GEORGIAN ECONOMY PRESENTS MIXED PICTURE.

Publication: Monitor Volume: 8 Issue: 16

Although the Georgian economy likely recorded an acceptable level of growth in 2001, the country’s future economic position continues to be threatened by a number of different factors. First are internal and external security concerns. But Georgia is also facing problems with fiscal, trade and energy policies, all of which had a detrimental effect on the country’s economic performance last year. The country now relies on the IMF and World Bank to finance its budget and current account deficits. The government thus has little room in which to maneuver.

The difficulties in securing stable supplies of energy is an unfortunate development, due partly to bullying from Russia but primarily to payment problems. The situation has played havoc with Georgian industry over the past year. Industrial production fell by 0.7 percent in the first three quarters. Trade has borne the brunt of that decline. Exports fell by 6.9 percent in the first three quarters of 2001 to US$231.87 million, and imports rose by 11.3 percent to US$520.3 million. The trade deficit surged by one-third to reach US$288.5 million during that period. It is quite likely that Georgia might need to undergo a current account adjustment in the future.

The country’s fiscal problems have also been pressing. Fiscal policy developed poorly in 2001, which can be attributed in part to privatization and corruption. Privatization revenues through October were far below the year-end target, reaching 11 million rather than 80 million lari. With budget revenues below expectations, the parliament had no choice but to heed the IMF’s demands for spending cuts. On October 23 it thus reluctantly approved a 15-percent cut in budgetary spending for 2001, a reduction of 164.6 million lari. The original budget had envisaged revenues of 840 million lari and spending of 1,120 million, with a deficit of 278 million–some 4 percent of GDP. Had it not taken this step, the country would have faced a serious economic crisis. IMF loans to Georgia would have been suspended, and most likely have also led to a halt in lending programs by other international financial organizations and donor countries as well. After the budget cuts had been made, however, the IMF offered a new US$11-million tranche of the Poverty Reduction and Growth Facility to Georgia on October 26, after a six-month suspension. At the end of December, Georgia also received tranches from the World Bank’s Structural Adjustment Credit (SAC) and Energy Sector Adjustment Credit (ESAC) totaling some US$32.5 million. Fragile economic balance sustained. Crisis averted.

The possibility that the World Bank and the IMF might withhold future tranches of credits on the basis of poor revenue collection represents a major risk to Georgia’s public finances. Without such funds, Georgia would be unable to run even small budget or current account deficits, and the country would likely suffer a painful decline in aggregate demand. The government’s remedy in the past has been to cut expenditures. That approach, however, also poses risks, including a high volume of payments arrears (Interstate Statistical Committee of the Commonwealth of Independent States: www.cisstat.com; Sarke, October 23, 29, 2001).

The Monitor is a publication of the Jamestown Foundation. It is researched and written under the direction of senior analysts Jonas Bernstein, Vladimir Socor, Stephen Foye, and analysts Ilya Malyakin, Oleg Varfolomeyev and Ilias Bogatyrev. If you have any questions regarding the content of the Monitor, please contact the foundation. If you would like information on subscribing to the Monitor, or have any comments, suggestions or questions, please contact us by e-mail at [email protected], by fax at 301-562-8021, or by postal mail at The Jamestown Foundation, 4516 43rd Street NW, Washington DC 20016. Unauthorized reproduction or redistribution of the Monitor is strictly prohibited by law. Copyright (c) 1983-2002 The Jamestown Foundation Site Maintenance by Johnny Flash Productions