GEORGIAN ECONOMY RECOVERING FROM LAST YEAR’S DROUGHT…

The Georgian economy is recovering from the 2000 drought, which last year led to a 15 percent drop in agricultural production and pushed GDP growth down to just 1.9 percent. GDP was up 5.2 percent in the first half of 2001, mainly because of strong growth in agriculture, which accounts for more than one-quarter of the country’s GDP. High rates of growth were also registered in hotel and restaurant services, telecommunications, and financial intermediation. Although precise figures are currently unavailable, the first quarter rise in agriculture was likely the result of higher animal production since many animals had to be slaughtered due to shortages of fodder following last year’s draught. During the remainder of this year, growth in agriculture will likely be pushed up by strong crop output.

Industry has been a sore spot on the Georgian economy thus far this year. Value-added in industry declined by 3.1 percent in the first half of the year due to poor first-quarter results that were the result of energy supply problems. Heavy debts and problems with supplies continue to cause frequent power outages, which have had a negative effect on both industry and private citizens. According to the World Bank, corruption has been a major hindrance to energy sector reform and is the main cause of the country’s energy crisis. Georgia’s continued dependence on Russia for natural gas supplies also presents a major problem. The Russian firm Itera is the sole supplier of natural gas to Georgia; on several occasions the firm has cut off supplies, sometimes apparently for political reasons. Clearly, the opening of the Baku-Tbilisi-Erzurum natural gas pipeline will have a significant effect on the Georgian economy, providing cheaper natural gas to Georgia and reducing Russia’s leverage over the country.

Personal consumption also appears to be weak this year. After rising by 11 percent in 2000, retail trade turnover rose by just 3.3 percent in the first half of this year. That slowdown occurred largely because of declines in January and February that coincided with the fall in industrial production. Retail trade increased by just 1.5 percent in the first quarter of 2001. Nonetheless, retail trade is difficult to measure because of the large percentage of such activity that takes place behind the scenes. According to the State Department of Statistics, nonrecorded production in trade and services is especially high, accounting for an estimated 54 percent of retail trade and 66 percent of restaurant and hotel services (Georgian Economic Trends, 2001, no. 1; State Department of Statistics).

…AS SHADOW HANGS OVER GEORGIAN GOVERNMENT FINANCES.