Background: In June 2014, Georgia signed an Association Agreement with the European Union. The Agreement, which includes a Deep and Comprehensive Free Trade Area (DCFTA), marks several years of cooperation between Tbilisi and Brussels under the Eastern Partnership program, and represents the first step on Georgia's journey towards membership. It describes the gradual improvements needed in areas such as trade, environment, agriculture, tourism, energy, transport and education to bring Georgia in line with EU standards. The DCFTA is aimed at enhancing Georgia's trade and economic growth through bringing its legislation closer to that of the EU. It also removes the existing barriers on the trade of goods and services with the EU.
The recession in Russia and slower growth among other trading partners impacted Georgia through lower exports and reduced remittances, particularly from Russia and Greece. The tradable sector suffered the most, with industrial production contracting by one percent in 2015. As a result, growth moderated from 4.6 percent in 2014 to 2.8 percent in 2015. With a decline in external performance, the current-account deficit widened to 11 percent of GDP, and the Lari lost 30 percent of its value since December 2014. The tightening of monetary policy together with lower oil prices helped contain inflation during 2015 to 4.9 percent. Prudent financial sector supervision ensured stability of the banking sector and low level of NPLs at 2.3 percent in 2015. In an environment of weak external demand and high policy rates, the government supported growth through a 17 percent increase in capital expenditures.
Despite the overall slowdown, growth was supported by non-tradables such as construction, which grew at 16 percent, and services with growth of 3 percent. Foreign direct investment (FDI) and tourism proceeds remained stable, which also helped increase employment by 20 percent and real wages by 4.7 percent in 2015. The largest increases in wages were in construction, real estate, and health.
With Parliamentary elections scheduled for October 2016 and the weakness in external markets likely to persist, growth is projected at 3 percent in 2016. Georgia’s anticipated adoption of the Estonian tax model would replace the corporate profit tax with dividend tax: while this measure could boost medium-term growth, tax revenues will decline immediately and could increase the fiscal deficit by up to 2 percentage points of GDP by 2017 (IMF estimate). Slow growth, a large current-account deficit, high levels of external debt (over 100 percent of GDP), and a widening fiscal deficit are the main macroeconomic challenges faced by the country.
Priorities: Located on the shortest route between Europe and Asia, Georgia’s transport system is a key link in the historic “Silk Road.” The Government’s commitment to rehabilitating main, secondary and local road networks has intensified in response to the global economic down-turn, as road rehabilitation will improve access to markets and services, and create short-term employment through civil works.
Georgia has a developed, stable and reliable energy sector but efforts are required to improve the efficiency in domestic energy use. The most promising source of additional energy generation is hydropower and the Government is focused on securing private investments for construction of new hydropower stations.
Georgia has also adopted a State Strategy for Regional Development to create a favorable environment for regional development and to improve living standards of the population. Addressing regional disparities, poverty, and unemployment has been flagged as a key priority for intervention by the Government in its Socioeconomic Development Strategy - 2020. An integrated and demand-driven approach to regional development has been designed with the support of the Bank and is currently seen as critical in spurring growth and job creation in historic cities and heritage villages.
Tourism is one of the fastest growing economic sectors in Georgia – total contributions accounting for 23.5% of Gross Domestic Product (GDP) and 20.1% of total direct and indirect employment in 2015. The sector also currently provides as much as 36.4% of total export earnings. This focus on improving the entire tourism value chain around a tourism circuit across the region, and not simply single sites or individual projects, is expected to increase the country’s rank in the Tourism Competitiveness Index, providing economic benefits for the entire country for years to come.
Last Updated: May 05, 2016