RECENT ECONOMIC DEVELOPMENTS
The Georgian economy picked up pace in the first half of 2019, growing at 4.9 percent and accelerating to 5.1 percent by July. While domestic demand was supported by higher consumption, investment contracted due to the completion of several infrastructure projects and declining foreign direct investment (FDI). Net exports improved considerably, reflecting slowing imports and the increased re-export of used cars and copper ores. On the supply side, all sectors, except mining and electricity production, positively contributed to growth.
The unemployment rate declined to 12.7 percent in 2018, helping to lower the poverty rate (measured at the national poverty line) to 20.1 percent. This was driven by a 3.4 percentage point decrease in rural poverty, while urban poverty fell by 0.6 percentage points. These trends continued in the first half of 2019 as the unemployment rate declined further to 12 percent.
Inflation accelerated to 4.9 percent year-on-year (y-o-y) in July 2019 due to the weakening of the lari as well as higher tobacco excises. In response, the authorities tightened the monetary policy rate in early September by 50 basis points to 7 percent.
The trade balance continued to improve as export of goods expanded by 12.4 percent and imports were 4.7 percent lower in the first seven months of 2019. Money transfers (including remittances but also other transfers) rose by 7 percent. The growth of tourism proceeds moderated to 7.8 percent in January-July from 21 percent in 2018. In the first quarter of 2019, the current account deficit of 6.2 percent of GDP was well covered by FDI as well as portfolio investments of 6 percent and 4 percent of GDP, respectively. This allowed the National Bank of Georgia to accumulate record high international reserves.
The budget registered a deficit of 0.6 percent of annual GDP by end-July 2019 compared to a 0.5 percent of GDP surplus in the same period of last year. This was result of a faster outturn in government spending and a revenue increase (by 10 percent y-o-y) in January-July. Public debt has increased by 7.4 percent since the start of the year, reflecting the depreciation of the lari, the pickup in capital spending (mostly foreign financed), and efforts to develop the domestic debt market.
After moderating in early 2019, credit growth accelerated to 13.5 percent y-o-y in August (excluding the foreign exchange effect). The credit expansion was driven mainly by lari-denominated loans. Deposits grew by 8 percent in August y-o-y, driven primarily by lari deposits.
Growth is projected to slow to 4.4 percent in 2019, adversely affected by the ban on all flights between Russia and Georgia, which is estimated to cost the economy around 0.6 percent of GDP. This will be partially offset by stronger net exports, a recovery in credit growth, and some fiscal stimulus. Growth is projected to slow further in 2020, reflecting the full-year effect of fewer arrivals from Russia, the delay in some larger planned infrastructure projects, and more moderate credit growth as international financial markets tighten.
On the other hand, some expansion of government spending, as well as improved air connectivity to and recovery in Turkey, is expected to partially mitigate the growth moderation. Growth is therefore projected to recover over the medium term as some of the constraints to growth dissipate.
Although more moderate, growth will remain positive and create more employment and other income-generating opportunities at the bottom of the income distribution. Public spending (for example, higher pensions or discretionary increases in social assistance) may also help to reduce poverty further, although the impact on fiscal sustainability will need to be considered carefully.
Last Updated: Oct 18, 2019