Economy of Georgia (country)

Economy of Georgia
Currency	1 Georgian lari (GEL) = 100 tetri
Fiscal year	1 January - 31 December
Trade organisations	WTO, GUAM and others
Statistics
GDP	$20.75 billion (2009 est.)
GDP per capita	$4,500 (2009 est.) (PPP) (149th)
GDP by sector	agriculture: 12.1%; industry: 25.9%; services: 62% (2009 est.)
Inflation (CPI)	3% (2009 est.)
Population below poverty line	31% (2006)
Gini coefficient	40.8 (2009)
Labour force	1.991 million (2009 est.)
Labour force by occupation	agriculture: 55.6%; industry: 8.9%; services: 35.5% (2006 est.)
Unemployment	16.9% (2009 est.)
Main industries	steel, aircraft, machine tools, electrical appliances, mining (manganese and copper), chemicals, wood products, wine
Ease of Doing Business Rank	16th
External
Exports	$1.134 billion (2009 est.)
Export goods	scrap metal, wine, mineral water, ores, vehicles, fruits and nuts
Main export partners	Turkey 19.9%, Azerbaijan 14.6%, Canada 10.3%, Armenia 7.8%, Ukraine 7.3%Bulgaria 7.2% (2009)
Imports	$4.378 billion (2009 est.)
Import goods	fuels, vehicles, machinery and parts, grain and other foods, pharmaceuticals
Main import partners	Turkey 17.9%, Ukraine 9.5%, Azerbaijan 8.6%, Germany 6.8%, Russia 6.6%, United States 5.1% (2009)
FDI stock	$759 million (2009 est.)
Gross external debt	$7.711 billion (31 December 2008), $10,8 billion (30 September 2011)
Public finances
Public debt	34.4% of GDP (2009), 47% (2011)
Revenues	$4.917 billion (2009 est.)
Expenses	$5.726 billion (2009 est.)
Economic aid	ODA $309.8 million (2005 est.)
Credit rating	Standard & Poor's: BB- (Domestic) BB- (Foreign) BB (T&C Assessment) Outlook: Stable Moody's: Ba3 Outlook: Stable Fitch: BB- Outlook: Stable
Foreign reserves	US$2.718 billion (March 2011)
Main data source: CIA World Fact Book All values, unless otherwise stated, are in US dollars

Despite the severe damage the economy of Georgia suffered due to civil strife in the 1990s, Georgia, with the help of the IMF and World Bank, has made substantial economic gains since 2000, achieving robust GDP growth and curtailing inflation.

GDP growth, spurred by gains in the industrial and service sectors, remained in the 9–12% range in 2005–07. In 2006 and in 2008, the World Bank named Georgia the top reformer in the world.

International money transfers from Georgian migrant workers, working mostly in Russia, accounted for approximately 7% of the Georgian GDP in 2007. In 2010, money transfers surpassed the FDI as a source of hard currency influx into the economy.

History

Georgia's economy has traditionally revolved around Black Sea tourism, cultivation of citrus fruits, tea and grapes; mining of manganese and copper; and output of a big industrial sector producing wine, metals, machinery, chemicals, and textiles.

Like many post-Soviet countries, Georgia went through a period of sharp economic decline during 1990s, with high inflation and large budget deficits, due to persistent tax evasion. In 1996 Georgia's budget deficit rose to as much as 6.2%. During that period international financial institutions played a critical role in Georgia's budgetary calculations. Multilateral and bilateral grants and loans totaled 116.4 million lari in 1997 and totaled 182.8 million lari in 1998.

Economic recovery had been hampered by the separatist disputes in Abkhazia and South Ossetia, resistance to reform on the part of some corrupt and reactionary factions, and Asian financial crisis. Under President Shevardnadze's leadership, the government had nonetheless made some progress on basic market reforms: all prices and most trade have been liberalized, a stable national currency (the lari) was introduced, and massive government downsizing took place.

