Friday, 09 August 2013

Georgia's Economy Stops Growing

Published in Field Reports

by Eka Janashia (the 08/07/2013 issue of the CACI Analyst)

On June 28, the Georgian state statistics office (Geostat) announced a 0 percent growth of the country’s real GDP in May. The economic slowdown started in 2012 Q4, accounting for a 2.9 percent increase in January, 2.1 percent in February and 0.2 percent in March of 2013.

Prior to Geostat’s report, the European Bank for Reconstruction and Development (EBRD) and the International Monetary fund (IMF) downgraded their 2013 growth forecasts for Georgia’s economy from 5 percent to 3 percent and from 6 percent to 4 percent, respectively.

In its latest Regional Economic Prospects report, EBRD suggested that the lack of investment flows plus post-election political uncertainty led to a slowdown of the economy since the end of 2012. The report assessed the restoration of Georgian-Russian trade optimistically, assuming that the move would contribute to an augmentation of Georgia’s exports over time.

The IMF mission’s report examines the reasons and implications of the deceleration at a more fundamental level. It says that from 2010 to the first half of 2012, the economy has been growing rapidly at an average rate of 7 percent but started to slow in 2012 Q3, reducing the GDP growth to 4 percent in 2013, but could recover to around 6 percent from next year onwards.

The report explains that uneasy procurement procedures and financial difficulties in the construction sector have reduced government spending and public consumption reflected in a consequent decline of the inflation rate, domestic demand as well as food and energy prices. As a result, in 2013 the revenue has been reduced by almost 1 percent of GDP and is now in need of a consistent monetary and fiscal policy plus improved clarity over economic policies to revert the economic recovery prospects.

IMF supports the National Bank of Georgia’s (NBG) initiative to issue government treasury bills and deposits to encourage long term Lari lending by banks and make it easier for them to access NBG funding. However, at the same time, the report suggests a reduction of the real interest rate to stimulate credit growth that has fallen from 30 percent in 2011 to 12 percent in 2013. The other measures proposed by the IMF mission include a prudent de-dollarization policy and enlargement of the financial system through advancing the pension funds.

The report signals an urgent necessity in lowering the current account deficit which remains one of the highest in the region, averaging 11.5 percent of GDP from 2010 to 2012. Unless it is limited to 6.5 percent, the country’s vulnerability to speculative capital or external exchange rate shocks will be extremely high, given the fact that Georgia’s gross external debt has reached 80 percent of GDP, the document says.

In addition, the mission criticizes several steps taken by the new government led by Prime Minister Bidzina Ivanishvili. Among them are the premature announcements of some policy initiatives such as the newly adopted Labor Code and the reduction of electricity tariffs that lowered the profits of electricity distribution companies and increased public uncertainty over the terms of agreement reached with them. The IMF mission assumes that the shift may trigger concerns among potential investors and prevent their entry into the energy sector.

Further, the report indirectly questions the viability of various investment funds, such as the Agricultural Development Fund and the Private Equity Fund, initiated by the government. “While the intention seems good, the potential size of these funds, uncertainty over their scope, and possible preferential treatment could, inadvertently, discourage investment by others,” the report says. 

President Mikheil Saakashvili insisted in a televised statement on June 29 that the economic growth figures from May depicted a “disastrous” state of Georgia’s economy and blamed the government for failed social-economic policies. “Now it is time for [PM Ivanishvili] to make a large-scale investment of his own money into Georgia’s economy,” he said.

In response Ivanishvili declared on July 3 that the capital of a co-investment fund would start operating in a few months, which could amount to US$ 6 billion including a contribution of US$ 1 billion from the PM personally. “There will not be any problems with money ... the main obstacle is the lack of projects,” he said

Whereas a large flow of investment is instrumental in realizing Georgia’s economic potential, the country’s economy displays some peculiar features. The major driver of Georgia’s economy has been rising consumption rather than growing production capacity. The total amount of private and public consumption reaches 90 percent of Georgia’s GDP. In turn, the growth of consumption has mostly been encouraged through private reimbursement provided by emigrants. The amount of such transfers reaches more than US$ 1 billion annually.

This could be a reason for Georgia’s inability over the last decade to translate its economic growth into increased employment. Officially, the unemployment rate reaches 13-15 percent. However, according to polls conducted by local and foreign NGOs, 70 percent of the respondents consider themselves to be unemployed.

In fact, due to their insufficient income, self-employed persons who constitute around 60 percent of the labor force do not deem themselves employed. Moreover, although 54 percent of the labor force works in the agrarian sector, it contributes only 8 percent of GDP. 

Thus, a large cash injection into the economy will not in itself guarantee economic growth. Instead, Georgia needs to conduct a proficient diagnosis of its scanty production capacity and develop a more precise vision for how to develop sectors where it has a comparative advantage. Such an approach, combined with a cautious fiscal and monetary policy, is needed if the announced large-scale investment is to yield tangible results for Georgia’s economy, and if it is really intended to produce commercial rather than political profits.

Read 7891 times Last modified on Monday, 12 August 2013

Visit also





Staff Publications

Screen Shot 2023-05-08 at 10.32.15 AMSilk Road Paper S. Frederick Starr, U.S. Policy in Central Asia through Central Asian Eyes, May 2023.

Analysis Svante E. Cornell, "Promise and Peril in the Caucasus," AFPC Insights, March 30, 2023.

Oped S. Frederick Starr, Putin's War In Ukraine and the Crimean War), 19fourtyfive, January 2, 2023

Oped S. Frederick Starr, Russia Needs Its Own Charles de Gaulle,  Foreign Policy, July 21, 2022.

2206-StarrSilk Road Paper S. Frederick Starr, Rethinking Greater Central Asia: American and Western Stakes in the Region and How to Advance Them, June 2022 

Oped Svante E. Cornell & Albert Barro, With referendum, Kazakh President pushes for reforms, Euractiv, June 3, 2022.

Oped Svante E. Cornell Russia's Southern Neighbors Take a Stand, The Hill, May 6, 2022.

Silk Road Paper Johan Engvall, Between Bandits and Bureaucrats: 30 Years of Parliamentary Development in Kyrgyzstan, January 2022.  

Oped Svante E. Cornell, No, The War in Ukraine is not about NATO, The Hill, March 9, 2022.

Analysis Svante E. Cornell, Kazakhstan’s Crisis Calls for a Central Asia Policy Reboot, The National Interest, January 34, 2022.

StronguniquecoverBook S. Frederick Starr and Svante E. Cornell, Strong and Unique: Three Decades of U.S.-Kazakhstan Partnership, Central Asia-Caucasus Institute, December 2021.  

Silk Road Paper Svante E. Cornell, S. Frederick Starr & Albert Barro, Political and Economic Reforms in Kazakhstan Under President Tokayev, November 2021.

The Central Asia-Caucasus Analyst is a biweekly publication of the Central Asia-Caucasus Institute & Silk Road Studies Program, a Joint Transatlantic Research and Policy Center affiliated with the American Foreign Policy Council, Washington DC., and the Institute for Security and Development Policy, Stockholm. For 15 years, the Analyst has brought cutting edge analysis of the region geared toward a practitioner audience.


Sign up for upcoming events, latest news and articles from the CACI Analyst