In early August, hostilities occurred in northern Georgia. On August 13, a cease-fire agreement that triggered a staged withdrawal of troops from the territory of Georgia was signed between the parties. Monitors from the European Union have now started patrols in an area north of Gori and adjacent to the administrative border with South Ossetia, Georgia, which contains some 50 villages with an estimated population of 24,000, and is known as the €œadjacent areas€,the remaining military forces have now begun to withdraw. The European Union-brokered agreement also calls for the return of OSCE monitors to South Ossetia. UN observers are expected to remain in Abkhazia, Georgia.

Over the last five years, Georgia has implemented far reaching strategic reforms centered on anti-corruption measures and has established strong mechanisms of accountability and transparency in government. The reforms aim at developing a competitive private sector as the main engine of growth, with the state playing a supportive role by providing basic public goods and services €“ as seen in improvements in education and health care delivery and the introduction of a well targeted social safety net to protect the extreme poor. Driven by rapidly rising foreign direct investment (FDI) flows, economic growth averaged 10½ percent per year over the last three years and reached 12½ percent in 2007.

The over-arching objective of donor assistance is to help Georgia attain its preconflict economic growth and social development trajectory. This would require addressing the immediate effects of the conflict on economy, society and infrastructure as well as strengthening the capital base through public and donor-funded investments thereby bridging to the period when full confidence returns and private investment flows are resumed. It would also create the room in the budget for higher social spending.