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The Nature of the Georgian Economy in 2018

The past year should be appraised as a positive period for Georgian economy, against the background of problems in previous years.

First of all, we should mention an about 5% economic growth, however, more optimistic forecasts were released in the middle of 2018. Namely, International Monetary Fund (IMF) forecast 5,5% upturn, but the third quarter recorded a slowdown in GDP growth pace and the annual growth was fixed at about 5%. We should also mention the debts pardoning program announced in the middle of November, as part of which Cartu foundation covered bank loans on behalf of 600 000 citizens.

 Revenues from tourism sector and direct money transfers increased in 2018, but foreign investments declined. Despite recovering economy, unemployment and poverty remain sharp challenges. Regretfully, the 2018 indicators about unemployment and poverty have not been published yet. In 2017, both indicators slightly rose by 0.1%, similar growth paces cannot bring desirable effects for Georgian economy.

This article covers the 2018 key economic events and other macroeconomic indicators, such as economic growth, inflation, external trade and other issues. 

Economic Growth

After a slowdown in the 2014-2016 economic growth paces, starting 2017 Georgian economy showed recovery signs. In the fourth quarter of 2017, the real growth made up 5.4%, while the year of 2017 recorded 5% economic upturn.

Economic activity started strengthening in 2018. According to preliminary estimations, in the first quarter the growth constituted 5.3%, while the averaged growth in the second quarter constituted 5.5%. As to the third quarter, economic growth in July marked 4.6%, August – 2% and September – 5.6%. Real averaged growth in January-September made up 4.9%.

As to the latest data, in October 2018, as compared to the same period of 2017, GDP growth pace marked 6.7%, while the January-October growth constituted 5.1%.

It is noteworthy that in 2018, the processing industry, trade and finance sectors made essential role in economic growth. At the same time, exports growth has made particular contribution to the external trade growth. 

External Trade

In January-November 2018 Georgia’s foreign trade turnover (excluding undeclared trading) constituted 11 324.7 million USD, up 18.6% year on year, including the exports marked 3 033.5 million USD, up 24% and the imports constituted 8 291.2 million USD (16.8%). Georgia’s negative trade balance in January-November 2018 constituted 5 257.7 million USD, which is 46.4% in foreign trade turnover. In the same period, the exports  without re-exports marked 2 086.7 million USD, up 11.1% as compared to the same period of 2018. The graphic image demonstrates general tendencies in Georgia’s foreign trade turnover, due to the 2013-2018 dynamics. 

Georgia in International Ratings

The current year was successful for Georgia in terms of international ratings. For example, this year the World Bank (WB) named Georgia on the 6th position in terms of doing business. The country has improved the rating by three positions compared to 2017. In the economic freedom index of Fraser Institute, Georgia occupied 7th position among 162 countries, while in the rating of Heritage Foundation the country ranked 16th among 180 countries. In the Open Budget Index, which measures the budget transparency and how transparently the budget funds are spent – Georgia ranks 5th. The country has also made progress in the international rating of property protection. The country was 131st in 2012, and in 2018 it has progressed to the 45th position. It is very important that Georgia improves the rating in the media index on annual basis and the country has moved to 61st position from 104th place of 2012. Georgia has made progress in the Forbes rating published at the end of 2018. The influential international edition Forbes has published the list of the best countries for business, under which in the 2018 rating Georgia improved positions by 8 places compared to 2017 and moved to the 44th position. The rating assesses the countries due to 10 components. Georgia occupies leading positions in 4 components such as protection of investors, bureaucracy, freedom of trade and taxation burden.

Inflation and GEL exchange rate

Unlike the previous years, the inflation level showed stabilization signs in 2018. In January the consumer price index rose by 4.3%, but in the next months the growth pace was lower and remained around the target indicator of 3%. In October the inflation level constituted 2.3% as compared to the same period of 2017. The base inflation in the corresponding period was fixed at 1.7%. In November 2018, as compared to October 2018, the inflation level made up 0.7%, and the annual inflation recorded 1.9%.

In 2018, price changes in the following groups made influence on formation of the inflation:

Transport: the group recorded 3.8% upturn with 0.49% effect on the annual inflation. Prices rose on exploitation of personal transport (9.2%);

Healthcare: prices rose by 5.5% with 0.46% effect on the whole index growth. Prices rose in the subgroups: medical products, equipment and (10.1%), outpatient medical services (3.7%) and hospital services (2.5%);

Strong drinks, tobacco: prices rose by 4.6% with 0.31% effect on the whole index growth. Prices on tobacco products increased by 8.5%;

Apartments, water, electricity, gas: prices rose by 3.6% with 0.3% effect on annual inflation. Prices rose on water supply and apartment services (7.7%), electricity, gas and other heating services (3.5%), housekeeping  and overhaul (2.2%).

