By Isabel Gorst

Georgia will stand by its liberal economic policy despite a recession that has stoked popular discontent since the disastrous war with Russia last August, Nika Gilauri, the Georgian prime minister said.

The country’s western leaning government unleashed a whirlwind of economic reforms after the Rose Revolution in 2004, cutting taxation and red tape, reducing corruption and vowing in the words of Kakha Bendukidze, the former economy minister, to privatise “everything that could be sold except its conscience.”

Its liberal policies attracted large inflows of foreign investment, transforming Georgia from a failed state into one of the most dynamically growing economies in the former Soviet Union.

But the war with Russia, closely followed by the global financial meltdown, halted foreign investment, causing an economic crisis. Street protests this year have added to investors’ concerns.

Nika Gilauri, the Georgian prime minister, said Georgia’s gross domestic product would fall by at least 1.5 per cent in 2009, a disappointment for the country which was enjoying annual growth of more than 12 per cent until last August.

But the decline is less severe than in most European and former Soviet countries despite the challenges posed by the war.

Mr Gilauri ruled out state intervention in the economy, saying liberal policies were the key to foreign investment essential to Georgia’s revival.

“There are only six taxes and they are flat and very easy to administer. Investors love it,” he said in an interview with the FT.

Some $4.5bn of donor aid pledged after the war, including $1bn from the United States, is offsetting the shortfall in foreign investment. Georgia has already received $1.8bn of the funds and expects an additional $1.7bn by the end of September.

None of Georgia’s banks have failed, although most have halted lending amid concern about rising volumes of non-performing loans. The government plans to issue treasury bills to mop up liquidity in the banks and may temporarily ease tight banking regulations to stimulate lending.

Some arable land, real estate and, possibly, the post office will be sold off this year, underscoring the government’s commitment to privatisation.

However, plans to privatise the railways, a crucial part of Georgia’s strategic east west transport corridor, have been cancelled to avoid possible conflict with Russia, Azerbaijan and Kazakhstan.

“We don’t need any more international political struggles in the region,” said Mr Gilauri.

The big question is whether international donors hit by the global crisis will continue to support Georgia until foreign investment revives.

In an encouraging sign, the International Monetary Fund decided last month to add $420m to a $780m stand by agreement pledged to Georgia after the war, saying the government’s strong record on reform inspired confidence.

URL:http://www.ft.com/cms/s/0/769e3318-8102-11de-92e7-00144feabdc0,dwp_uuid=70662e7c-3027-11da-ba9f-00000e2511c8.html