the assistance of other donor organizations would be very instrumental.

   

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Major challenges to note are possible increased imports from the EU and additional pressure on the domestic producers, especially in the short run. This paired with increased costs due to stringent compliance requirements with the EU standards. So, Supporting SMEs is extremely important in the scope of effective implementation of the DCFTA, as together with new opportunities the DCFTA opens to Georgia, there are also challenges for business sector such as compliance with the EU regulations.

DCFTA shall be beneficial for Georgia in the context of increased benefit for the citizens who will have access to better quality products on the national market and in the long-term, the possibility of having higher incomes due to new business opportunities and increased economic growth brought by the trade with the EU. Agriculture and food industry has a huge potential in terms of export of national products to the EU market but at the same time SMEs active in the field are week and need proper support from the Government in terms of modernization their production and increasing their products quality in line with European standards. Number of Governmental programmes introduced during the recent years by the government has proved to be instrumental proposing preferential agro loans and Co-financing possibilities (“Preferential agro loan programme”; “produce in Georgia”) but nevertheless more efforts are needed to facilitate disbursement of loans for farmers from the commercial banks.

In the long-term perspective, the DCFTA is expected to have economic benefits for Georgia, as it will result in the gradual integration of the Georgian economy into the EU internal market. In the short to medium-term, the DCFTA seems to be associated with substantial regulatory costs connected to EU approximation process. In the short-to medium-term, its economic impact is supposed to be rather limited, but it will definitely have great political significance, especially because it is an important breakthrough in Georgia’s EU integration course.

Trade balance in agricultural and related products, as well as in trade turnover as a whole, between the EU and Georgia has been largely negative. The EU has been by far rather protective of its domestic agricultural and food industry and has been imposing tariff and nontariff barriers in trade. The DCFTA shall see many tariffs disappear, however the nature of reductions shall differ among the product categories. For example in agriculture one product – garlic- shall see the tariff-rate quota, while a number of others shall maintain the market entry prices.

It is necessary to draw up a medium- and long-term strategies for the entire agricultural sector and to assess its export potential, determine those sectors in which Georgia might have a comparative advantage. Assessing the country’s competitive advantage in agricultural goods and targeting the most promising fields in the short-run, while later on the gains created could be further expended to other fields as well through the spill-over effect. Special attention should be paid in correctly utilizing the technical and financial assistance provided by the EU, so they bring tangible results.

Access to information for the producers is a key in the process together with the training and education. A fruitful initiative to overcome information asymmetry shall be creation of a handbook for producers on the trade information how to export to the EU that shall be very specific, including information on both tariff and non-tariff barriers. Currently existing web portal under the Ministry of Economy and Sustainable Development of Georgia has initially been created to serve that mission; however it is quite complicated and does not provide relevant and practical information for SMEs, therefore it has to be improved and simplified.