As to GEL exchange rate, this year the national currency was stable compared to previous years. In January 2018 the exchange rate was 1USD=2.59 GEL. From February to the Middle of August the GEL exchange rate against USD was around 2.44. However, in the second half of August the GEL started plunging and fell to 2.75 as of November 7. Then, the national currency saw a slight upturn and strengthened to 2.65 point. It is noteworthy that this year the National Bank of Georgia (NBG) has not supplied USD to the market and used currency interventions for only purchasing foreign currencies.

Investments, Money Transfers, Tourism

Money transfer from Georgian citizens employed abroad rose by 9% (up 11 million USD) in November 2018, compared to November 2017, and constituted 133 million USD. This is a record figure for the month of November ever.

At the same time, money transfers from Georgia abroad made up 19.7 million USD, down 174 000 USD compared to November 2017.

In January-November 2018, total money transfers constituted 1 426 million USD, up 15% year on year (up 185 million USD).

In November money transfers growth was preconditioned by growing transfers from Italy, Greece, Poland, Israel and the USA.

As to foreign direct investments, the reporting period recorded a downturn in FDI inflows. According to preliminary estimations, FDI inflows in the third quarter 2018 made up 322.6 million USD, down 48.2% as compared to the final indicators of the third quarter of 2017. Key reasons for the mentioned contraction are as follows: completion of the main gas pipeline construction project, transmission of several enterprises to the ownership of residents of Georgia and reduction of obligations before nonresident direct investors.

Total FDI inflows in January-September 2018 made up 998.7 million USD, down 373.5 million USD year on year (1.372 billion USD in January-September 2017).

Despite contraction in FDI inflows, the year of 2018 recorded a growth in revenues from tourism sector. According to preliminary indicators, in January-October 2018, revenues from tourism sector made up 2.8 billion USD (up 19.9%), up 468 million USD year on year. In January-November 2018 the number of tourism visits made up 4 486 595, up 659 454 year on year (+17.2%). The majority  of international visits was made from: Russia – 1 341 127 (+23.8%), Azerbaijan – 1 311 907 (+9.8%); Armenia – 1 162 220 (+0.3%) and Turkey 1 031 147 (+11.6%).

A total of 8 105 829 international visitors arrived in Georgia in January-November 2018, up 10.6% year on year. 

Growth in Social Expenditures and Debt Pardoning.

According to the 2019 budget bill, salaries of a number of state officials and social allowances will increase. The Government will cover electricity costs for families with many children. New rules of subsidization will come into force on January 1, 2019.

According to the government resolution, the 20-GEL subsidies will be issued to those parents, who have four underage children (under 18 years old). If parents have more than 4 children, they will receive no more than 10 GEL allowance for each next child for covering electricity tariff.

The families with many children will receive social allowance  if they are registered at the united database of socially vulnerable families and their rating point equals to or is under 300 000 conditional points.

As to salaries, in 2019 salaries will increase to a number of state officials. In 2019-2020, salaries will increase to 7 526 servicemen due to ranks, Prime Minister Mamuka Bakhtadze noted at the news conference prior to the government meeting.

Salaries to borderguards and coastguard vessel servicemen will increase by 250 GEL in 2019. Salaries will increase to other detachments too, including to the staff of special services, he added.

Under the Prime Minister’s initiative, the social aid will increase to underage children in poverty. Children under 16 years old form socially vulnerable families will receive 50 GEL assistance instead of current 10 GEL aid package. This initiative refers to about 140 000 children.

As to the so-called Loan Pardoning program, this project was implemented with the support of Cartu foundation. On November 19 Prime Minister of Georgia Mamuka Bakhtadze introduced a new unprecedented initiative regarding excessive indebtedness. This initiative will free hundreds of thousands of families from huge problem.

Today about 750 000 citizens of Georgia are recorded in the so-called Black List and the majority of them, 600 000 citizens will be freed from their debts before commercial as of December 31, 2018, Mamuka Bakhtadze noted. Total amount of these loans exceeds 1.5 billion GEL.

At this stage, a total of 1 271 038 loan records of 597 659 borrowers have been uploaded onto the website www.vali.ge. Total amount of these records exceeds 3.9 billion GEL. All Commercial banks and microfinance organizations and the majority of online loan companies have engaged in the mentioned program.

By Merab Janiashvili
Economic Analyst
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