The new Abkhazian government’s economists are trying to determine what is happening to the state finance system. President Sergey Bagapsh concluded, “There is no money in the budget or funds. No funds are left in the special accounts either.” The issue that economists are now grappling with is: why is it so difficult to meet the current year’s budget?

Most experts offer us three responses:

First: the financial system is bankrupt, since the primary budget generating bodies could not meet budget requirements;

Second: budget failure is the result of the extended political crisis, when the economic activity of the country had decreased to minimum;

And third: the state simply lost control of its money.

In this situation, the government will apparently stop looking for someone to blame. Now they have a more difficult task to deal with – to fulfill the social obligations assumed by the state. They also have to keep the promises they made during the election campaign – to fund the sowing and plowing season. Thus far, salaries are being paid on time, but statements have already been made that the cultivating season will require over two million USD. At the same time, reorganization of the armed forces will need at least three million USD.

The need to generate funds has forced the government to postpone its financial inspection of the ministries and state companies, which was planned for the beginning of the new term.

In order to find additional funds, Prime Minister Aleksandre Ankvab ordered the government economists to find out what has happened to credit extended by the government over the last few years.

This credit was managed by the privatization fund, and money received by the state from privatization and subletting of state property was accumulated in this fund. The head of the fund was the president. The management included the prime minister and the speaker of parliament, among others. In reality, however, the fund was managed by President Vladislav Ardzinba. It has now become clear that most board members had no information about the activities of this body. The fund extended credit to small businesses and individuals from “privatization” revenue, allegedly for “support and development of small enterprises.” Unfortunately, there was no structured scheme for credit activity in place. No criteria were defined to establish eligibility for funding.

Lack of transparency in the fund erupted in scandal last summer. At that time, Parliament Speaker Nugzar Ashuba declared that he was leaving the board, since he could neither participate in the activities of the fund nor access the organization’s financial documentation.

This was followed by a number of allegations of corruption in the fund, and of credit being extended to close acquaintances. As it appears, most of this credit has not been repaid. At this point, it’s difficult even to estimate the amount of debt. Moreover, it was common for the fund to extend further credit to someone who already owed.

In a nutshell, one main goal of the government is to recover at least a portion of the credit given out over the past few years.

A second strategy for surviving the budget crisis is to meet the budget with taxes.

The Abkhazian tax inspection is headed by parliament member and banker Vakhtang Pipia. As in other cases of appointment, neither the president nor the head of the government bothered to say anything about why Pipia was chosen for this office. Instead, they said that it would be necessary to increase tax revenue substantially. This will probably be implemented through administrative pressure. The long promised tax law reform has been put off. Money is needed now. Discussion of the tax code has been halted as well. MPs had planned to make changes back in the fall of last year, but still no moves have been made. In this situation, it is unclear how, how much, or why the budget must be met. The tax benefit system is completely out of order as well. There is no explanation as to why certain companies should have benefits. Apparently, these benefits also provide good grounds for corruption.

Experts claim that the overall level of taxes is lower then anywhere else in the post-Soviet world, but this is not reflected in tax revenue.

There is no tax inspection or taxpayer audit mechanism in Abkhazia. Respectively, the economic activity of most enterprises is not transparent for the state, and they pay taxes as they choose.

Either way, the immediate measures that the government is taking to save the breakaway region from the budget crisis will take some time to have effect. Neither the credit money nor the tax money will appear any time soon. This is why we can predict that the government will have serious problems in fulfilling its social obligations.

Where Is the Money?

While still prime-minister, Nodar Khashba declared that the economy had lost five-six million USD because of the political crisis. On the other hand, independent experts state that in reality, the economy lost funds in this period equal to the entire state budget – 15 million USD. But they also claim that these funds have not really been lost. This money was lost because investment projects in Abkhazia were delayed. Meanwhile, the activity of budget generating bodies never changed during the political crisis. Now all the main structural bodies on which the budget revenue part depends have started speaking of meeting 2004 budget responsibilities. These bodies are the ministry of tax and revenue, the state customs commission, etc.

The problem of meeting budget requirements is shared by most state companies, some regional administrations which did not pay state land taxes, and agricultural enterprises. But this does not change the big picture. They were never before able to meet the requirements completely, and are not expected to do so now.

The picture in some local budgets - namely Sokhumi’s - is very optimistic. The capital city administration declared that they had a 33 percent budget surplus in 2004. It is true, however, that this may be PR more than anything else, and because most city tenants paid their rent for the first quarter of 2005 in advance.

Subletting city property for commercial projects is the main tool for meeting the city budget revenue needs.

In short, there have been no violations in the activity of the bodies responsible for fulfilling the state budget, so the money should be there. In the end, the general prosecution will have to answer the final question – Where is the money?

News

Security and defense commission member Vitali Tarnava presented a proposal to start the full-scale reform of the army recruiting system, his main argument being corruption in the system. In his opinion, the main goal of the reform should be annulment of military recruiting points – commissariats. He states, “This institution is the only one of its kind in post-Soviet countries and is a constant source of corruption. The ministries of interior and defense should coordinate recruitment. The first should detain those who evade enlistment, and the second should send them to the army.”