Country Profile Georgia

Population3.7 million

GDP, current US$ billion - 14.2

GDP, per capita, current US$ - 3, 833

School Enrollment, primary (% gross (2015) – 116.9

Life Expectancy at birth, years (2015) – 74.5

Following several years of robust growth performance in the post-financial crisis and conflict period of 2008–09, Georgia’s macroeconomic outlook and fiscal position have deteriorated in recent years, amid a weak external environment and policy changes. Concerns about domestic uncertainties faded relatively quickly after the 2012 elections, but soon after, there were tensions in the country’s external environment, and Georgia could not return to the earlier growth model of utilizing outside finance to support domestic growth.

The country’s key economic partners saw their own growth falter as oil prices collapsed in the second half of 2014 and other geopolitical events materialized. Thus, following a very short-lived recovery in 2014, Georgia has struggled to revive its main engines of economic activity. At the same time, the external sector has weakened—the current account deficit widened back to two digits—but within a much less favorable context for the external inflows that may help sustain it.

The fiscal accounts have also weakened, partly because the authorities have sought to provide a countercyclical boost to domestic demand that has not proven fully effective, especially in the face of what seems likely to be a protracted adverse change on the country’s borders. The increase in social spending, however, helped to increase incomes at the bottom 40%.

Georgia’s key macroeconomic vulnerabilities include risks to external and fiscal sustainability. The pace of poverty reduction may continue to slow and eventually stall if the recent rate of private sector employment growth were to decline.

Georgia’s economy grew by 2.7% in 2016, driven by construction and other non-tradables. Net exports declined mainly because of the slow adjustment of imports and continued decline in exports. Growth was supported primarily by investment that exceeded 30% of GDP in 2016. Meanwhile, tourism-related services performed well, as tourist arrivals from abroad increased significantly. Similarly, remittances recovered in 2016, especially in the second half of the year. Poverty is expected to have declined slightly.

Increases in international food and oil prices, combined with the doubling of fuel, tobacco, and car excises, translated into an overall inflation spike of 5.5% by end-February 2017, notably higher than the National Bank of Georgia (NBG) target of 4%. These increases, especially in food, negatively affect household purchasing power, especially at the bottom of the distribution.

The decline in exports, along with the slow adjustment of imports, widened the current account deficit from 12% of GDP in 2015 to 12.4% in 2016. Foreign direct investment (FDI), however, financed nearly 90% of the deficit. External debt increased from 107% of GDP in 2015 to 111% in 2016 because of the higher external deficit and a 10% nominal depreciation of the lari.

The NBG responded adequately to the external shock by maintaining a floating exchange rate. As a result, the lari depreciated by 10.5% in 2016, helping the economy adjust. Despite the large depreciation and high rate of dollarization, the financial sector remains stable. Prudent banking supervision reinforced the stability of the banking sector, yielding a return on assets of 2.8% and return on equity of 19.2%. Nonperforming loans represented only 7.3% of all loans in December 2016, similar to the 2015 level.

Economic Outlook

Economic growth is projected to average 4% a year over the medium term, but downside risks to growth remain. The pickup in growth in 2017 will largely be driven by high investment and some recovery in the export markets. With the Russian economy inching toward growth in 2017 and an uptick in oil prices, growth in Georgia’s trading partners is likely to increase, which will raise the demand for Georgian exports.

FDI inflows, which largely originated from Azerbaijan and Turkey in 2016, have remained resilient. All these factors should contribute to an increase in employment in the construction and tradable sectors, providing more income generation opportunities at the bottom. In the outer years, growth prospects can factor in improved economic ties with the EU. The downside risks arise primarily from a protracted period of slowdown among Georgia’s trading partners.

Fiscal sustainability is expected to be achieved through the revenue enhancing measures announced in the 2017 budget to counter the impact of the adoption of the Estonian tax regime. The Estonian tax model, which replaces corporate income tax with a dividend tax, came into effect in January 2017 and will reduce tax revenues by 1.5% of GDP. To compensate for this loss, the Government increased excises for tobacco and fuel and introduced an excise tax on cars.

The 2017 budget also indicates the Government’s determination to restrain recurrent spending. The fiscal deficit is expected to narrow during 2017– 20 as a result of these measures. However, capital expenditures and net lending are budgeted to increase from 6.5% of GDP in 2016 to 8% in 2017 to boost growth. Georgia’s public debt increased to 45% of GDP in 2016 and is likely to be maintained at this level over the medium term.

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