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$ 2, 090. 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.
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.
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 early August 2008, hostilities occurred in South Ossetia . On August 13, a cease-fire agreement that triggered a staged withdrawal of troops from the territory of Georgia was signed between the parties. The conflict resulted in:
Direct damage to the economy, particularly to transport links, agriculture, tourism, the environment, and to housing.
Biggest impact at overall macro-level. Dampened investor and consumer confidence; growth down from over 10 percent per annum in recent years to around 3-4 percent this year and next, assuming significant international support. Positive growth is sign of economy’s resiliency due to and strong policy reforms and prudent fiscal management. These factors will help Georgia weather the impact of the conflict.
Serious human impact – Internally Displaced People (IDPs) – at height of conflict 160,000 IDPs. Most now either returned or will soon return. Long term displacement for some 30,000 – mostly from S. Ossetia. Another 34,000 temporarily displaced. Urgent shelter and service needs for both groups. Additionally, reduced livelihoods for many farmers and others due to damage and reduced investor confidence.
Economy
Prior to the conflict of August 2008, the Georgian economy was on a strong growth track, with GDP rising by 10½ per cent annually. Rising public expenditures, financed by a substantial increase in the tax to GDP ratio, were being directed at improvements in education and health services and in targeted social assistance for the poor as well as infrastructure. Economic policies were guided by reliance on the private sector for growth in a highly liberal trade, investment and business environment. Also central to government policies were a belief in a small, effective government that formulated policies and financed services with delivery being delegated to the private sector, and an emphasis on high governance standards.
Over the last five years, following peaceful revolutionary change of power in November 2003, 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.
Recent Economic Developments
Strong reforms generated rapid growth from 2004 through mid-2008. Georgia implemented far-reaching reforms over this period in the areas of strengthening public finances, improving the business environment, upgrading infrastructure services, and improving social services. These structural reforms generated strong growth in excess of 9 percent per year and improvements in the quality of life for many Georgians.
The double shocks resulting from the August 2008 conflict and the global economic crisis have resulted in a number of significant shocks to growth and stability, including a deterioration in investor and consumer confidence, contraction of liquidity in the banking system, some infrastructure damage, and increased numbers of internally displaced persons (IDPs). The impact of these shocks has been a significant decline in investment and economic development, stress on balance of payments due to a slowdown in FDI and other private capital inflows, and stress on public finances from revenue shortfalls and increased expenditure needs. Economic growth, estimated at 2.1 percent in 2008, represents a sharp slowdown from rapid growth in excess of 9 percent during the preceding four years. The economy contracted by 3.2 percent during the second half of 2008. Inflation (end-of-period) has significantly declined to 2.1 percent as of end February due to drop of world prices on oil, food and other essential products. Slow down in domestic demand also contributed to the price downward adjustment on the local market. Despite significant shock to the gross international reserves and depreciation pressure on the foreign exchange rate the government managed to maintain stable exchange rate with one-time adjustment and increase reserves to the level comparable to before-crisis one.
The government remained loyal to its medium-term reform agenda continuing improvement of business environment through reducing tax rates on income and simplifying tax administration, significantly improving customs services and developing new public finance management vision. The enhanced commitments of the government have encouraged donor’s community to support Georgian economy, pledging USD4.5 billion in October 2008 for recovery as well as medium-term outlook, based on the Joint Needs Assessment (JNA) report.
The Georgian authorities also swiftly responded to the shocks with a macroeconomic policy mix directed at mitigating the economic downturn, restoring investor confidence and economic growth, and maintaining macroeconomic stability. In particular, the authorities relaxed the fiscal stance to implement a countercyclical response to the shocks, provided immediate liquidity and regulatory support to the banking sector.
