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Impact of External Shocks on the Economy of Georgia

Economic situation in the main trade partners is of great importance for the countries with small economies such as Georgia.

That is the conclusion of the survey conducted by  the Business School at Ilia State University. The researchers estimate that a decline in purchasing power in the region, the developments in Ukraine, weakening of  Russia’s  economy and the global strengthening of the dollar  had a significant adverse effect on Georgia’s economy. It was reflected in the sharp drop in exports with major trade partners, the reduction of the volume of money transfers and devaluation of the national currency.

A reduction in the volume of remittances  has  significantly reduced the purchasing power of the Georgian population  that  enhances the process of slowing economic activity. Remittances  in  Georgia began to decline in 2014 and  further intensified in 2015. According to  the National Bank of Georgia (NBG), in the first five months of the current year this figure  amounted to  $ 438 million that is  23%  ($ 132 million) less compared with the same period of the previous year.

In January-May 2015 Georgia experienced a 25%  decline in exports mainly due to reducing volume of exports in four major trading partner countries: Azerbaijan, Armenia, Russia and Ukraine.

Russia -Ukraine’s protracted conflict, sanctions against Russia and reduced purchasing power in  main trading partner countries have  a damaging effect on Georgian exports and remittances. As you know, Greece has failed to repay  1.5 billion euros to the International Monetary Fund that led to  deepening a debt crisis in the country. Crisis in Greece will cause a decline in remittance flows  from the  country to Georgia. Money transfers reduction significantly damages Georgia’s economy. This is especially obvious amid  the negative balance of payments and the exchange rate depreciation.

In May, the Regional Economic Outlook  document includes  the International Monetary Fund forecast according to which,  economic activity in  the Caucasus and Central Asian countries, including Georgia, is  expected to  decline due to low purchasing power of  consumers, negative flow effects from Russia and the tighter monetary policy in the United States. The latter has a negative impact on Georgia as the international financial market borrower. In addition, the inflationary pressure will increase in the wake of the devaluation of the national currencies in the region.

In such a situation strengthening  of consumers and investors confidence and a maximal  use of the Association Agreement with the EU is especially important which will allow our country to diversify  Georgian export and facilitate inflow of investments.