By Tomáš Baranec and Giorgi Khishtovani

Long-term rapid GDP growth is one of the pillars on which the Georgian government builds its legitimacy amid social and political instability following the October 2024 parliamentary elections. The numbers seemingly confirm the government’s argument. Georgia's GDP growth was 7.8 percent in 2023 and 9.7 percent in 2024. In 2025, overall growth is expected at 7.5 percent and International financial institutionsexpect GDP growth at 5-5.5 percent for 2026. The growth of recent years, however, was driven by several temporary and random factors rather than structural reforms. Numerous indicators suggest that growth in 2025 was artificially inflated and that the Georgian economy is in fact entering a turbulent phase.

BACKGROUND:

Georgia’s high GDP growth after 2020 was driven by three primary and two secondary factors. The first, most short-term, primary factor was natural growth after a sharp decline during the first year of the COVID-19 pandemic. After a contraction caused by the pandemic in 2020, when GDP fell by 6.3 percent, GDP grew by 10.6 percent the following year. The economy grew rapidly, primarily due to the fading of the initial shock from the pandemic and adaptation of the labour market and supply chains to the new pandemic reality.

While the effect of adaptation to the pandemic gradually faded, two other strong primary factors of GDP growth emerged, both associated with the Russian invasion of Ukraine in the spring of 2022. These were the mass arrival of Russian citizens and the opening of a transport corridor for sanctioned goods to Russia via Georgia. Following 2022, more than 80,000 Russian citizens settled in Georgia, mostly IT professionals, small businesspeople, and other members of higher-income groups. Their arrival stimulated overall demand, particularly growth in housing prices and development of the construction and IT sectors. In addition, Russian capital in the form of deposits from Russian citizens began flowing into Georgian banks in large quantities in 2022.

After 2022, Georgia became one of several transport corridors for the (re)export of sanctioned goods to Russia. Official statistics indicate Georgia’s role as an export corridor for passenger cars. In 2025, Kyrgyzstan (export from Georgia US$ 1.49 billion) and Kazakhstan (export from Georgia US$ 909 million) became Georgia’s main trading partners, and the main official export destinations for passenger cars from Georgia. The export value of this commodity reached US$ 2.81 billion. Passenger cars were also the largest import item to Georgia with a total value of US$ 3.87 billion. It should be noted that the “Georgian corridor” is partly absent from Kyrgyz and Kazakh statistics. While there is an immense increase of Georgian exports to Asia, the corresponding imports from Georgia are missing in the statistics of these countries. For instance, Kyrgyzstan’s official imports from Georgia are at least ten times lower than exports from Georgia to Kyrgyzstan.

The war in Ukraine also became the impetus for the emergence of two secondary factors of GDP growth in Georgia: foreign students and Russian tourists. Before the war, universities in eastern Ukraine were the main competitors of Georgian universities for international students, especially from India. After the war broke out, large numbers of students instead came to Georgia, increasing by an average of 20 percent year-on-year. In the 2024-2025 academic year, 37,100 international students studied in Georgia, more than double the 17,500 foreign students in Georgian universities in 2021-2022. This factor is an often overlooked yet significant secondary driver of Georgia’s GDP growth over the past few years.

Moreover, unlike many Western countries, Georgia has not banned flights to Russia, thereby stimulating growth in tourism. Russians represented 23.32 percent of total visits to the country in 2025.

Increased state revenues are an additional element that have contributed to strong growth figures and increased government spending in the years 2021-2025. Central government tax revenues rose from US$ 3.5 billion in 2021 to US$ 8.0 billion in 2025, reflecting a 128 percent increase, while state budget appropriations increased from US$ 6.19 billion to 10.3 billion, a 66.3 percent rise.  

IMPLICATIONS:

Several trends indicate that the main drivers of Georgia’s growth have already peaked and are beginning to fade. The economic growth in 2025 was likely inflated mainly by the International Company Status Act adopted in 2020. The Act grants certain types of companies in the IT and maritime sectors the opportunity to qualify for significant tax breaks. The changes adopted in 2020 allow foreign IT companies to register in Georgia, having to pay only a 5 percent corporate tax and 5 percent on employee wages. The ultimate catalyst for growth under the legislation was the arrival of Russian and Belarusian IT experts in 2022. In parallel with this law, the government also introduced simplified permanent residence for employees in the Information and Communication Technology (ICT) sector in 2025.

