Issue 5, 2012. October-November



Henry Kerali is the World Bank's (WB ) new Regional Director for the South Caucasus. Before coming to Georgia, he was the bank's manager for transport sector activities in all countries in the European and Central Asian regions. In an interview with, Kerali outlines the WB's plans for 2013.

Maia Edilashvili

Q: How would you describe WB's role and strategy in the region? Do you think that there is a need to change anything or introduce new initiatives?

A: For Georgia, the current World Bank Group (WBG) Country Partnership Strategy (CPS) for the period up to 2013 was prepared against the backdrop of the twin crises of the August 2008 conflict with Russia and the global economic downturn. The Georgia CPS remains relevant and is built around two pillars: meeting the post-conflict and vulnerability needs; and strengthening competitiveness for post-crisis recovery and growth. The CPS envisages total WBG support of about $600–$750 million for the period of 2009 to 2013, including support to private-sector investments through the International Finance Corporation. The bank will soon start consultations with the government, civil society, and other stakeholders on the framework for the next CPS covering the four-year period from 2014.

The common objectives in all three countries of the South Caucasus are the need to diversify the economies, increase productivity, strengthen institutional capacity, and to increase physical and human capital. We will be working with a broad range of stakeholders in all three countries to see if there is a need to fine tune the respective partnership strategies or to introduce new initiatives.

Q: What is WB's top agenda in Georgia for 2012 and 2013? In particular, which projects are you working on presently?

A: The World Bank's current portfolio of operations — total lending of $680 million — comprises a combination of investment projects and development policy operations. Through a programmatic development policy operation series, with the first installment of $60 million delivered in July 2012, the bank is supporting the government's reform measures that are critical to the achievement of competitiveness and inclusive growth. The main policy areas supported by this operation are: competitiveness; public financial management; and effectiveness of social spending. The reform strategy adopted by the government is to promote a virtuous cycle of productivity improvements, higher investment and exports, to generate growth and employment, and to strengthen social safety nets.

Looking forward, the bank is now working on preparation of another Regional Development Project to be delivered in 2013 that will focus on the Imereti region and provide investments for renewal of cultural heritage treasures, such as Tskaltubo city and the village of Vani. In addition, the bank will continue a policy dialogue and support ofkey reforms through a planned second development policy operation currently under preparation. The bank remains ready to support the government to enhance human capital in the areas of education, health, pensions or social protection, since Georgia's people will always be its most precious resource.

Q: During your first press conference in Tbilisi you said that infrastructural and heritage projects, as well as the tourism sector, are the WB's key sectors of interest in Georgia. What projects are planned to continue supporting these sectors?

A: The bank will continue to support these sectors through three programmatic investments:

The East-West Highway Program: We are considering financing a fourth project under this program to upgrade the E60 highway from Gori to the Khashuri bypass. The Secondary and Local Road Program: Earlier this year the bank approved a new project that will finance several road segments throughout the country and pilot the use of performance-based contracts for road maintenance. The Regional Development Program: The first project, focusing on the Kakheti region, was approved in the amount of $60 million from the bank and $15 million from the government and is now under implementation. The objective of the project is to improve infrastructure services and institutional capacity, including workforce development, to support the expansion of tourism-based businesses and cultural heritage circuits in the Kakheti region. A second project, focusing on the Imereti region, is expected to be approved by the bank in November 2012. The overall Regional Development Program aims to encourage the private sector, small and large, to start new businesses or expand their current projects so as to create jobs and support Georgia's socioeconomic development.

In addition to the above, the bank is also supporting: the Regional and Municipal Infrastructure Development Project, which has improved water services and urban roads in several Kakheti towns and villages; the Rural Development Project, which has helped to support lines of credit to microfinance institutions in the region; and the Irrigation and Drainage Project, which has rehabilitated head works and the main irrigation channels in Kvemo Alazani.

Among the knowledge products that the World Bank plans to deliver this year are an assessment of potential sources of growth, options for a "green" transport policy, a strategy for regional development, an assessment of Public Expenditure and Financial Accountability, as well as a series of surveys on household and firm skills and workforce development aimed at enhancing the link between the supply and demand for labor.

Q: How important is regional economic integration for Armenia, Azerbaijan and Georgia? Which should have a higher priority - regional or international integration?

A: Both regional and international integration are important. The South Caucasus countries are not large. The combined population is less than 20 million, and the combined gross domestic product (GDP) is less than $100 million. However, they do have the potential to be high-growth economies for a sustained period. In order to achieve that, tapping regional and international markets and production networks will be critical.

Turkey is one example where regional economic integration can yield significant dividends. Turkey is the world's second -largest exporter of apparel and a very successful exporter overall. Integrating with Turkish production networks offers significant potential for boosting exports and employment in Georgia. This is just one example. Georgia is also pursuing a Deep and Comprehensive Free Trade Agreement with the European Union. Similar efforts are underway in Armenia and Azerbaijan. These initiatives would enhance market access and integration with the EU. The South Caucasus also must look eastward to high-growth markets in East, Central, and South Asia with a combined population of three billion.

The South Caucasus countries are also ideally positioned on the historic Silk Road, at the intersection of east and west, to take advantage of this integration. If one draws a straight line between the center of economic mass in Asia and the center of economic mass in Europe, that line would almost certainly have to pass through the South Caucasus. Leveraging this geographical advantage should be an important component of the development strategies of the South Caucasus countries.

Q: You have worked in nearly every continent. What are the main trends in the global economy? How are current developments in international markets affecting economies and economic policies in the region?

A: The global economy is passing through an increasingly uncertain period. The euro-area sovereign debt crisis, along with fiscal challenges and banking-sector deleveraging in advanced economies, are keeping the global-growth outlook weak in 2012. Overall, global GDP is projected to increase by 2.4 percent in 2012. Growth for developing countries is projected to be 5.3 percent, and for advanced economies, 1.4 percent, with the eurozone projected to contract by 0.3 percent.

This has two important implications for developing countries. The first is that foreign direct investment and other capital inflows are likely to remain uncertain for the foreseeable future in an environment of heightened investor uncertainty, so that more domestic savings will need to be mobilized to finance growth. The second is that developing countries will need to double their efforts to sustain export growth, by tapping new markets and diversifying their production base. The focus should remain on improving competitiveness and enhancing integration to achieve sustainable growth and employment generation in the medium term. For the South Caucasus countries, the eurozone crisis poses a potential threat, although this is much less than the potential impacts of the crisis on other countries in Eastern and Central Europe.