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Despite the severe damage the economy of Georgia suffered due to civil strife in the 1990s, Georgiamarker, with the help of the IMFmarker 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, the World Bank named Georgia the top reformer in the world.

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 Abkhaziamarker and South Ossetiamarker, 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 Statesmarker began assisting Georgia in reform process soon after the country gained independence from Soviet Unionmarker. 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 fastest growing 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 recent years current account deficit has been steadily growing, reaching 20% of the GDP in 2007. Although this figure may appear huge at first glance, large current account deficits are a common feature among many Eastern European economies, as evidenced by the following table.

Rank Country Current account balance

as a percentage of GDP (2007)
1 -22.938
2 -21.369
3 -20.000
4 -18.065


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

Recent indications suggest the economy has been severely affected by the war with Russia in August 2008. Third quarter GDP was down by 3.9% compared with the same period of the last 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 Georgiamarker attacted $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 78,0
2 51,1
3 41,9
4 27,0
5 26,6
6 25,1
7 10,0


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

Institutional reforms

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

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. Doing Business 2008 The World Bank Group

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. 10 reasons to invest in Georgia, investingeorgia.org 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. Doing Business 2007 The World Bank Group

Labor regulation

With unemployment around 15% and many jobs in the informal sector, Georgia undertook a far-reaching reform of labor regulation. The new Labor 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 labor 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 labor regulations boost job creation. But they don’t mean giving up protections. Georgia has ratified all the core labor standards of the International Labour Organization. Flexible labor 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 Department of Statistics of Georgia unemployment rate stood at 13,6% in 2006. 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.

Hearly 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 Distribution of Population age of 15 and older by economic status in urban and rural areas).

By contrast, the average unemployment rate in cities is 26%. In Tbilisimarker 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

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 generating.

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.

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.

Before 2004 Georgia's transmission network was in critical condition, with electricity blackouts being common throughout the country. Since late 2005, distribution has been much 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.

Georgia has transmission lines that connect its power grid to Russiamarker, Turkeymarker, Armeniamarker and Azerbaijanmarker. In July 2008 Georgia began exporting electricity to Russia through the Kavkasioni power line.

Georgian Natural gas consumption stood at 1.8 billion cubic meters in 2007. Natural gas used to be supplied to Georgia by Russiamarker. 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 Azerbaijanmarker.

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

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. 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.

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.

See also



References

  1. Doing Business: Georgia is This Year's Top Reformer, The World Bank Group
  2. World Economic Outlook Database, October 2008, IMF
  3. IMF, World Economic Outlook Database, October 2008
  4. IMF, Transcript of a Conference Call on Georgia Request for Standby Arrangement September 15, 2008
  5. Official exchange rate of LARI against foreign currencies
  6. Gross Domestic Product and Other Indicators of National Accounts for 2008, III quarter(Preliminary)
  7. Gross Domestic Product at constant prices
  8. FDI in Georgia by countries
  9. EBRD, Georgia economic overview
  10. UNCTAD, World Investment Report 2008. Selected indicators are available at UNCTAD Country Fact Sheets
  11. International Monetary Fund (IMF), 1993. Balance of Payments Manual, fifth edition (Washington, DC).
  12. FDI in Georgia by Economic Sectors
  13. Doing Business 2006 The World Bank Group
  14. Georgia: ratification status of up-to-date conventions, ilo.org
  15. STATISTICAL YEARBOOK OF GEORGIA, 2008
  16. Rural poverty in Georgia
  17. Government press release on unemployment in 2007
  18. http://meero.worldvision.org/issue_details.php?issueID=5 Widespread unemployment takes its toll
  19. CIA World Factbook
  20. http://www.infoplease.com/country/profiles/georgia.html
  21. Russia and Georgia: economy as a battlefield en.rian.ru
  22. [1], Ministry of Energy of Georgia
  23. New foreign investors are entering the Georgian market, caucaz.com
  24. Inter RAO UES begins importing energy from Georgia en.rian.ru
  25. en.rian.ru
  26. INOGATE website
  27. Main Indicators of Agriculture Development investingeorgia.org
  28. Being Russia's No 1 enemy could be good for Georgian business,Irish Times. August 30, 2008


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