In the third quarter of 2025, the ICT sector grew by 21.1 percent; in the second quarter of 2025, by 37.1 percent; and in the first quarter of 2025, by 28.6 percent. In the third quarter of 2025, the sector reached 7.4 percent of the country’s GDP, from only 3 percent in 2020. While the state’s revenues from this scheme are rather insignificant, it does contribute to inflating growth statistics.

At the same time, almost all sectors relevant to the real economy and the state budget recorded a decrease in growth or a decline in the third quarter of 2025: energy (-3.3 percent), agriculture (-5.4 percent), construction (0.2 percent), trade (+3 percent) and manufacturing (+2,5 percent).

Other trends also contribute to the slowdown of the real Georgian economy. The number of people employed in the Georgian economy has decreased (most probably due to emigration) in the third quarter of 2025. Meanwhile, growth rates of imports are decreasing as compared to 2024. 

While state budget revenues increased by approximately 25 percent in 2024, they increased by only 10 percent in 2025, with 4 percent offset by current inflation. These trends contradict the estimated 2025 GDP growth rate.

The Georgian economy’s growth was not only an important PR tool for the Georgian government but also a practical means for maintaining its public support in the critical years of 2024 and 2025.

During its time in power, Georgian Dream has created a self-dependent layer of civil servants and citizens receiving various social benefits. Over the past two years, the ruling party has further strengthened their loyalty by increasing salaries and benefits. This was permitted by strong economic figures in 2022-2024. After 2025, Georgian Dream is starting to run short of resources to continue buying the support of these groups.

Most probably, the Georgian government is aware of the real slowdown in economic growth and the threats it poses to its legitimacy. It is currently taking several steps to address this threat. In the summer of 2025, the National Bank of Georgia managed to restore its dollar reserves to the same level as in 2024, before it started to sharply sell US$. 

Keeping a stable currency is one of Georgian Dream’s main priorities. The government has also become more careful in spending budgetary funds in comparison to previous years, and is actively building a financial reserve to limit the impact of slowing economic growth.

Georgian Dream’s ability to prepare for a period of economic turbulence will depend on several factors. These factors cannot currently be estimated accurately, however, the duration of Western sanctions against Russia stands out among the most relevant. Maintaining Georgia’s relevance as a transport corridor to Russia would significantly help Tbilisi weather the upcoming economic turbulence. On the other hand, a quick resolution of the conflict in Ukraine and the restoration of trade relations between Moscow and the West could, indirectly but significantly, weaken Georgian Dream’s position.

CONCLUSIONS:

The slowdown in the Georgian economy’s real growth will likely be the next big challenge for the ruling Georgian Dream party in the coming years, following the protest year of 2025. Unlike the mass protests, a significant deterioration in the population’s socio-economic situation could undermine support for the ruling party, even among its core electorate. Several current government actions indicate that Georgia’s de facto leader, Bidzina Ivanishvili, is aware of this threat and is taking steps to maintain the government’s capacity to support the existing social system. However, several key factors in this direction are shaped by other actors and trends and depend only marginally on the actions of the Georgian government. Of these, an end to the war in Ukraine could have the most severe negative impact. Moreover, the data accounted for here precedes the recent outbreak of war in Iran. The fallout from the conflict adds uncertainty to an already precarious economic situation in Georgia.

AUTHOR’S BIO: 

Tomáš Baranec is a Research Fellow and Head of the Caucasus Program of the Slovak think tank Strategic Analysis. He currently works as a field researcher on the Georgian-Ossetian ABL. Tomas studied Balkan, Central European and Eurasian Studies at Charles University in Prague. Giorgi Khishtovani is a Full Professor and Head of the Department of Finance at Ilia State University (Georgia). He holds a PhD in Economics from the University of Bremen (Germany), an MSc in Business Administration, and an LLM in Law from the University of Trier (Germany). His research focuses on political economy, governance, economic and fiscal policy.

By Saima Afzal

The escalation of conflict in the Middle East following U.S. and Israeli strikes on Iran is exposing the geopolitical vulnerability of Central Asia’s trade diversification strategy. Over the past decade, Kazakhstan and Uzbekistan have invested significant political and financial capital in developing alternative transit corridors including southbound routes through Iran, Afghanistan, and Pakistan to reduce reliance on northern pathways historically oriented toward Russia and to secure access to global maritime markets.
The current crisis is rapidly testing their underlying assumptions. Instability across key transit regions now threatens emerging logistics networks, raising concerns about the reliability of corridors that were intended to enhance economic resilience.

