Georgia: Georgia Economy Profile

Georgia’s economic recovery is gaining strength, backed by steady implementation of the program’s economic policies. Nevertheless, risks remain, as evidenced by the recent weakness of FDI inflows and related exchange rate pressures. The authorities’ prompt policy response, inclunding faster depreciation and a tightening of monetary and fiscal policies, places Georgia in a good position to meet the objectives of the program, which are to fasten macroeconomic stability and increase based on private sector financing and investment .

The Soviet Socialist Republic of Georgia was one of the majority prosperous areas of the Soviet Union. Political turmoil following Georgia’s independence had a catastrophic result on the country’s economy. The cumulative decline in real GDP is estimated to have been additional than 70% between 1990 and 1994, and by the end of 1996, Georgia's economy had shrunk to around one-third of its size in 1989. Today, the major share of Georgia's GDP is produced by agriculture, followed by trade, manufacturing, and transport. Georgia's major exports are metals and ores, wine, and nuts.

Although Georgia experienced some years of increase in the mid-1990s, it was significantly affected by the Russian economic crisis of 1998-99. The later years of former President Shevardnadze's government were marked by rampant cronyism, corruption, and mismanagement. Public disaffection resulted in the Rose Revolution of 2003. The new government led by Mikheil Saakashvili promised to combat corruption, stabilize the economy, bring order to the budget, and reorient the government and the economy toward privatization and free markets.

The government has reduced the number of taxes from 21 to six: a flat personal gain tax of 20%, profit tax of 15%, 18% price added tax (VAT), a variable customs tax, and property taxes up to 1% of self-assessed price of property. Based on this simplified system and low rates, Forbes rates Georgia fourth best in the world in terms of tax burden on its citizens. It has significantly reduced the number of licenses a business requires, and introduced a "one-window" system that allows an entrepreneur to open a business relatively quickly. Strict deadlines for agency action on permits have been introduced, and consent is assumed if the agency fails to act within the time limit.

The World Bank has recognized Georgia as one of the world's fastest-reforming economies, and in 2010 ranked it as the world's 11th-easiest place to do business, an development from 115th in 2005 and presently in the same tier as nations such as Australia, Norway, and Japan. The World Bank's "Anti-Corruption in Transition 3" statement places Georgia part the nations showing the majority dramatic development in the struggle against corruption, due to implementation of key economic and institutional reforms, and reported reduction in the bribes paid by firms in the course of doing business.

Economic increase was 6.4% in 2010; inflation reached 10.5% in the same year. The economy contracted by 4% in 2009 as a result of the world economic crisis and the 2008 Georgia-Russia conflict. In response to the damage suffered during the conflict, 38 nations and 15 international organizations pledged to provide U.S. $4.55 billion to Georgia at the Brussels donors’ conference on October 22, 2008. The pledges amounted to approximately U.S. $3.7 billion to meet the urgent post-conflict and priority infrastructure investment needs from 2008 to 2010, with the balance going to shore up the financial and banking sector, support improvements in health and education, and promote democratic governance and free media. This package included U.S. $1 billion pledged by the United States.

Official unemployment was 16.9% in 2010. A strongly negative balance of trade has been offset by inflows of investment and assistance from international donors. Although net investment inflows decreased in the immediate aftermath of the August 2008 conflict, private investment is returning. The Brussels aid package mitigated loss of private investment in the short term, allowing the government to continue to run a current account deficit of roughly 15%-20% of GDP. In 2010, foreign direct investment (FDI) rose to $814.5 million, up from $658.4 million in 2009. Over 30.5% of FDI came from EU nations and 16.7% from the United States. The sectors with the highest levels of FDI were industry ($228.8 million), transportation and communications ($215.1 million), real estate ($119.3 million), and financial sector ($107.4 million), according to the National Statistics Office of Georgia.

From 2004 to 2009, improved collection and government of taxes and the widespread privatization of national-owned assets greatly increased government revenues. During that period, tax collections went up from 17.8% of GDP to 24.5%. The government was able to pay off wage and pension arrears and increase spending on desperately needed infrastructure such as roads and electric energy supply systems. However, tax revenues declined commensurate with the reduction in in general increase in 2008 and 2009. As Georgia’s economy has begun to recover, government revenues have grown concurrently, reaching approximately $3.3 billion in 2010, up 10.3% from 1 year before.

Prior to 2004, electricity blackouts were common throughout the country. Since late 2005, however, distribution has been much additional reliable, approaching consistent 24-hour-a-day service due to increased metering, better billing and collection practices, reduced theft, and management reforms. Investments in infrastructure have been made as well. Hydroelectricity output increased by almost 27%, and thermal by 28%, from 2005 to 2006. Through conservation, new hydroelectricity sources, and the availability of new sources of natural gas in Azerbaijan, Georgia has significantly reduced its historical dependence on Russia for energy supplies. Although the Enguri hydroelectric power plant, which supplies up to 40% of Georgia’s winter electricity supply, is located in Abkhazia with the dam located in undisputed Georgia, there have not been any significant disruptions in transmission to undisputed Georgia since the 2008 conflict.

The banking sector remains relatively stable, though it was challenged by the 2008 conflict and world financial crisis. The sector is open to foreign banks, and several are operating in Georgia, inclunding ProCredit Bank, HSBC, and Bank Republic. International financial institutions and international banking institutions own equity shares in several of Georgia’s banks. Interest on commercial loans remains high, though has started to drop as competition for credit-worthy customers has increased. The economy continues to be credit-challenged, as the price of loans remains high and borrower eligibility requirements remain strict.

Georgia faces a lot of challenges in expanding trade. The major market to which Georgia has traditionally been linked is Russia. (For example, at one time nearly 100% of the Soviet Union's citrus fruits were grown in Georgia.) In 2006, Russia imposed bans on all Georgian exports of wine, fruits and vegetables, and mineral water; severed all direct transportation links; and eliminated postal service and visa issuance. (Since January 2009, direct charter flights between Tbilisi and Moscow have taken place intermittently, with agreements to establish direct charter flights between Moscow and Kutaisi and Batumi signed as of 2011.) Georgia has since reoriented its trade relations toward the EU, Eastern Europe, the Middle East, North America, and elsewhere. Georgia’s foreign trade turnover in 2010 was $6.731 billion, up 19% from 1 year before. The price of exports was $1.58 billion, up 38% from 1 year before, and the price of imports was $5.16 billion, up 14.5 % from 1 year before. Georgia’s trade deficit for 2010 stood at $3.6 billion, up 3.4% from 1 year before. Turkey was Georgia’s major trade partner, accounting for $1.104 billion, followed by Azerbaijan ($708 million) and Ukraine ($662 million). Georgian trade with the United States accounted for $353.9 million in 2010, according to the National Statistics Office of Georgia.

The sizeable reduction in the fiscal deficit targeted for 2010―by nearly 3 % points of GDP―brings the objective of reaching a fiscally sound position within closer reach. The authorities’ adoption of new revenue measures inclunding their commitment to cap spending in 2010 is commendable. Moreover, the decision to postpone the implementation of a referendum requirement on tax increases will help maintain the necessary policy flexibility until the fiscal deficit has returned to additional prudent levels. The authorities are encouraged to continue their efforts by targeting an ambitious reduction in the fiscal deficit in 2011.

Bank lending shows signs of recovery, supported by a gradual lowering of lending interest rates over the completed year. The tightening of monetary policy in June was warranted and the policy stance should continue to be adjusted promptly to changing market conditions.

The banking sector’s high levels of capital and provisioning continue to provide adequate buffers against adverse shocks, but continued close supervision of banks remains critical.