During late 1990s more than 10,500 small enterprises had been privatized, and although privatization of medium- and large-sized firms had been slow, more than 1,200 medium - and large-sized companies had been set up as joint stock companies. A law and a decree establishing the legal basis and procedures for state property privatization reduced the number of companies controlled by the state.

The United States began assisting Georgia in reform process soon after the country gained independence from Soviet Union. Gradually, the focus shifted from humanitarian to technical and institution-building programs. Provision of legal and technical advisors was complemented by training opportunities for parliamentarians, law enforcement officials, and economic advisers.

Recent macroeconomic performance

Over the last few years Georgian economy has been one of the fast in the FSU. Annual GDP growth exceeded 9% in every year since 2005. In 2007 the economy expanded at the rate of 12.4%.

This rapid growth in output was accompanied by rising inflation - 11% in 2007, up from 7% in 2003.

In 2009, IMF estimated current account balance of Georgia was -2.612 BN USD. Georgia has one of the highest deficits among the European and Transcaucasian Post-Soviet states:

Rank	Country	Current account balance as a percentage of GDP (2007)	2009 IMF estimates
1	Azerbaijan	28.869	38.608
2	Russia	5.906	3.372
3	Ukraine	-3.722	-9.218
4	Armenia	-6.400	-10.800
5	Belarus	-6.834	-8.026
6	Lithuania	-14.638	-8.675
7	Moldova	-16.995	-19.139
8	Estonia	-18.065	-8.731
9	Georgia	-20.000	-18.700
10	Latvia	-22.938	-8.320

Deficits in current account have been more than offset by strong foreign capital inflows, allowing the Georgian currency to appreciate.

In 2008, third quarter GDP was down by 3.9% compared with the same period of the previous year. This marked a sharp reversal of the situation as it was in the first half of the year, when the economy grew by 8.7%. FDI inflows fell to only $150 million in the Q3 2008, compared with $430 million in Q1 and $525 in Q2. This had put Georgian currency under extra pressure. Nevertheless, the government has managed to preserve financial stability thanks to the considerable aid provided by the US and international institutions. EBRD analysts believe that substantial international financial support and remittances from workers living abroad will cover the current account deficit in the medium term.

Foreign direct investment in Georgia

Large inflows of Foreign direct investment (FDI) have been a driving factor behind a rapid economic growth in Georgia since 2003. In 2007 alone the economy of Georgia attracted $1,7 billion in FDI, bringing the total FDI stock to $5,2 billion, which is over 50% of the GDP

The table below shows FDI stock as a percentage of GDP in selected FSU countries. For statistical purposes, FDI is defined as a foreign company owning 10% or more of the ordinary shares of an incorporated firm or its equivalent for an unincorporated firm.

Rank	Country	FDI stock as a percentage of GDP (2007)
1	Estonia	78,0
2	Georgia	51,1
3	Kazakhstan	41,9
4	Ukraine	27,0
5	Armenia	26,6
6	Russian Federation	25,1
7	Belarus	10,0

The major recipients of FDI in Georgia are the telecommunications industry, transportation sector, production and distribution of electricity, and construction.

Foreign direct investment fell significantly during the global economic downturn of late 2000s, to $814.5M in 2010, compared to $2 014.8M in 2007.

International money transfers

International money transfers accounted for approximately 7% of GDP of Georgia in 2007, with roughly 20-30% of the Georgian labour force working abroad.

As of August 2010, most of remittances come from Russia, according to the National Bank of Georgia: monthly remittances for Georgian migrant workers from Russia accounted for $61,5M (60.1%), followed by migrants working in Greece, $7,5M (7.3%).

Overall, in 2010 international money transfers from migrant workers to Georgia amounted to $939,7M, surpassing the FDI of $814.5M.

Institutional reforms

Under the Saakashvili administration, Georgia undertook a number of profound institutional reforms aimed at modernizing the economy and improving business climate.

