Georgian Economy Recovers But Moves at Slow Pace
15 March, 2012
Georgian Economy Recovers But Moves at Slow Pace

For Georgia 2011 was a recovery year from the global financial crisis in spite of the unexpected shocks in the world economy; however, the growth rates were less than in the pre-crisis period.

 

2011 was characterized by some unexpected events that affected the global economic atmosphere, major surprises being the Japanese Tsunami and the unrest in the Middle East that affected the oil prices. This increase was partially responsible for record high global food prices as well. Highlights for the world

economy were sovereign debt and banking sector problems in the Euro area that economists fear might get out of control of the policymakers, and the economic activities in the United States that are already slow and might suffer additional shocks.

Notwithstanding these global cataclysms for Georgia 2011 was a recovery from the global financial crisis with GDP growth of 6.8% which is less than a pre-crisis indicator of around 10%, the Economic Policy Research Center (EPRC), a non-governmental watchdog reported in its Georgian Economic Outlook – Annual Review of the 2011 on March 7, 2012. EPRC releases Economic Outlook quarterly reports since July 2011 and this is the fourth report already. The paper covers major economic developments of the country for the past year and highlights ongoing challenges.

“As for a country that imports oil and gas products major challenge for 2012 for Georgia remains fiscal consolidation and addressing external vulnerabilities, as well as combating both exogenous and endogenous inflationary pressures. The key threat for Georgia is the ongoing fiscal and current account deficit that questions the future external sustainability,” Nino Evgenidze, a spokesperson of the EPRC said.

According to the EPRC experts, living standards in Georgia are below the world average. The report also underlines that agriculture, tourism and restaurants sectors in Georgia, been zealously touted by government lately, are less attractive to foreign investors.

Foreign Direct Investments (FDIs) for 9 months of 2011 made USD643 million. The major investor countries in Georgia are Denmark, the Netherlands, and Turkey. For all three quarters the Netherlands is the largest investor by 21% of total FDIs amount. A look at FDIs structure discovers that mining and manufacturing received 22% of all investments in the reported period and energy sector is the largest FDIs recipient in the third quarter making 32% [USD 86 million]. Investments were mainly directed towards small-medium hydropower plant building/rehabilitations. The least popular sectors for investors were agriculture and fishing, real estate, hotel and restaurants together with construction.

For the year of 2011 total foreign trade turnover increased by 35% compared to the last year and amounted to USD 9.244 million.  The negative trade balance reached USD 4.865 million translating into a 32% increase as compared to 2010 and is record high.

“A similar trade deficit was observed once in 2008. However, economic growth was higher during that time, thus partially balancing this deep deficit,” EPRC experts said.

Inflation has been a major challenge for Georgia in 2011 for 8.5% at average. Since the second half of 2010 inflation has taken up the growing tendency and equaled a two digit figure for most of the year 2011. Inflation peaked in May 2011 with 13.6% average inflation as compared to the same period of the previous year and eased by end of the year.

In 2012 food price inflation is expected to abate from 2011 levels but is projected to be slightly above the historical average for the past two decades and projected to increase by 2.5 to 3.5% over 2011 levels.

State debt to GDP ratio is maintained at tolerable levels at 31.3% as of 2011, debt-to-export ratio is currently set at 89 %, while it exceeded a hundred percent in 2009. This means that the country’s state foreign debt is almost as much as annual exports. As to debt-to budgetary revenues indicator, currently the ratio is 135%, it reached its highest in 2010 and equaled 150%.

“Even though the government has succeeded in maintaining the state debt levels below the 60% of GDP, according to the data from IMF, gross foreign debt of the country outreached the 60% of GDP restriction in 2010 and is currently 57.5% with a projection of a decrease in 2012 to 56.6%,” EPRC experts stressed on.

2011 was mainly characterized by high inflationary pressure, global abrupt price increase in both food and oil products, thus resulting in higher trade deficit for Georgia. Prognoses for the coming year are not optimistic, EPRC warns. Economists believe that the euro zone crisis might negatively affect output levels in other countries as well through financial, trade and remittance channels. Since the country has exhausted its package of external financing provided by different donors, there is an uncertainty in external environment and large stock of non-performing loans in the financial sector. These are the fundamental vulnerabilities that Georgia will face in the coming year. Georgian banks are heavily depended on foreign sources of lending, which in the conditions of upcoming projections regarding economic slowdown in the US and the ongoing debt crisis in the euro area might become very unstable and expensive source of financing.

“Therefore, emphasis should be put on promoting domestic saving,” the EPRC analysts recommend.

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