RECENT ECONOMIC DEVELOPMENTS
Economic growth accelerated in the first half of 2018 to 5.7%, supported by a strengthening of both external and domestic demand. External inflows remained strong in the first half of 2018. Merchandise exports grew by 28% year-on–year (y-o-y), tourism proceeds by 24%, and money transfers by 18%.
However, robust domestic demand resulted in a 23% y-o-y increase in imports and a slight widening of the current account deficit. Despite a 4% depreciation of the lari against the U.S. dollar in August 2018, the effective exchange rate was appreciating for most of 2018 due to the weakening of the currencies of Georgia’s major trading partners, including Russia and Turkey. Annual inflation stood at 3.1% in August 2018, within the Central Bank’s 3% target.
Fiscal policy was conservative in the first half of 2018 relative to the approved budget. Outlays on infrastructure were slower than expected, while the consolidation of current expenditure remained on track. Although the fiscal accounts posted a modest surplus in the first half of 2018, a deficit of 3.1% of GDP is projected for full-year 2018 (below the planned deficit of 3.8% of GDP), barring any unanticipated acceleration in capital spending.
The banking sector is well capitalized and profitable, with a low nonperforming loans ratio (2.7% of total loans at end-July 2018). However, structural vulnerabilities persist in some areas. The economy remains highly dollarized. Although the share of both foreign currency deposits and foreign currency loans has decreased slightly compared to the past year, those figures were 60.8 and 54%, respectively, for the first six months of 2018. The declining trend in poverty in Georgia has plateaued since 2015. Limited employment growth and static social assistance transfers could be the main reasons for the stagnation.
With real GDP growth expected to reach 5.3% in 2018 and hover around 5% over the medium term, Georgia’s economic outlook is positive. A strong pipeline of investments, gradually increasing public capital spending, and improved connectivity will keep the economic activity vibrant.
The flexible exchange rate and a gradual strengthening of the monetary policy transmission mechanism will support competitiveness while preserving price stability.
After widening in 2018, the external deficit is projected to narrow gradually, though its financing may have to rely more on nonconcessional debt-generating inflows. At above 108% of GDP, total external debt is already a source of vulnerability.
Government spending is expected to continue to gradually shift from current to capital spending over the medium term, reflecting the large infrastructure gap in the country and the availability of concessional financing. The fiscal deficit is forecast to hover around 3% of GDP through 2020 in line with the Government’s medium-term fiscal framework, helping to reduce Georgia’s public debt to about 40% of GDP.
Economic expansion should generate more employment and other income-generating opportunities at the bottom of the income distribution.
Discretionary increases in social assistance may also help to reduce poverty further and increase resilience in the upcoming years, although the impact on fiscal sustainability will need to be considered carefully.
Last Updated: Oct 11, 2018