Country brief 2007 Updated January 2008

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Map of Georgia

*Most recent data available 2001-2005 More Georgia data

Georgia is a small transition economy with a population of about 4. 5 million people and a gross national income (GNI) per capita of US$1,560. In Soviet times, Georgia exported agricultural and energy–intensive industrial products to the Soviet Union and was a popular tourist destination for the region. After independence in 1991, the economy collapsed under the impact of civil war and the loss of both preferential access to Former Soviet Union (FSU) markets and large budget transfers from Moscow. Output fell by 70 percent and exports by 90 percent, the worst decline suffered by any transition economy.

The conflicts in Abkhazia and South Ossetia, regions within Georgia seeking independence, took a significant toll, with about 300,000 people displaced, much physical capital destroyed, important trade routes disrupted, and the new government’s authority in large segments of its territory undermined to this day. In addition, the spill–over from the conflict in Chechnya has weakened Georgia’s control of the Pankisi Gorge and surrounding territory, where there has been rampant smuggling, extortion, and kidnapping. Georgia's economy has been buffeted by internal fragmentation, droughts, and the 1998 financial crisis in Russia.

Georgia is resource rich. Its location on the “Silk Road” between Europe and Asia has made it a transit conduit for goods being shipped through the Caucasus. Georgia’s Black Sea coast, mountains, and rich cultural history offer strong tourist potential. Other attributes include an educated labor force, widespread land ownership, and a long tradition of entrepreneurship. Georgia has a natural resource base that offers strong economic growth potential. Fertile land and a favorable climate enable diverse agricultural production, including a range of fruits and vegetables, livestock, dairy products, nuts, and tea. The country has a long history of viticulture and some 500 varieties of grapes are cultivated. Recent investments in oil exploration have indicated significant oil and gas potential. Other physical resources include manganese, iron, coal, copper, gold, granite, limestone, marble, and mineral waters. Dense forests cover one third of the country and numerous fast–flowing rivers offer good hydropower potential.

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Economy

Developments since the "Rose Revolution"

In November 2003, Georgia underwent the "Rose Revolution," a peaceful uprising that was spurred by years of rampant corruption and a failing state. In its first 18 months in office, the new Government has focused on uprooting corruption, stabilizing the economy, and bringing order to fiscal management. The Government has also initiated sweeping reforms of the education system, reduced red tape for businesses, and has begun to address long–standing issues in the energy sector.

Building on these accomplishments, the Government is now entering the second phase of reforms, focusing on deeper institutional change, enhanced social protection, and the essential infrastructure needed to enable economic growth, job creation, and a reduction in poverty. With the recently presented Progress Report on the Economic Development and Poverty Reduction Program (EDPRP) the Government has reaffirmed its commitment to improving: (i) governance; (ii) macroeconomic policies, particularly in the fiscal area; (iii) the business environment; (iv) human development; (v) the safety net for the poor; (vi) priority sectors of the economy—energy, transport, communications, tourism and agriculture; and (vii) environmental protection.

Recent Economic Performance

Upon taking office in January 2004, the new Government responded decisively to its mandate to curb corruption and improve Georgia’s development prospects. First, its anti–corruption efforts and the agenda to establish strong mechanisms of accountability and transparency cut across all areas of government. Second, the reform strategy has aimed at developing a dynamic and competitive private sector as the main engine of growth, with the state playing a supportive role by providing basic public goods and services. And third, the Government has undertaken complementary reforms to ensure that the population benefits from growth through improvements in education and health care delivery and by developing an effectively targeted social safety net to protect the extreme poor. The institutional and structural reforms are being supported by prudent macroeconomic policies.

Macroeconomic management in Georgia continues to show solid performance and an ability to mitigate internal and external shocks. Despite large increases in energy prices and the loss of part of its traditional export market, fiscal and external current account balances are in line with the program. The fiscal deficit on a cash basis was 2.6 percent of GDP in 2006, compared to 2.5 percent in 2005. The overall fiscal deficit in 2007 may go over 3 percent of GDP.

Approximately one–third of public spending is currently allocated to the social sectors and another 12 percent is allocated to infrastructure. As a result, public spending is complementary to private investment and is supportive of growth and poverty reduction. The external current account deficit widened in 2006 to 13.8 percent of GDP and may reach 15 percent in 2007. This deficit has been financed by large foreign direct investment flows (FDI) which reached 15 percent of GDP in 2006 and have maintained high levels during the first nine months of 2007. They are expected to finance the external current account deficit and accumulation of international reserves. Despite inflationary pressures from large capital inflows, rapid expansion of credit to the private sector, and unusually severe external shocks experienced in 2005–2007, the Government has implemented an appropriate macroeconomic policy mix to safeguard growth. At the same time, the inflation rate exceeded expected levels due to fast growth of reserve money and may reach two–digit number by the end of year.