BACKGROUND:

The latest escalation in the Middle East is reverberating well beyond the immediate theatre of conflict, disrupting energy markets, trade routes, and regional economic planning. Oil prices rose sharply following strikes on Iran and subsequent retaliation, reviving concerns about disruption in the Strait of Hormuz, a critical artery through which a significant share of global oil supplies transits daily. For energy-importing economies across Asia, the shock echoes earlier inflationary pressures experienced during previous geopolitical crises.

For Central Asia, the effects are both systemic and immediate. As landlocked economies, states such as Kazakhstan and Uzbekistan have long prioritized the diversification of trade routes as a strategic objective. This has involved developing southbound connectivity through Iran, Afghanistan, and Pakistan, alongside east–west alternatives linking the region to China and Europe.

Iran has played a central role in these plans, offering access to maritime trade via ports such as Chabahar within the framework of the International North-South Transport Corridor (INSTC). Regional initiatives such as the proposed Uzbekistan-Afghanistan-Pakistan railway have likewise aimed to provide direct access to Pakistani ports and shorten transit times to global markets.

These initiatives were conceived well before the current crisis. What the escalation has done is bring into sharper focus the extent to which their viability depends on political stability across multiple transit regions.

At the same time, the conflict is already producing tangible disruptions. Airspace closures and security risks have forced flight cancellations and rerouting, reduced cargo capacity and raising transport costs. Border crossings that serve as key trade arteries are also under pressure, with increased congestion and tighter controls affecting both freight and passenger movement.

In several cases, these disruptions intersect directly with everyday economic activity. Iran’s temporary suspension of selected exports and interruptions in cross-border trade have affected the flow of food and consumer goods into neighbouring Central Asian markets, particularly in countries with strong import dependence. Localized shortages and price increases have already been reported in border regions reliant on Iranian supplies.

IMPLICATIONS:

The unfolding conflicts across Iran and the Afghanistan-Pakistan corridor highlight a structural feature of Central Asia’s connectivity strategy: diversification reduces dependence on any single route, but it also distributes exposure across multiple geopolitical environments.

Southern corridors illustrate this dynamic most clearly under current conditions. Routes passing through Iran now face heightened uncertainty linked to maritime disruption, rising insurance costs, and sanctions-related risks. Even without a formal closure of the Strait of Hormuz, security concerns have slowed tanker traffic and increased freight premiums, costs that are disproportionately borne by landlocked economies.

Overland connectivity through Afghanistan and Pakistan remains constrained by persistent insecurity and fragile political relations. Escalating tensions between Kabul and Islamabad further complicate both the implementation and long-term reliability of projects such as the Uzbekistan-Afghanistan-Pakistan railway. Existing road and rail links are vulnerable to disruption, while transit agreements risk suspension under political pressure, creating uncertainty for trade flows.

Energy and infrastructure initiatives are similarly affected. Projects such as the Turkmenistan-Afghanistan-Pakistan-India (TAPI) natural gas pipeline and the CASA-1000 electricity transmission line depend on stable transit conditions across regions that continue to experience volatility. These risks are not new, but they are in the current environment becoming more acute and more difficult for investors and policymakers to discount.

Beyond infrastructure, the economic transmission mechanisms are already visible. Rising fuel prices are feeding into inflation across import-dependent economies such as Kyrgyzstan and Tajikistan, increasing the cost of food, transport, and basic goods. Disruptions to supply chains-particularly for agricultural products and consumer goods imported via Iran are compounding these pressures. At the same time, any slowdown in major partner economies such as Russia or China would have secondary effects through trade, investment flows, and remittances.

Rather than triggering a shift in strategy, the crisis is reinforcing an existing trend toward hedging. Central Asian states are likely to deepen engagement with alternative corridors perceived as comparatively stable. The Trans-Caspian International Transport Route, linking the region to Europe via the South Caucasus, has gained prominence as an east-west option that avoids both Russian territory and southern conflict zones. Similarly, established rail connections to China provide access to global supply chains through more predictable logistical networks.

This does not signal a retreat from southern connectivity. Instead, it reflects a growing emphasis on redundancy-maintaining multiple routes to manage disruption rather than relying on any single corridor to deliver uninterrupted access.