As of 2011, Georgia is #88 (of 142 countries) by the global competitiveness rating, as estimated by the World Economic Forum. Compared to its neighbours, Georgia has a better rating than Armenia (#92), but much worse than Azerbaijan (#55), Turkey (#59), and Russia (#66). The competitiveness rating of the WEF is based on assessing country's institutions, infrastructure, macroeconomic factors, work force, market efficiency, technology & innovations level, and a few other indicators.

Licensing regulation

Just 3 years ago getting a construction permit for a commercial warehouse in Tbilisi required 29 different procedures. Before even applying for the permit a builder needed permission from agencies as diverse as the Center of Archaeology at the Academy of Science and the Inspector of Sanitary Observation. Illegal construction activity was widespread. In 2004 less than 45% of ongoing construction projects in Tbilisi had permits.

Things have changed after new Law on Issuance of Licenses and Permits was introduced in 2005. The law cut from 909 to 159 the number of activities subject to licensing. A one-stop shop was created for license applications, so that now businesses can submit all documents there, with no verification by other agencies required. In the construction industry Georgia eliminated many of the approvals required to obtain a construction permit (while maintaining procedures necessary for regulating in the public interest) and introduced a “silence is consent” rule, whereby a permit or license is automatically granted if no government action is taken within statutory time limits. The number of procedures needed to build a warehouse dropped to 12. The time required fell by nearly 3 months. The approval process for building a warehouse in Georgia is now more efficient than in all EU countries except Denmark.

Tax collection

In 2005, Georgia enacted a new Tax Code that introduced lower, flat tax rates. The total number of taxes was reduced from 22 to only 7. The number of taxes was further reduced starting January 1, 2008, when new changes to the Tax Code of Georgia took effect that abolished the 20% social tax paid by businesses. The rate of personal income tax was rased instead, from 12% to a flat 25% rate.

Georgia has seen a drastic fall in perceived corruption of tax officials. In 2005 only 11% of businesses, surveyed by the World Bank, reported that bribery was frequent, down from 44% in 2002.

Labour regulation

With unemployment around 15% and many jobs in the informal sector, Georgia undertook a far-reaching reform of labour regulation. The new Labour Code was adopted on 25 May 2006. The new law eases restrictions on the duration of term contracts and the number of overtime hours and discards the premium required for overtime work. It also eliminates the requirement to notify and get permission from the labour union to fire a redundant worker. The new law provides for 1 month’s severance pay, replacing complex rules under which required notice periods depended on seniority and the manager had to write long explanations to labor unions and the Ministry of Labor. In general, new regulation makes Georgian labor market much more flexible.

Coupled with the fact that Georgia also reduced the social security contributions paid on wages by businesses from 31% to 20% in 2005, and abolished them entirely starting January 2008, these changes make Georgia the sixth easiest place to employ workers globally.

More flexible labour regulations boost job creation. But they don’t mean giving up protections. Georgia has ratified all the core labour standards of the International Labour Organization. Flexible labour regulations that give workers the opportunity for a job in the formal sector and easy transitions from one job to another.

Judicial procedure

Reducing corruption in courts was one of the chief priorities of the new government. Since 2004, when the Saakashvili administration came in, seven judges have been detained for taking bribes and 15 brought before the criminal courts. In 2005 alone the judicial disciplinary council reviewed cases against 99 judges, about 40% of the judiciary, and 12 judges were dismissed. At the same time judges’ salaries were increased fourfold, to reduce dependence on bribe money.

Unemployment

Unemployment has been a persistent problem in Georgia ever since the country gained independence in 1991. According to National Statistics Office (Georgia) unemployment rate stood at 16,3% in 2010. This is by far the highest level among the FSU countries. However, even this figure is misleading and doesn't reflect the vast discrepancies between urban and rural areas of the country.

