GEORGIA REACHING NEW EU MARKETS TWO YEARS AFTER EU TRADE DEAL
The Georgian business community and government are celebrating modest achievements two years into the country's Deep and Comprehensive Free Trade Area (DCFTA) deal with the EU. There are, however, high expectations of bigger, more tangible benefits in the long term.
The Start of a Long Trip
The past two years have been a starting point for a long trip, said Mariam Gabunia, Head of Department for Foreign Trade and International Economic Relations at the Ministry of Economy and Sustainable Development.
Over the past 24 months, Georgian products have been the most successful in Eastern European markets, she said. In 2015, for example, Georgian exports to Poland grew by 184 percent.
Georgian companies are also finding their niche farther west. For example, there has been a 13 percent increase in Georgian exports to Ireland.
Georgia signed its Association Agreement with the European Union, which included the DCFTA, in June 2014. Put into force on September 1 of the same year, the DCFTA became the foundation for a long-term reform agenda for the government.
The trade deal creates opportunities for various economic benefits, including easier access to the EU's 500-million- consumer single market—the largest in the world—and zero customs duties for 9,600 varieties of products.
In pure numbers, the share of Georgian exports heading to EU countries increased by four percent in 2015, even as overall foreign trade declined, according to official figures. The main exports driving the growth were a four percent increase in walnut exports, a 40 percent increase in the export of vegetables and canned fruit, and a 104 percent increase in the export of nitrogen fertilizers.
In addition to higher volumes of exports to Poland and Ireland, Georgia also increased its exports to the Netherlands by 35 percent, to Germany by 10 percent, and to Lithuania and Romania by 5 percent each.
The increases do not indicate any major new markets for Georgian products, as most of the Georgian products which are relevant to the EU market were already covered by the EU General System of Preferences (GSP+), noted Mariam Zaldastanishvili, Research Associate at the ISET Policy Institute, which is part of the International School of Economics at Tbilisi State University.
"Increasing capacities in new niche products, such as wine, will require time. However, Georgia's trade with the EU is still developing and there is potential for further expansion," Zaldastanishvili told Investor.ge.
New Varieties to Make Way to the EU's Supermarket Shelves
The GSP+ program, which went into force in 2005, means that there is no tariff—or there is a reduced tariff—on 7,200 types of Georgian products. The DCFTA has expanded the list and simplified the import of products of animal origin.
However, due to the EU's advanced food safety system and agricultural practices, Georgia cannot meet the requirements quickly and the agriculture sector requires constant reforms.
The Georgian government says the reforms are being implemented over a 13-year period so that new regulations will be introduced stage by stage, and will not be a heavy burden for producers.
"We are working hard to allow new varieties on the EU markets," Gabunia told Investor.ge. "For example, I see it as a success that after prioritizing honey and fish, these two products now have a chance to go there." Georgian honey will enter Europe "very soon," once some formal procedures are finalized, she said.
There are big hopes that Georgia will have similar result for fish, as all obligations have been fulfilled, she said, adding "Now we are expecting a mission to come and check the situation in the fish industry."
Putkara LLC, which unites up to 2,000 honey producers in Georgia and claims to be the largest honey exporter in the country, is focused primarily on Asian markets, since quality requirements there are less strict, according to the company's director, Gocha Tetruashvili.
"However, if we get a chance to sell [honey] in EU countries as well, that would be great," he told Investor.ge. At the same time, he thinks it will take two to three more years for Georgian honey exporters to be ready for Europe.
"Europe has a high demand for high-quality honey, and so far we cannot meet that," Tetruashvili said, explaining that many farmers use certain pesticides for their orchards and crops that are prohibited in Europe in honey production.
In the Soviet times, he recalled, beekeepers used to get notifications when such chemicals were used by farmers so that their bees would be kept inside during those days. Now that these regulations are no longer in place, Tetruashvili is relying on farmers becoming better informed about this problem and hoping that they will eventually change their practices.
Another concern, he said, is that "chestnut, acacia and other trees—from which bees get nectar—are being cut down in recent times in big quantities."
Under the DCFTA, Georgia approved a plan in 2015 to monitor the use of antibiotics, as well as other veterinary drugs and various polluters in the beekeeping field.
A special laboratory for checking honey quality was opened.