CONCLUSIONS:

At the core of this challenge is a structural dilemma: while diversification reduces dependence on any single route, it also distributes exposure across multiple geopolitical environments. As a result, Central Asia’s broader transport strategy is increasingly shaped not only by infrastructure development, but by the political and security dynamics of regions far beyond its borders. The current Middle East conflict underscores the extent to which this impacts Central Asia’s economic integration. Connectivity initiatives designed to expand access to global markets are now being evaluated through the lens of geopolitical risk and operational resilience.

The immediate impact is not the abandonment of diversification strategies, but their recalibration. Policymakers are increasingly approaching connectivity not only as an economic objective, but also as a risk management tool, placing greater emphasis on flexibility, redundancy, and continuous reassessment of external exposure.

At the same time, the crisis highlights how quickly geopolitical shocks translate into everyday economic pressures-from rising food and fuel prices to disrupted transport links and constrained trade flows. Even without direct involvement in the conflict, Central Asian states are already absorbing its effects.

Ultimately, the resilience of Central Asia’s trade ambitions will depend not only on infrastructure investment, but on the capacity to navigate an increasingly complex and unpredictable geopolitical environment.

AUTHOR’S BIO: 

Saima Afzal is an independent and freelance researcher specializing in South Asian security, counter-terrorism, the Middle East, Afghanistan, and the Indo-Pacific region. Her work focuses on geopolitical developments, strategic affairs, and regional conflict dynamics. She holds an M. Phil in Peace and Conflict Studies from the National Defence University, Islamabad, Pakistan.

By Irakli Laitadze

On February 4, 2026, the Georgian Parliament adopted amendments to the Law of Georgia On Higher Education. The controversial reform triggered mass protests from the academic community and broader society, which are still ongoing. The government argues that the reform will modernize the education system, concentrate limited financial resources, and increase the competitiveness of universities. A central element of the reform is the principle “One City–One Faculty,” under which multidisciplinary universities will be reorganized into specialized institutions aligned with regional and market demands. Critics argue that the reform will reduce institutional autonomy, weaken interdisciplinary research, and hinder integration with the European higher education system.

BACKGROUND: Over the past twenty years, Georgia has implemented EU standards in the field of higher education. The country participates in the Bologna Process and meets the criteria of the European Higher Education Area (EHEA). The aim of this process and the EHEA standards is to improve the quality of education, promote student mobility, and ensure the international recognition of Georgian academic degrees.

Despite significant progress, several persistent problems remain: weak research infrastructure, insufficient links between universities and the labor market, and the excessive concentration of higher education institutions in the capital, Tbilisi. Of the sixty-one higher education institutions in Georgia, forty-six are located in Tbilisi.

In early February, the Government of Georgia initiated a reform of the higher education system; however, it significantly deviates from the actual needs of universities. The reform has provoked protests among professors, students, and the broader public. According to the government, the proposed changes will improve the quality of higher education and make it more responsive to labor market demands.

One of the declared goals of the reform is to support regional universities. The government argues that improving the quality of teaching may reduce the migration of young people to the capital and strengthen social and economic development outside Tbilisi. In addition, such support is expected to enhance the stability of regional universities and enable them to respond more effectively to local challenges.

The government argues that budget centralization and the redistribution of academic resources will enable more efficient use of funding for competitive salaries, equipment, and infrastructure. According to this view, restructuring will create better conditions for academic research.

One of the key elements of the government’s reform is the principle of “One City – One Faculty.” This approach implies the abandonment of classical multidisciplinary universities and the creation of institutions focused on only a few disciplines. Critics argue that such a model will ultimately weaken academia. According to the government, however, this mechanism will eliminate the duplication of academic programs across universities and align education more closely with labor market demands. The reform will also allow the state to control the distribution of quotas and admission rates. The number of students receiving state-funded scholarships, as well as their allocation across higher education institutions, will be determined directly by state priorities.

A significant share of Georgia’s academic community fiercely opposes the reform. Particularly active in the protests are professors and students at Ilia State University, an institution known for its strong criticism of the government. The university has become a main target of the authorities, most probably for this reason. Since February 4, protests have been held daily by several thousand campaigners, taking the form of marches and open-air lectures in front of the university.

