Strong investment rebound seems increasingly uncertain for Georgia
03 March, 2011
Strong investment rebound seems increasingly uncertain for Georgia

Georgian economy is predicted to grow by more than 5 % this year; price hike may wane in the second half of the year and inflation rate shall slump to one-digit figure, the International Monetary Fund projects.
Based on preliminary findings of International Monetary Fund (IMF), aired on February 22, 2011, Georgian real GDP grew by over 6% in 2010. The growth was broad-based across all economic sectors, caused by a rebound - of credit to the private sector and

strong export demand. The recovery of private sector growth enabled the government to withdraw some of the fiscal stimuli of 2009 and improve its financial position by cutting down current spending. As a result, the government deficit narrowed to 6.6% of GDP in 2010 from 9.2 % in 2009.
The external position has also improved since mid-2010, as evidenced by the absence of exchange rate pressures, which allowed the Central Bank to strengthen its net international reserve position. While Foreign Direct Investment (FDI) inflows are well below the initial forecast their level (estimated at under USD 600 million or 5% of GDP in 2010) remains quite respectable by international standards, the IMF report informs.
As in most other countries, consumer price inflation in Georgia has risen unexpectedly since mid-2010, reaching 12% in January 2011. Nearly all of this inflation originates from hikes in the international prices of food and energy: since mid 2010, the price of primary food commodities has risen by about 20% (wheat prices by nearly 60%) and the price of oil by 30%. The erosion in living standards from these price shocks is of concern, particularly for the most vulnerable sections of society, and should be addressed by maintaining adequate social safety nets. In the absence of additional external shocks IMF expects prices to stabilize in the second half of 2011 and the inflation should decline gradually back to single digits by the end of the year.
The policy response to the twin crisis of 2008-09 succeeded in averting a much deeper economic contraction, but vulnerabilities remain, the IMF experts warn.
The countercyclical fiscal response led to a significant increase in public debt (from 22% of GDP in 2007 to 39 % in 2010). Private sector balance sheets have also been weakened by the crisis, as evidenced by higher dollarization and indebtedness and, for the banks, a deteriorated loan portfolio, although the increase in non-performing loans (NPLs) also reflects vulnerabilities built-up prior to the crisis. Meanwhile, the external environment is likely to remain volatile and the expected strong rebound of FDI appears increasingly uncertain.
“Against this background, the main economic policy challenges over the next few years are to create the conditions for solid economic growth even in the absence of a strong rebound of FDI, strengthen public balance sheets, maintain price and external stability, and prevent the emergence of new imbalances and systemic risks in the private sector as credit and external borrowing resume,” the IMF report states.
The IMF mission has revised upward its real GDP growth projection for 2011 to 5 percent. Public investment has been crucial to sustaining growth during the crisis and enhancing the economy’s productivity through infrastructure improvements. The IMF mission shares the government’s view that private sector investment should replace government investment as the motor of growth going forward and agrees that sole reliance on FDI may not be sufficient to unlock the economy’s growth potential in the post crisis environment. It supports the authorities’ intention to adopt a more proactive approach to promote productivity growth and attract private investment in high potential sectors such as agriculture and energy. Sector development programs could include structural reforms and targeted public investment, which however would need to be consistent with a compression of the overall capital budget. While public private partnerships and state enterprise investment may also be effective instruments of development, such ventures should be considered with caution in view of the large direct and contingent fiscal costs which they may generate.
To preserve external competitiveness of the country the crisis-related real exchange rate depreciation has moved the lari exchange rate much closer to equilibrium. However, the current account deficit (10% of GDP in 2010) remains large by most measures, including by comparison with other emerging market economies in the region. In line with a more conservative view of FDI inflows, the mission considers that policies should aim at reducing the current account deficit to 5-6% of GDP over the medium term.
The government and the central bank face large external debt service obligations in 2012-14 (including to the IMF), peaking at just over USD 1 billion in 2013 (equivalent to 8% of GDP). Georgia’s sound policy performance and overall macroeconomic conditions and prospects place it in a good position to tap international financial markets to cover a good part of these obligations—the rest being repaid out of the accumulation of international reserves and T-bill issuance.

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