Economy
Posted: 2 years ago

Overview and Forecast of Georgia's Economy for 2021 by David Gondauri

David Gondauri, Doctor of Business Administration, Professor at the University of Business and Technology shares an Overview and forecast of Georgia's economy for 2021.

1.The current situation

As the restrictions of the epidemic are easing, the global economy continues to improve, with 5.9% growth expected in 2021. In Georgia's trading partners, expectations have also improved. In 2022, however, growth is expected to be 4.9 percent. [1]

In 2021, the reason for the high economic growth in Georgia, in addition to the baseline effect, is the still strong fiscal stimulus, credit activity and deferred demand after mobility restrictions. This is evidenced by the very high contribution of consumption to economic growth. Real GDP growth in the third quarter of 2021 was 9.1%. The main driver of growth, accounting for 23.2%, was services, with the industrial sector accounting for 6.9%. Agricultural output declined, with a negative contribution of 0.2%.

foreign trade. In January-November 2021, the foreign trade turnover of goods increased by 25.1% compared to the corresponding period of the previous year. Of this, imports increased by 24.5% and exports by 26.7%. Georgia's negative trade balance amounted to 40.4% of foreign trade turnover, which is an improvement of 0.7% and 2.7%, respectively, compared to the same period in 2020 and 2019. In January-November 2021, the share of the 10 largest exporting countries in the total exports of Georgia amounted to 77.5%. China, Russia and Azerbaijan are the three largest exporters. During this period, the share of the 10 largest importing countries in the total import of Georgia was 66.9%. The top three include Turkey, Russia, and China. The increase in exports was mainly due to the increase in demand for ferroalloys and natural grape wines. Exports of cars and phones to Azerbaijan increased. The increase in exports to Turkey was due to increased sales of ferroalloys and ferrous scrap. Of the EU countries, there has been a significant increase in walnut and hazelnut exports to Italy, while from other countries, increased demand from China for copper ores and concentrates stands out. The increase in exports of goods was mainly due to the high increase in external demand for intermediate and consumer goods, while the increase in exports of investment goods contributed little to the growth of total exports.

Unemployment rate. Unemployment rate in Georgia in the third quarter of 2021 was 19.5%, which is an increase of 1% compared to the same period in 2020. According to 2021 data, 3.24% of the population in Georgia lives on less than $ 1.9 per day, and almost 14% on less than $ 3.20.

Gini coefficient. There are significant challenges in the direction of social inequality. According to the adjusted Gini coefficient, Georgia is in the top ten most unequal countries.

Exchange rate. In the third quarter of 2021, the nominal GEL exchange rate strengthened by 6.2% against the US dollar and by 8.1% against the previous quarter. Georgian lari also strengthened against the Russian ruble and the Turkish lira, reaching 5.2% and 8.1%, respectively. During the same period, the nominal effective GEL exchange rate strengthened by 6.7% on a quarterly basis and by 1.4% on an annual basis. It should be noted that the strengthening of the real exchange rate is observed with respect to all major trading partner countries, except Ukraine.

Consumer prices. In the current period, inflation in Georgia was 12.5%. The reason for the high inflation is the extraordinary situation related to the pandemic, during which several factors at the same time influenced the growth direction of inflation. The increase in inflation in Georgia is closely linked to the increase in prices for US consumer goods in US dollars. It's noteworthy the rise in food prices. Due to pandemic-related delays, poor harvests and increased transportation costs, world food prices have been at a record high for the last ten years.

Interest rates. In September, the monetary policy rate became 10.0%. In the third quarter of 2021, interest rates on government securities increased slightly, which was partly due to the increase in the monetary policy rate. In September, compared to June, the interest rate on deposits in national currency increased slightly to 10.0%, while on foreign currency deposits decreased slightly to 1.9%. Interest rates on GEL mortgages and consumer loans have not changed significantly. While loans to legal entities issued in the national currency increased slightly.

2. Forecast - perspective

GDP growth. According to the baseline scenario of the National Bank, real GDP will grow by 10% this year and 5% next year. High domestic demand will be the main driving force of economic growth.

Inflation. Given that the contribution of temporary factors to annual inflation from the second quarter of 2022 is still determinant, it is expected that when these one-time factors are excluded from the calculation of annual inflation, inflation should begin to decline significantly. This is expected from the second quarter of next year, and this process, along with the adoption of temporary factors, will be facilitated by tighter monetary policy and fiscal consolidation.

Monetary policy. In response to rising inflation, monetary policy is likely to remain tight. It should be noted that the factors affecting current inflation are exogenous and temporary. Under other things being equal, central banks usually do not respond to similar types of shocks, as the impact of these types of shocks usually disappears on its own, and responding to them causes additional economic fluctuations.

Virus risk. In general, the slow pace of vaccination is hampering the recovery of tourism. In the wake of possible new waves of the virus, tourist inflows from certain countries may continue to decline. The materialization of this risk may exacerbate the current account deficit and reassess the country's sovereign risk.

[1] International Monetary Fund. 2021. World Economic Outlook Update: Fault Lines Widen in the Global Recovery. Washington, DC, July.