IMPLICATIONS: The concentration of administrative and financial management reduces the role of universities in academic decision-making. Without control over financial resources, universities lack the capacity to strengthen specific disciplines. Decisions on how to allocate funds should remain the responsibility of the universities themselves. External bureaucratic structures are not well positioned to accurately identify or assess the specific needs of individual institutions.

The dismantling of multidisciplinary higher education institutions will reduce opportunities for interdisciplinary research and may hinder innovation. Excessive specialization risks making education overly dependent on current economic conditions and short-term market demands. Such institutions tend to be less adaptable to changes in the labor market and may limit graduates’ career prospects. If only one specialized institution operates in a region, local students will face limited educational choices, which may further increase migration to Tbilisi. Although specialization may appear beneficial, since concentrated funding could strengthen specific subdisciplines, in practice this effect is likely to be limited.

This is a complex issue that involves the broader context of the entire education system, including secondary education. It cannot be addressed solely through structural changes within universities, as the quality of higher education is directly influenced by the preparedness of school graduates, curriculum standards, teacher training, and assessment models. Without coordinated reform at earlier stages of education, university reforms risk becoming fragmented and ineffective. A systemic approach is therefore essential to ensure coherence, continuity, and long-term sustainability across all levels of education. Consequently, the government’s emphasis on specialized institutions may replace strategic development with short-term objectives. In the long term, such reliance on market signals may undermine the stability of educational institutions.

Nearly 75 percent of Georgia’s population supports further integration with the European Union and there is significant concern that these reforms will jeopardize the country’s participation in the Bologna Process and its ability to meet EHEA criteria. The inadequacy of the reform in addressing existing challenges raises international, as well as domestic, concerns. Moreover, the reform appears to contradict the commitments outlined in Georgia’s Association Agreement with the EU.

From 2026, Georgian state universities will be unable to admit foreign students, or will be allowed to admit only a limited number with prior state approval. Such academic restrictions and increased state control are likely to reduce both the number and the quality of joint research projects, participation in international academic programs, and student exchange programs.

The reform was developed without meaningful involvement of the academic community through open consultations, analytical assessments, or financial evaluations, raising serious concerns about its transparency. The absence of clearly presented criteria, objectives, and implementation mechanisms undermines trust among professors and students and encourages perceptions that the reform serves political rather than strategic goals, including increased control over academic freedom and expression.

Moreover, unclear decision-making procedures heighten the risk of politicization. When the criteria for financing and the reorganization of higher education institutions are not transparent, concerns about political influence and corruption arise. Limited public access to information on decision-making processes, budget allocations, and performance indicators also makes it difficult to evaluate whether the reform’s objectives are being achieved. The lack of clear benchmarks and independent evaluation mechanisms weakens accountability and reduces public trust in the reform process.

CONCLUSIONS: Criticism of the higher education reform by scholars and students highlights significant risks. The reform goes far beyond administrative restructuring and carries important social and political implications. These include the preservation of institutional and academic autonomy, transparent governance, funding for research, admission policies, the social role of universities, continued integration into European education and research frameworks, and the risk of unemployment among the intellectual elite. All of these areas risk becoming adversely affected by the proposed changes.

As of today, the reform applies to all state-owned universities, but there is no guarantee that similar measures will not later be extended to private higher education institutions. The reform contradicts Article 27 of the Constitution of Georgia, which guarantees academic freedom and the autonomy of higher education institutions. A major concern is that the reform may institutionalize political control over universities and significantly reduce their autonomy. Critics argue that an implicit objective of the reform is to marginalize pro-Western academic circles, which have traditionally served as spaces for open debate and free discussion. In the context of the government’s increasingly anti-Western orientation and democratic backsliding, the autonomy and independence of universities remain essential pillars of a free society.

AUTHOR’S BIO: Irakli Laitadze is an Adjunct Professor at Ilia State University (Tbilisi, Georgia) and Senior Fellow of the think-tank EU Awareness Centre (Brussels). He was previously a career diplomat, serving as a senior Counsellor in the Mission of Georgia to the EU and Director of the EU Political Department, Ministry of Foreign Affairs of Georgia. After his diplomatic service, he was the CFO in GMT Hospitality and CEO of Publishing House Artanuji. He holds degrees from Tbilisi State University, the Diplomatic School of Madrid (Diploma), and Cambridge University (MBA), and a Ph.D. (Magna cum laude) from Tbilisi Free University.