EBRD on Georgia’s Key Economic Challenges
18 October, 2012
EBRD on Georgia’s Key Economic Challenges

In its economic outlook of Georgia the European Bank for Reconstruction and Development (EBRD) indicates three key challenges of Georgian economy, such as improving the investment climate, de-dollarizing the economy and strengthening of municipal and other physical infrastructure. 

The EBRD finds Georgian macroeconomic performance strong. Output expanded by around 7 per cent in 2011 and in the first half of 2012. Growth has been broad-based with manufacturing, financial services and tourism among the main contributors. As international food prices moderated, inflation

declined rapidly to -0.2 per cent in June 2012. The share of non-performing loans declined to 7 per cent of total loans and general government deficit declined to 3.6 per cent of GDP in 2011.

Risks to the outlook relate to the following factors:  the large current account deficit, financed primarily through official sources, and related uncertainty about recovery of Foreign Direct Investments;   the financial sector remains heavily dollarised and the level of non-performing loans is high; and  high external debt for an emerging market economy and significant external debt rollover requirements in 2012-14.

The EBRD accentuates that Georgia’s investment climate remains among the best in the region. The authorities are yet to address concerns about the politicisation of the tax administration that emerged during the past year. The weakness and lack of independence of the judiciary remains a serious concern for the protection of assets, including foreign investments.

The EBRD recommends structural challenges in Georgia as following:  Policies should support recovery of private investment. The government responded to investment contraction during the crisis by embarking on a promotion campaign and setting up a partnership fund that would leverage equity in public companies to attract significant infrastructure and other investments. It will be important to ensure that the fund operates on a commercial basis and foments rather than substitutes for foreign direct investment. Moreover, the EBRD puts the complete restructuring and modernisation of the energy sector on Georgian agenda.

“The country’s energy sector has undergone a significant transformation in recent years as hydropower capacity was rebuilt and transmission networks established. However, the sector still suffers from significant distribution losses and seasonal supply patterns inherent to Georgia’s hydrology,” the EBRD outlook states.

The unemployment rate and income inequality are high. Crisis time surveys reveal that a significant portion of Georgian population had to skip purchases of basic foods and medical visits due to lack of resources and inadequate social safety nets. Georgian economic analysts agree with the EBRD findings and think that dollarization is a crucial problem that hampers development of Georgian export and the banking sector may discharge the situation if they fix equal yield rates on credits and deposits in both foreign and national currency. Interest rates in Georgian national currency are by average 2-3% higher that bespeaks of bigger risks related with Georgian Lari and undermines the trust in national currency.

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