When a Latvia-based laboratory checked Georgian honey in 2013, they found violations in 27 percent of the samples; by 2015, that had decreased to 19 percent.
For Tetruashvili, Georgia's inability to provide a large and stable supply is another challenge. "Germany, for example, asks for 20 tons of honey monthly, which is impossible for us to provide," he said.
Georgia produces approximately 4,000 tons of honey annually, and mainly exports it to the United Arab Emirates, Saudi Arabia, Iraq, Lebanon, China and South Korea.
Last year, 5.4 tons of honey, worth $54,000, was exported. Under the DCFTA, Georgia can export up to 1,500 tons of honey annually to EU countries.
One solution for increasing Georgia's honey supply is to create cooperatives and to expand bee farms. The Ministry of Agriculture is helping in this process, Tetruashvili noted.
More EU Customers Buying Georgian Wine
GSP+ did not cover a number of products, including a very important export item for Georgia—wine—so there is the expectation that the DCFTA deal will help wine sales to the EU.
During the first five months of 2016, Georgia exported more than 15 million bottles of wine—an increase of 44 percent compared with a similar period in 2015, according to National Wine of Georgia, which is part of the Ministry of Agriculture.
The increased volume of exports included higher numbers to traditional markets, China, and EU countries. For example, wine exports to Great Britain increased by 79 percent, sales to Lithuania increased by 46 percent, and there was a 31 percent increase in wine exports to Germany.
Poland has been one of the top five markets for Georgian wine exports this year.
The country bought 30 percent more bottles in the first five months of the year—835,800 bottles—than in the same period last year.
Giorgi Piradashvili, founder of the wine company Winiveria, told Investor.ge that exporting to the EU has become easier.
However, he added that he does not expect any quick, drastic changes. "We have to grow up, gain more experience and [growth] will come," he believes.
Half of Winiverisa's production is exported. In addition to Russia, Ukraine, China and other destinations, the company exports wine to a number of the EU countries, including Italy, Spain, France, the Baltic countries, and—this year—Great Britain. Last year, the company's sales came to 1,400,000 lari (approximately $607,000).
DCFTA Facility in Support of Local SMEs
Experts believe that more should be done to educate Georgian producers—especially small- and medium-sized enterprises—about the DCFTA requirements, and the timetable for when which rules need to be implemented.
"For example, there has been a lack of communication regarding the requirements for small- and medium-sized enterprises, and as a result, some agricultural producers and food processors are likely to incur significant compliance-related costs," Zaldastanishvili said, adding that even if properly communicated, there is a chance that small- and medium-sized enterprises and smallholders will not be able to fully comply with DCFTA measures.
"Exempting certain sectors from EU regulations might be a way to go. However, this may harm larger producers operating in the same sectors," Zaldastanishvili said. "The government should consider these sector-specific trade-offs before proceeding with the implementation of the requirements," she suggested.
One additional benefit from the DCFTA has been the creation of the DCFTA Facility for SMEs, under the management of the EU and the European Bank for Reconstruction and Development (EBRD). This regional initiative is aimed at mobilizing a 150 million euro grant to unlock around 1.5 billion euros in investments in the small- and medium-sized business sectors in Georgia, Moldova and Ukraine.
The initiative allows SMEs access to financing, including direct lending or loans through local partner banks.
Also, it provides the necessary know-how for entrepreneurs to increase the quality and standards of their product and services, expand their businesses and gain access to new markets.
The first project under this facility, for example, allowed the EBRD, along with TBC Bank, to provide a 1.9 million euro loan to Georgia's local broadcast operator Stereo+ Ltd, to support the switch from analog to digital broadcasting through a risk-sharing facility.
The EBRD and EU introduced small- and medium-sized enterprises in Georgia to the new facility implemented by the Bank of Georgia through credit lines on September 21. This project supports the modernization of local SMEs in accordance with AA/DCFTA requirements.
The EU, according to the EBRD's regional office in Tbilisi, will provide interested SMEs with investment incentives of up to 15 percent, as well as free advisory services from international experts.
The loans will be in local currency, and they will have a maturity of up to five years, with a two-year grace period.
The package also includes support for investment in new technologies and equipment. Other local banks will join the facility soon, the EBRD has announced.
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