RECENT ECONOMIC DEVELOPMENTS
Exports and remittances declined in the first half of 2016 amid a weak external environment marked by low commodity prices. In contrast, the construction and other non-tradable sectors grew by 26%, pushing the GDP growth rate for the first half of 2016 to 2.9%.
The unemployment rate declined marginally from 12.4% in 2014 to 12% in 2015, with jobs slightly shifting toward services and away from agriculture. With economic growth below potential and low inflation, the National Bank of Georgia reduced its policy rate to 6.5% in September. Prudent supervision reinforces the stability of the banking sector, with nonperforming loans amounting to 2.3% of all loans in July 2016.
The decline in exports and remittances, coupled with the slow adjustment of imports, widened the current account deficit from 12% of GDP in 2015 to 13% in the first quarter of 2016. Foreign direct investment (FDI) has financed nearly 85% of this year’s current account deficit, while reserve assets have covered the rest.
External debt declined from 107% of GDP in 2015 to 100% in the first quarter of 2016, after US$675 million in intercompany loans was written off. In an effort to support growth, the Government boosted both capital and current spending, thereby widening the fiscal deficit to 2.5% of GDP.
There has been significant progress in poverty reduction and shared prosperity in recent years. The poverty rate, estimated using the US$2.5/day PPP poverty line, fell from 46.7% in 2010 to 31.2% in 2015. During 2013–14, poverty reduction was largely driven by a combination of strong growth in the construction and non-tradable sectors, contrasting with 2010–13, when income growth among the poor was mostly driven by increased social transfers. Despite significant gains in agricultural incomes, poverty remains higher in rural areas.
With the significant increase in government spending in the run-up to the October parliamentary elections, growth is likely to pick up to 3.4% in 2016. External markets will likely remain weak, resulting in a large current account deficit of close to 12% of GDP during 2016–17. Greater policy certainty following the elections, a modest recovery in external markets, and strong FDI inflows are projected to boost the GDP growth rate to 5% in 2017–18. The current account deficit is expected to narrow gradually in the outer years.
The fiscal deficit is expected to be between 4 and 5% of GDP in 2016 because of increased social spending and expenditures and the adoption of the corporate dividend tax model. In the absence of major consolidation measures, the deficit is expected to remain elevated over the medium term and to increase public debt.
The poverty rate is projected to continue declining through 2018. Construction activity, supported by anticipated investments and the growth of tourism, is expected to drive poverty reduction through increased job opportunities among the less skilled. The rise in real wages observed since 2010 is likely to continue, which should further reduce poverty, especially in urban areas.
The expected increase in pensions will have a positive distributional effect, given that pensions represent close to 20% of income among the poor. Lower food prices in 2016 will positively impact the purchasing power of households at the bottom end of the income distribution.
Nevertheless, Georgia’s exposure to external shocks, fiscal pressures, elevated rural poverty, and high rates of unemployment pose important challenges to the Government’s economic development and poverty reduction objectives. Going forward, the Government will need to better manage aggregate demand through lower deficits, minimize contingent liabilities, better target social programs, and prioritize public expenditures.
Last Updated: Oct 04, 2016