The World Bank in Georgia

Country Context

Georgia has made notable gains in income growth and poverty reduction over the past decade. As a result of sound macroeconomic management, GNI per capita (constant 2017 USD) increased from $9,580 in 2010 to $15,880 in 2022. Poverty (measured by the $6.85 poverty line in 2017 PPP) declined from 70.6% in 2010 to an estimated 47.7% in 2022. The job market experienced a strong recovery, with unemployment falling from 20.6% percent in 2021 to a record low of 16.4% in 2023, which was estimated to positively impact poverty levels.

Nevertheless, structural challenges persist, notably weak productivity and limited high-quality job creation. About a third of workers remain engaged in low-productivity agriculture, and Georgia also has a large share of self-employed in other sectors. Access to finance remains a major obstacle for SMEs, while skills mismatches are reported to be an impediment for most firms. Due to its high degree of trade openness and dependence on tourism, Georgia is vulnerable to external shocks. In December 2023, Georgia was granted candidate status by the European Union (EU). The EU accession process offers unique opportunities to boost reforms to achieve prosperity and converge with other member states.

Last Updated: Apr 09, 2024

Strategy

The current active lending portfolio includes 13 investment projects with a total commitment of $1.4 billion. As of March 29, 2024, the undisbursed balance is $756 million (54.2%), with a YTD disbursement ratio of 23.1%. Of the current portfolio 44% is committed to human development, 25% to infrastructure and digital development, and the remaining 31% to regional connectivity, energy, irrigation, agriculture and land, entrepreneurship and innovation, as well as support to micro-small-and medium enterprises. There is also a DPO series that supports the Government’s policy and institutional reform agenda.

The FY24 lending pipeline includes the Energy Security through Power Interconnection and Renewable Energy Project ($35 million), which is scheduled for Board discussion on May 21, 2024. The Second Green and Resilient Georgia DPO ($50 million) is scheduled for delivery in FY25.

The Georgia CPF FY25-29 is scheduled to be delivered by July 2024. It proposes to focus on economic opportunities and job creation, human capital outcomes, and resilience, including considering activities to support the green transition and institutional strengthening, in line with the EU accession process and the World Bank Group Evolution Roadmap. Support to the Middle Corridor and the Black Sea Submarine Cable represents two key activities that are expected to be central in the World Bank’s engagement, with contributions from IFC and MIGA, if the appropriate conditions are in place.

Each year, the World Bank delivers a robust knowledge program that includes advisory services and analytics (ASA) that address a broad range of development challenges including human capital and private

sector development, poverty reduction, infrastructure development, agricultural productivity and climate change. The active ASA program in Georgia includes nine activities to be delivered in FY24-27, as well as a number of South Caucasus regional ASA that have deliverables covering one or more countries. Among these, Georgia’s Country Climate and Development Report is expected to be delivered in FY25. An active program of 10 trust funds totaling $6.7 million supports institutional capacity building, water, finance, energy, governance, environment, and transport sectors.

Last Updated: Apr 09, 2024

Recent Economic Developments

Growth in 2023 is estimated at 7.5%, driven by robust investment performance, notably fueled by a surge in construction activities (+17% in real terms). Annual inflation slowed sharply to 0% at end-2023 from 9.8% in December 2022, reflecting falling global food and energy prices, and lari appreciation. The introduction of reference prices for medicines exerted downward pressure on inflation. Core inflation stood at 2.0% in December (YoY). In response, the National Bank of Georgia cut the monetary policy rate six times, from 11% to 8.25% between May 2023 and March 2024. Against this backdrop, poverty is on a declining trend, buoyed by labor market improvements and lower food inflation.

The job market experienced a strong recovery, with unemployment falling from 20.6% in 2021 to a record low of 16.4% in 2023.

The current account deficit narrowed slightly in 2023, to 4.3% of GDP. The trade deficit of goods widened by 19% in nominal terms (USD). Exports grew by 8% (YoY) in nominal terms (USD), driven by the re-exports of used cars, while import growth reached 12%. Service exports remained supported by the continued post-COVID-19 recovery in tourism. International reserves increased to $5.0 billion, equivalent to around 4.2 months of imports of goods of the same year.

The fiscal deficit narrowed in 2023, reaching 3.0% of GDP (including privatization proceeds). General government revenues increased by 14.2%, while tax collection rose by 13.5% in 2023 in nominal terms. Current spending grew by 14.6%, reflecting increases across the board. Capital spending rose by 4.6% in nominal terms. At end-2023, public debt was estimated at 38.1% of GDP, slightly down from end-2022.

Economic Outlook 

Growth is expected to ease to 5.2% in 2024 because of tight monetary policy, a slowdown among trading partners, and heightened geopolitical risks. Growth is projected to stabilize at around 5% of GDP for 2025-26 benefiting from the gradual recovery among Georgia’s trading partners. The poverty rate is expected to decline gradually. Inflation is expected to converge to its 3% target by end-2024 as monetary easing is underway in 2024. Despite dwindling money transfers, the current account deficit will remain well below pre-COVID-19 levels in the medium term.

The 2024 state budget law reflects the government’s commitment to pursuing gradual consolidation by reducing the fiscal deficit to 2.5% (including privatization revenues) and maintaining public debt below 38% of GDP. Revenue and tax collection are projected to continue their solid performance in 2024, with additional profit tax revenues in the financial sector (0.5 ppt of GDP) and higher taxation of gambling (rendering 0.5 ppt of GDP increase). Current expenses are set to increase by 0.8 percentage points, to 23.0% of GDP, to be offset by a slight decline in public investment.

There are substantial risks to the outlook, reflecting uncertainties. A more rapid reversal in money inflows, weaker tourism revenues, and an increase in global commodity prices could hinder growth and increase debt levels and financing needs. Other risks include tighter global financial conditions and climate change-related risks. An adequate monetary and fiscal policy stance with adequate buffers is expected to help cushion potential shocks while exchange rate flexibility should help shield reserve levels by supporting an adjustment in imports.

Last Updated: Apr 09, 2024