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GEORGIA’S ECONOMY: KEY ECONOMIC MESSAGES FROM THE EBRD’S OFFICE OF CHIEF ECONOMIST

Published: October 3, 2012 | 12:35 pm
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The COMMERCIAL TIMES

Today’s challenges:

  • Improving the investment climate. The government should focus particularly on reinforcing the rule of law, stimulating educational attainment and acquisition of skills by its population and promoting further improvement of public sector governance.
  • De-dollarising the economy. The EBRD is committed to its local currency initiative in Georgia. Next steps are expected to build on the recently signed framework agreement on reforms required to support de-dollarisation.
  • Strengthening of municipal and other physical infrastructure: rehabilitation of infrastructure, tariff reform and restructuring of municipal enterprises.

Macroeconomic developments and risks

Macroeconomic performance has been strong. Output expanded by around 7 per cent in 2011 and in the first half of 2012. Growth has been broad-based with manufacturing, financial services and tourism among the main contributors. As international food prices moderated, inflation declined rapidly to -0.2 per cent in June 2012. The central bank was able to loosen monetary policy by decreasing the refinancing rate from the peak of 8 per cent in June 2011 to 5.75 per cent in June 2012. Although the current account deficit weakened to 12.7 per cent of GDP in 2011, rising private inflows caused appreciation pressures and enabled the central bank to replenish external reserves. The share of non-performing loans in the financial sector has declined steadily, to 7 per cent of total loans at end-March 2012. General government deficit declined to 3.6 per cent of GDP in 2011. The authorities have been able to reduce reliance on official external financing, while maintaining a precautionary arrangement with the IMF.

Risks to the outlook relate to the following factors:

(i)     the large current account deficit, financed primarily through official sources, and related uncertainty about recovery of FDI;

(ii)   the financial sector remains heavily dollarised and the level of non-performing loans is high; and

(iii) high external debt for an emerging market economy and significant external debt rollover requirements in 2012-14.

Structural reforms and priorities

Georgia’s investment climate remains among the best in the region

Large-scale privatisation is very advanced; tax and customs bodies are generally well run; and tangible results have been achieved in fighting corruption. According to the EBRD-World Bank Life in Transition survey II, carried out in 2010, perceptions of corruption are as low as in western European countries. At number 16, Georgia is the top-rated transition country in the World Bank’s latest Doing Business index.

The authorities are yet to address concerns about the politicisation of the tax administration that emerged during the past year. The weakness and lack of independence of the judiciary remains a serious concern for the protection of assets, including foreign investments.

Structural challenges in Georgia include:

  • Policies should support recovery of private investment. The government responded to investment contraction during the crisis by embarking on a promotion campaign and setting up a partnership fund that would leverage equity in public companies to attract significant infrastructure and other investments. It will be important to ensure that the fund operates on a commercial basis and foments rather than substitutes for foreign direct investment.
  • Complete restructuring and modernisation of the energy sector. The country’s energy sector has undergone a significant transformation in recent years as hydropower capacity was rebuilt and transmission networks established. However, the sector still suffers from significant distribution losses and seasonal supply patterns inherent to Georgia’s hydrology.
  • The unemployment rate and income inequality are high. Crisis time surveys reveal that a significant portion of the population had to skip purchases of basic foods and medical visits due to lack of resources and inadequate social safety nets.
Georgia: Main macroeconomic indicators 10
2008 2009 2010 2011 2012
            (proj.)
GDP growth per cent, y-o-y 2.3 -3.8 6.3 7.0 5.5
CPI inflation per cent, average 10 1.7 7.1 8.5 2.0
Government balance per cent of GDP -6.3 -9.2 -6.6 -3.6 -3.5
Current account balance per cent of GDP -22.6 -11.3 -11.5 -12.7 -10.3
Net FDI US$ mn 1494 659 809 921 970
External debt per cent of GDP 44.0 58.0 62.0 53.1 50.0
Gross reserves per cent of GDP 11.5 19.6 19.9 20.3 17.7
Private sector credit per cent of GDP 33.2 31.1 32.4 32.8.
Nominal GDP US$ bn 12.9 10.8 11.6 14.3 16.0

 

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