Nearly a half of Georgia's population lives in rural areas, where low-intensity self-sufficient farming provides the principal source of livelihood. Georgian statistics service puts individual peasants into the category of self-employed workers. As of 2007 416,900 peasants were listed as self-employed in agriculture. For large families, heads of households are typically described as "individual entrepreneurs", members of the family that help to cultivate land are classified as "unpaid family business workers". The use of this methodology produces relatively low unemployment rates for rural areas (4,8% as 2006 ).

By contrast, the average unemployment rate in cities is 26%. In Tbilisi unemployment is reported to be reaching 40% Apart from the obvious social strain that widespread unemployment creates, the issue has strong political implications. Some observers have argued that desperation about poor living conditions fuelled the discontent that eventually erupted into violent anti-government protests in November, 2007.

Structure of the economy

Energy

Inguri hydropower plant, completed in 1987, provides 46 percent of Georgia's electricity

In recent years Georgia has fully deregulated its electricity sector, and now there is free and open access to the market. However, state-owned actors still play an important role, most notably in generation.

Georgia has a sizable hydroelectric capacity, a factor that has become an increasingly important component of its energy supplies and policies. The country’s topography and abundance of hydro resources give it serious potential to dominate hydroelectric markets in the Caucasus region. The Georgian Ministry of Energy estimates that there are around 26,000 rivers within Georgian territory, with approximately 300 of those rivers being significant in terms of energy production. The Ministry also claims that current projects for hydroelectric power plants total around 2.4 billion USD. Alexander Khetaguri, the Georgian Minister of Energy, proposed new hydroelectric projects worth well over 22,000 megawatts of capacity, which would cost over 40 billion USD and would be privately funded. These projects alone would transform Georgia into the world’s second-largest hydropower producer.

In 2007, Georgia generated 8.34 billion kilowatthours (Bkwh) of electricity while consuming 8.15 Bkwh. Most of Georgia's electricity generation comes from hydroelectric facilities. In 2005, the country generated 6,17 Bkwh of hydropower, or 86% of total electricity generation. In 2006 rapid growth in hydroelectricity output (by 27%) was matched by equally strong growth in thermal electricity (by 28%). Since then the share of hydropower has grown even bigger, when Inguri power plant reached full capacity in November 2007. In addition to state-owned Inguri, which has an installed capacity of 1,300 megawatts, Georgia's hydroelectric infrastructure consists of many small private plants.

In recent years, Georgia became a major exporter of electricity in the region, exporting 1.3 billion KW·h in 2010. Hydropower stations of Georgia produce 80-85% of the electricity utilized within the country, the remaining 15-20% is produced by thermal power stations. According to Ministry of Energy, so far Georgia has been exploiting only 18% of its hydro resource potential.

Georgia's reliance on hydropower leaves the country vulnerable to climatic fluctuations, which requires imports to meet seasonal shortages, but also opens the possibility of exports during wetter conditions. Georgia still has the potential to increase hydro-generated power, through refurbishing existing facilities, as well as constructing new hydropower plants.

One of the more difficult realities facing many of the former Soviet republics was the loss of Soviet-subsidized fuel and utility transfers. Prior to 2004, Georgia's transmission network was in critical condition, with electricity blackouts being common throughout the country. In response to mounting pressures, the Georgian government initiated a series of legislative reforms in 1998 and 1999 to begin to develop the power sector and electricity markets. While measures were taken to unbundle and liberalize the energy sector, a new law was drafted and Georgia’s independent regulatory authority, the Georgian National Energy Regulatory Commission (GNERC), was formed. In addition to providing government subsidies, the GNERC was able to increase the prices of electricity and natural gas in Georgia to buffer the costs of recovery from the state’s reform process. Following these reforms, distribution has been increasingly more reliable, approaching consistent 24-hour-a-day services. Investments in infrastructure have been made as well. Currently, a privately-owned Energo-Pro Georgia controls 62.5% of the electricity distribution market.

Graphical depiction ofGeorgia's product exports in 28 color coded categories.