Stable macroeconomic policies and effective anti–corruption measures have increased confidence on the part of businesses and consumers. Simplified procedures for registering a business, reforms in customs administration and the border police, and more business–friendly tax and labor regulations have significantly improved the business environment. Georgia was the top reformer in 2006 according to the Bank’s Doing Business survey, vaulting from 112th place in 2005 to 37th place in 2006, an unprecedented one year change among the 175 countries in the sample. Georgia’s rank improved further to 18th place in 2007, which is second only to Estonia (17th place) in the ECA region.

Debt burden indicators continue to improve. The stock of public external debt was substantially reduced from 27 percent of GDP in 2005 to 24.7 percent in 2006, following a second round of Paris Club rescheduling in mid–2004 and the discipline of refraining from contracting non-concessional debt over the last two years.

Overall, macroeconomic management in Georgia in recent years has been effective in safeguarding stability and growth, and has shown an impressive ability to mitigate shocks.

Georgia—Top Reformer in "Doing Business"

This year Georgia entered the ranks of the top 25 most business friendly countries worldwide, according to Doing Business 2008. Georgia is ranked 18th out of 178 economies rated by the Doing Business report, a 19 position increase compared to last year. Georgia has been among the top ten reforming countries for the last three years.

When Georgia started major reforms three years ago, it was ranked 112th, behind many of the countries in the region such as Armenia, Russia, Kazakhstan, Turkey. It moved up 95 positions since then, the only country to achieve such progress in a short term. And with that the country has laid a strong foundation for future business growth.

CHALLENGES AHEAD

Development Challenges and the EDPRP

With the recently presented Progress Report on the Economic Development and Poverty Reduction Program (EDPRP), the new Government reaffirmed its commitment to improving the following: (i) governance; (ii) macroeconomic policies, particularly in the fiscal area; (iii) the business environment; (iv) human capital; (v) reduction in the vulnerability of the poor; (vi) development of priority sectors of the economy–energy, transport, communications, tourism, and agriculture; and (vii) the natural environment. The current Country Partnership Strategy (CPS) builds on the EDPRP Program, as well as on emerging strategic thinking of the government on the development framework.

In line with the EDPRP, the Government established employment–generating growth as its key development objective. Essential measures to induce employment–generating growth are as follows:

• eradication of corruption;
• improved management of assets under state control and privatization of unused state assets;
• liberalization of transport policies, broadening the transport network, and improving construction standards and maintenance in the road sector;
• enhancement of the security and viability of the energy system;
• optimization of the customs, tax, and financial police structures;
• efficient business licensing systems; and
• establishment of standardization, metrology, accreditation, and market supervision systems that are compatible with European Union standards.

Areas targeted for sector–specific interventions include tourism development, agriculture, and agro–processing.

Strong emphasis has also been placed on human resource development and protection of the vulnerable, particularly on the following:

• improving the efficiency of the health sector and expanding access to health care among the poor and vulnerable;
• improving the quality and coverage of the education system; and
• simplifying and improving the targeting and efficiency of social protection measures, including those for internally displaced persons.

Through ongoing projects and proposed new projects, the CPS is directly supporting this agenda.

World Bank Program

Program to date

Landmark Projects

• Education (2001 - 2007)
• Electricity (2001-2008)
• Avian Flu Preparedness (2006-2009)

More projects

The new World Bank Group Country Partnership Strategy (CPS) for FY06–09 is designed to assist Georgia in implementing the second phase of reforms. The CPS builds on the EDPRP Program, as well as emerging Government strategic thinking on the development framework. In doing so, it targets several goals:

• Generating growth and job creation by removing barriers to private sector development and improving infrastructure, finance and markets.
• Enhancing human development and social protection through improved education, health, social protection, and community services.
• Strengthening public sector management and budgetary processes to reduce corruption and enable Georgia to better plan and meet its own development goals.

A key component of the CPS has been a series of Poverty Reduction Support Credits (PRSCs) complemented by a Public Sector Reform Support Project. Together, these will support engagement in critical macro and sectoral policy reform issues, in a manner that matches the improvements in the Government’s capacity. The Bank Group will also support new investments in the transport and energy sectors, along with the possibility of other infrastructure sectors. These activities will both help to unify the regions within Georgia, and to strengthen Georgia’s role as a transit economy.

The Bank will also stay engaged in education by financing a follow–on education project and will consider continuing its engagement in the health sector should the IDA envelope allow. These goals will also be supported by 17 ongoing projects in a wide range of sectors.

IFC will complement the IDA program by continuing to provide investments and technical assistance (TA) to financial institutions in order to deepen the financial sector and expand the range of, and access to, financial products. IFC will also consider direct investments in private agribusiness and tourism and related industries; transport, and retail services; private companies participating in infrastructure; and companies engaged in manufacturing or developing natural resources for export markets.

