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Georgia - Economy

Since the Rose Revolution, Georgia has made sweeping economic reforms, moving from a near-failed state in 2003, to a relatively well-functioning market economy in 2015. Georgia made a peaceful transition of power following the 2012 and 2013 parliamentary and presidential elections, further demonstrating its commitment to a democratic process. The new government carried on the previous government’s low-regulation, low-tax, free market policies, while increasing social spending, strengthening anti-trust policy, amending the labor code to strengthen protections for workers, and consulting the private sector in the development of sound economic policies.

In early 2014, the government published its medium-term economic strategy Georgia 2020, which outlines Georgia’s economic policy priorities. It stresses the government’s commitment to business friendly policies such as low taxes, but also pledges to invest in human capital and to strive for inclusive growth across the country, not just in Tbilisi. The strategy also emphasizes Georgia’s geographic potential as a trade and logistics hub along the New Silk Road linking Asia and Europe via the Caucasus.

Since 2014, Georgia faced a large and persistent external shock. Lower oil and commodity prices reduced growth in the region, and with it the demand for Georgia’s exports. The strength of the US dollar and depreciation in partner countries put pressure on Georgia’s currency. Demonstrating its commitment to the floating exchange rate regime, the lari was allowed to adjust to exchange rate pressures, with the National Bank of Georgia making only limited interventions. Georgia’s current account deficit increased to close to 12 percent of GDP and external debt exceeded 100 percent of GDP by early 2016. After falling to less than 3 percent of GDP, the budget deficit in 2015 increased to 3.8 percent of GDP. Inflation remained relatively low since 2012, at 5 percent or lower.

The Soviet Socialist Republic of Georgia was one of the most prosperous areas of the Soviet Union. Political turmoil following Georgia’s independence had a catastrophic effect on the country’s economy. The cumulative decline in real GDP is estimated to have been more 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 largest share of Georgia's GDP is produced by agriculture, followed by trade, manufacturing, and transport. Georgia's main exports are metals and ores, wine, and nuts.

Although Georgia experienced some years of growth in the mid-1990s, it was significantly affected by the Russian economic crisis of 1998-99. The later years of former President Shevardnadze's administration 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 income tax of 20%, profit tax of 15%, 18% value added tax (VAT), a variable customs tax, and property taxes up to 1% of self-assessed value 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 improvement from 115th in 2005 and now in the same tier as countries such as Australia, Norway, and Japan. The World Bank's "Anti-Corruption in Transition 3" report places Georgia among the countries showing the most dramatic improvement 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 growth 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 global economic crisis and the 2008 Georgia-Russia conflict. In response to the damage suffered during the conflict, 38 countries 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 countries 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 administration of taxes and the widespread privatization of state-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 overall growth 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 earlier.

Prior to 2004, electricity blackouts were common throughout the country. Since late 2005, however, distribution has been much more 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 global financial crisis. The sector is open to foreign banks, and several are operating in Georgia, including 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 many 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 earlier. The value of exports was $1.58 billion, up 38% from 1 year earlier, and the value of imports was $5.16 billion, up 14.5 % from 1 year earlier. Georgia’s trade deficit for 2010 stood at $3.6 billion, up 3.4% from 1 year earlier. Turkey was Georgia’s largest 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.

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Page last modified: 23-04-2016 19:46:41 ZULU