Georgia’s Challenges & Opportunities

Op-Ed

Georgia has a remarkable track record of economic reforms. Starting in the mid-2000s, it successfully defeated widespread corruption, introduced sweeping tax reforms, and significantly reduced burdensome regulations. This bolstered economic activity and improved Georgia’s overall ranking in the World Bank’s Doing Business (from 112th in 2004 to 6th in 2019).

Prudent policies have also supported macroeconomic and financial stability. Fiscal deficits have been contained and public debt remains relatively low. The inflation targeting regime has become more credible and a flexible exchange rate has helped protect Georgia against external shocks. The banking sector, which has been soundly regulated and supervised by the National Bank of Georgia, is well capitalized, liquid, and profitable.

Despite the reforms and prudent policies, Georgia’s economic growth has been decelerating and has not generated sufficient opportunities for all Georgians. Average annual growth has slowed from 9.7% (2003–07) to 5.6% (2010–14) and 3.6% (2015–17). This reflects weaker external demand and productivity growth following the 2008-09 global financial crisis and the 2014-16 external shock caused by the effects of lower oil prices on the region’s economies. Progress in reducing poverty and inequalities has stalled, with the share of population in absolute poverty broadly flat since 2015.

Robust economic growth is projected over the medium term, but there are many dark clouds on the horizon. Our growth projection, of about 5%, is contingent upon implementation of structural reforms and subject to risks, including weaker trading partner growth, global trade tensions, and a sharper-than-projected credit growth after the introduction of new regulations. This calls for persevering with prudent macroeconomic policies, exchange rate flexibility, and a buildup of foreign-exchange reserves.

Georgia’s structural challenges also require renewed reform efforts going forward. Judicious public infrastructure investment will improve connectivity and reduce transportation costs, supporting Georgia’s aspiration to become a transport and logistics hub connecting Europe and Asia. Implementing a comprehensive education reform would enhance skills development, labor productivity, job creation, and generate better opportunities for all.

Mobilizing savings and developing local capital markets will help finance needed investments while reducing external vulnerabilities. The funded pension scheme will improve living standards of future retirees and promote savings and businesses’ access to long-term Lari funding. The upcoming legislation on investment funds, improving trading infrastructure, and the new PPP framework would also help mobilize savings for investment.

Despite remarkable progress, the business environment can be further improved to enhance the role of the private-sector in generating growth and jobs. The planned corporate insolvency reform will be critical to bolster the business environment by maximizing recovery values and allowing for timely rehabilitation. Efforts to improve tax administration, including the VAT refund system, and a judiciary reform that would lead to a modern, efficient, and transparent judiciary system would help improve the business environment and support investment.

Georgia’s strong commitment and reform record provide hope that it will succeed in dealing with these new challenges and delivering meaningfully higher living standards for all Georgians. Achieving higher and more inclusive growth will require persevering with structural reforms that would unleash the growth potential of the private sector.

First printed in The Economist’s The World in 2019 Georgian edition.

By Francois Painchaud, IMF Resident Representative in Georgia