RECENT ECONOMIC DEVELOPMENTS
The economy performed better in 2017 than earlier estimates had indicated. GDP growth improved markedly to 5% from 2.8% in 2016, led by the trade, construction, and transport sectors in an improved external environment. Exports of goods expanded by 24% on the back of strong demand from Russia, Azerbaijan, Ukraine, China, and the United States, while exports of services improved by 20%, led by a 27% spike in tourism proceeds.
In addition, workers’ remittances increased by 21% in 2017. Import growth was relatively lower, reflecting gradually firming oil prices. Gross foreign direct investment (FDI) inflows increased in 2017 to 12.3% of GDP, helping strengthen the international reserve position, which stood at four months of imports of goods and services.
Fiscal policy was prudent in 2017. Despite eliminating the income tax on reinvested profits beginning in 2017, revenues increased by 11%, reaching 28.8% of GDP. To prioritize social and infrastructure spending, the authorities generated savings of about 0.8% of GDP from lower administrative costs in 2017. This helped to scale up public investments to 8.3% of GDP and slightly narrow the fiscal deficit to 3.8% of GDP from the 3.9% observed in 2016.
Going forward, considerable consolidation of administrative spending, the streamlining of subsidies, and a more efficient social safety net will help to achieve medium-term fiscal consolidation while providing space for capital spending.
Prudent macro-fiscal policies helped preserve fiscal space and supported price stability. With inflation above the ceiling of its target range in 2017 and the rapid growth of credit, the National Bank of Georgia (NBG) increased the policy rate by 0.75 basis points to 7.25% over 2017. The policy rate has remained tight so far in 2018.
The banking sector is well capitalized and profitable and has a low number of nonperforming loans (NPLs). The sector yielded a return on assets of 2.8% and a return on equity of over 20% as of end-2017. Also by December 2017, NPLs represented only 2.4% of gross loans, down from 3.6% as of end-2016.
At the same time, systemic vulnerabilities persist, including the large market concentration of the top two banks, the high retail loan growth (including by non-bank financial institutions), and the elevated dollarization against the backdrop of deficient financial safety nets. The NBG plans to address the latter issues with support from the World Bank and International Monetary Fund.
Net job creation stagnated in 2016 and important challenges remain. According to household survey data that cover both the formal and informal sectors, the overall unemployment rate declined to 11.8% in 2016 from 14.6% in 2013. Nevertheless, this level is one of the highest in the Europe and Central Asia (ECA) region. The slowdown in employment creation had an adverse impact on poverty reduction, which has stalled since 2016. Inequality, as measured by the Gini coefficient, has fallen from a peak of 42 points in 2010 to close to 39 in 2016 (using the consumption aggregate used for international poverty comparison).
Georgia’s growth outlook over the medium term is positive. The more benign external environment should facilitate the development of private sector–led export sectors, encourage FDI, and support consumption from still robust remittances. A steady implementation of the reform program will result in a further acceleration of growth over the medium term to 5% by 2020, particularly by enhancing productivity.
Inflation is envisaged to remain well contained, converging to the NBG’s target of 3% by year-end 2018, while the current account deficit will narrow to below 9% of GDP by 2020. At the same time, as an open economy, Georgia is vulnerable to regional developments, given its historically high current account deficit, and the risks associated with a high export demand and a decline in remittances.
The considerable consolidation of administrative spending, the streamlining of subsidies, and a more efficient social safety net will help to achieve medium-term fiscal consolidation and provide space for capital spending. Current spending is projected to decline from 24.5% of GDP in 2017 to 23% in 2020, primarily by containing the wage bill and administrative expenses-which rose steadily and steeply for at least four years-and better targeting subsidies and social assistance programs.
The fiscal deficit of the general government will be gradually reduced to 3.0% of GDP by 2020, keeping public debt stable. Still, fiscal slippages, the accumulation of new liabilities, or the materialization of contingent liabilities may compromise the expected consolidation and result in a higher debt burden.
The continuous expansion of the economy in upcoming years should lead to more employment opportunities and further poverty reduction. In rural areas, employment opportunities outside agriculture will play a particularly critical role in promoting reductions in lagging regions. In contrast to the 2010–15 period, pensions and social assistance are expected to play a much smaller role in poverty reduction in the near term, given the more limited fiscal space.
Last Updated: Apr 17, 2018