IFC TA will support reducing barriers to business such as licenses/permits and inspections and the development of markets in key sectors in Georgia. MIGA is discussing the provision of political risk guarantees and TA on investment promotion.

Impact on the ground

Some of the results of World Bank assistance to Georgia include the following:

A Municipal Development Fund helps finance infrastructure upgrades in Georgia's cities. Read more

• Transport Infrastructure Improved: Georgia's capacity to improve and maintain its road network in a cost–efficient and sustainable manner has improved. Access has improved on Georgia's major transport corridor as well as on the interregional (secondary and local) road network in targeted areas throughout the country. Specifically, with funding from the Bank, 167 km of main roads and two bridges on these main roads were rehabilitated, 224 km of main roads benefited from routine maintenance, 250 km of secondary and local roads were rehabilitated, and a 15 km section of Georgia’s East–West Highway was upgraded from two lanes to a four–lane highway. As a result, time and cost of transport has been reduced.
• Basic social services improved. Some 1 million people have benefited from the rehabilitation of 400 schools, health facilities, cultural centers, water systems, irrigation systems, and roads and bridges under the Georgia Social Investment Fund project. In some cases, the physical rehabilitation of facilities has been accompanied by improvements in the delivery of basic services. Communities were encouraged to participate actively in managing the rehabilitation and operation of these facilities.
• Better access to health care now available. Under the Primary Health Care Development project, 71% of the rural population has access to a PHC clinic within 15 minutes of their homes in the Imereti, Adjara, and Shida Kartli regions. Utilization of PHC services on a national level has increased from 1.4 million (2003) to 1.85 million (2006). A 10% increase is observed nationwide in the proportion of infants that currently receive on–time immunization (DPT3) compared to the baseline in 2003; the level has now reached 86.8% ( 2006). In addition, there is a 7.5% increase in the proportion of pregnant women who have had at least 4 perinatal visits compared to the baseline.
• Education system improved. Considerable progress has been made in addressing structural, quality and financing reforms in education. A revised legal framework for all layers of the education system provides for the decentralized management of the system. Now governed by recently elected School Boards of Trustees, schools have greater financial and management autonomy than they did before. Major efforts have been made to improve the transparency of the education system, including the introduction of a per capita funding system at the general secondary level in the fall of 2005 and the development and implementation of unified university–entrance national examinations to guarantee fair and equal opportunity of access to higher education. Major efforts were also made to address the needs of depreciating school infrastructure through the State School Rehabilitation Program.
• Private businesses expanded. Private businesses have acquired new technologies, expanded their sales and exports, and created about 3,000 new jobs (1,500 in the banking sector alone). Bank–financed projects have supported numerous private enterprises through improved access to credit funds, management and restructuring of advisory services, and extensive training of managers in Georgia and abroad.
• New private land market has emerged. Land market development has been strengthened with the support of the Agricultural Development Project, co–financed by the World Bank and the International Fund for Agricultural Development. The legal framework for developing a private land market has been created, surveys of over 180,000 plots have been completed, and modern land registration offices have been established. Some 31,000 secondary land transactions have been registered by these offices.
• More favorable terms secured under hydrocarbon transit agreements. Georgia’s capacity to negotiate international agreements on oil and gas transit through the South Caucasus corridor has been enhanced through technical assistance funding by the Bank that enabled the country to retain legal, financial, and technical advisors. This enhanced capacity has enabled the country to secure more favorable financial terms and contingent environmental liabilities in its transit agreements. The Baku–Tbilisi–Ceyhan oil pipeline and Baku–Tbilisi–Erzerum gas pipeline provide to the country with additional revenue gas. The Baku–Tbilisi–Ceyhan has been constructed with the support of the World Bank’s private sector arm, the International Finance Corporation.
• Foundation laid for efficient operation of power sector. Bank assistance has helped to achieve significant improvements in the electricity sector, by implementing transparent collection and distribution of funds, and the efficient operation of the power transmission system.

World Bank Lending in Georgia

Georgia joined the World Bank in 1992 and the International Development Association (IDA) in 1993. Since then, the Bank has provided financing for 43 IDA projects totaling $ 904 million. Seventeen IDA credits totaling US$ 275 million are currently under implementation.

NB: Lending is per fiscal year, July 1-June 30

Active Portfolio by Sector as of March 2008
(US$ millions)

The Country Aggregate Report provides more lending data for Georgia

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Contact Information

For more information on the World Bank's work in Georgia, please contact:

Inga Paichadze
5A, First Drive, Chavchavadze Ave.
Tbilisi, Georgia
Tel: (995 32) 91-30-96 ⁄ 91-23-71
Fax: (995 32) 91-34-78
Email: ipaichadze@worldbank.org