Georgia has transmission lines that connect its power grid to Russia, Turkey, Armenia and Azerbaijan. In July 2008 Georgia began exporting electricity to Russia through the Kavkasioni power line. Later in 2009, Georgian Energy Minister Alexander Khetaguri incited scandal for a business deal struck with the Russian energy company, Inter RAO, to jointly manage the Georgian Inguri hydropower plant for 10 years. Khetaguri’s proposal would entail a cash flow of around 9 million USD into Georgia for use of the plant. Tensions ran high, however, as the Inguri hydropower plant provides nearly 40 to 50 percent of the country’s electricity and is located within the disputed Abkhazia region.

Georgian Natural gas consumption stood at 1.8 billion cubic meters in 2007. Natural gas used to be supplied to Georgia by Russia. In recent years, however, Georgia has been able to eliminate its dependency on imports from Russia, thanks to increased hydroelectricity production, and the availability of natural gas sources from Azerbaijan. In addition, all Russian gas exports to Armenia pass through the Georgian pipeline system. Georgia takes 10% of that gas as a transit fee.

Georgia is a partner country of the EU INOGATE energy programme, which has four key topics: enhancing energy security, convergence of member state energy markets on the basis of EU internal energy market principles, supporting sustainable energy development, and attracting investment for energy projects of common and regional interest.

Agriculture

Main article: Agriculture in Georgia (country)

Currently, about 55% of the total labor force is employed in agriculture, though much of this is subsistence farming.

Georgian agricultural production is beginning to recover following the devastation caused by the civil unrest and the necessary restructuring following the breakup of the Soviet Union. Livestock production is beginning to rebound, although it continues to be confronted by minor and sporadic disease outbreaks. Domestic grain production is increasing, and will require sustained political and infrastructure improvements to ensure appropriate distribution and revenues to farmers. Tea, hazelnut and citrus production have suffered greatly as a result of the conflict in Abkhazia, a crucial area for planting the latter crops.

While approximately 13.1% of the Georgian GDP is generated by the agrarian sector, crops often spoil in the field because farmers can't sell their goods because of high transportation cost, which make domestic goods more expensive than imported goods. In collaboration with European assistance, Georgia has taken steps to control the quality of natural spring water and how to appropriately sell it.

Viticulture and winemaking are the most important fields of Georgia’s agriculture. Over 450 species of local vine are bred in Georgia, and the country is considered as one of the oldest places of producing top-quality wines in the world. Russia was traditionally the biggest export market for Georgian wine. This, however, changed in 2006, when Russia banned imports of wine and mineral water from Georgia, preceded by statements of Georgian governmental officials about low quality requirements of the Russian market. Since then Georgian wine producers have struggled to maintain output and break into new markets.

In 2007 Georgia sold 11 million bottles of wine in about 40 countries, less than it sold in Russia alone before the ban was imposed. Total wine sales abroad in 2007 were down by about nine million bottles, forcing many vineyards to sell land, buildings and equipment to survive.

As of 2011, most Georgian wine is sold in three post-Soviet states: Ukraine, Kazakhstan, and Belarus. Total volume of sales is $54,03 million, down from $81,3 million in 2005, before the Russian ban. Georgian wine accounted for 8-10% of the Russian wine market before the ban.

Construction

The transition to legal construction is not without pain. On July 20, 2007 fire brigades had begun demolishing a 13-story building in downtown Tbilisi that had gone up before the reform and was now in danger of collapsing because of faulty engineering. The building had no project or operating license—and didn’t even show up in the city plan. To avoid the many approval procedures, the building company had simply paid off the mayor.^{[citation needed]}

See also

• List of Georgian companies
• List of countries by received FDI
• Kulevi Oil Terminal

Further Rading

• Gugushvili, Alexi: "Understanding Poverty in Georgia" in the Caucasus Analytical Digerst No.34

References

• Government press release on unemployment in 2007

External links

• Official site of American Chamber of Commerce in Georgia
• Sakartvelos Ekonomika, an online monthly on Georgia's economy.
• online English language business magazine in Georgia