The scaling up of public expenditures to deal with the economic downturn has been associated with a marked shift in the composition of expenditures away from defense and toward social and basic infrastructure investments in the 2009 budget. Health, education, and social protection expenditures increased from 8.2 percent of GDP in 2007 to planned 10.8 percent in 2009. The share of the state budget going to such expenditures is projected to increase from 28 percent in 2008 to 35 percent in 2009. At the same time, defense expenditures are projected to decline sharply. Thus, spending has shifted from defense and election related outlays toward reconstruction, social expenditures (including addressing the needs of internally displaced people), and infrastructure investments.
Net foreign direct investment (FDI) inflows fell from $1.65 billion (16.3 percent of GDP) in 2007 to $1.2 billion (9.1 percent of GDP) in 2008. In the aftermath of the August conflict, an IMF mission prepared a Standby Arrangement (SBA) for $750 million over 18 months to bolster investor confidence and support international reserves, which was approved by its Board on September 15. The First Review of the SBA was completed on December 15 and the Second Review – on March 23. The IMF identified risks of farther downturn, though endorsed the fiscal stimulus package for 2009 as well as other macro-policies carried over last months and recommended higher degree of flexibility of foreign exchange policy.
Improving external competitiveness of the private sector is of particular importance in generating sustained growth going forward. Rapid economic growth during 2004-07 has not been associated with rapid growth of exports. In fact, the export share of GDP has remained relatively stable at about 31-34 percent during this period, with GDP growth driven primarily by construction, telecommunications, finance, and other services. The impact of recent double crisis has been negative in terms of trade intensity. Both, imports and exports flows have decline over last six month after August more than by 30 percent. However, imports value has been affected in nominal terms with greater extent, contributing to the improvement of trade as well as current account deficit. The gap after slowdown in the private financing has been filled out and compensated by the outstanding international support and official financial inflows, accounting to over 10 percent of GDP by the end of 2008.
Although Georgia is likely to require significant external financing during 2008-2011, its external debt is expected to remain sustainable in the medium term. As a result of appropriate debt management and effective macroeconomic policies, Georgia had a low level of indebtedness prior to the economic downturn, with external public debt declining from 44.9 percent in 2003 to 34.5 percent in 2004, to 26.6 percent in 2005, 22 percent in 2006, and a record low of 17.6 percent in 2007. Following the August 2008 conflict, as Georgia has been receiving significant foreign financing for post conflict rehabilitation and economic recovery, with much of the assistance is in the form of grants and concessional loans, its debt ratios are projected to rise, though should remain significantly below relevant performance thresholds.
Georgia—Top Reformer in "Doing Business"
Georgia is ranked 15th out of 181 economies rated by the Doing Business report 2009. Georgia has been among the top ten reforming countries for the last four years. When Georgia started major reforms four 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.
The World Bank's mission in Georgia is to help achieve long-term economic growth, create jobs, improve social services and protect the environment. To do this, the World Bank provides financial support, analysis and advice. Priority Areas: Infrastructure, Education, Economic Reform
The World Bank in FY09: $100 million (IDA) – on October 2, 2008 ,two operations approved on expedited basis: $40 million budget support loan, and $40 million investment operation extended through the Municipal Development Fund (MDF) for critical infrastructure, including critical shelter needs. Later in October a third $20 million operation for improvement of a section of East-West Highway, a critical regional transport link between Central Asia, South Caucasus, and Black Sea. US$ 70 million Additional Financing Loan (first IBRD lending) for the Secondary and Local Roads Project (SLRP) was approved by the Board on 19 March, 2009. It permits the continuation and scaling up of the original US$ 20 million SLRP approved in June 2004.
Georgia eligible for IBRD lending this fiscal year
IFC support mainly for financial institutions affected by the crisis
World Bank-led Joint Needs Assessment (JNA) with participation from UN, EC, ADB, EBRD, EIB, and IFC. (Mission dates: Sept. 7-21, 2008) —Focus on impacts on national budget, infrastructure and services, IDP needs, and investments to support the economic recovery process. —Also included: review of funds channeling options for donors.
Donors Conference co-chaired by European Commission and World Bank on October 22 in Brussels
At a joint European Commission / World Bank Conference 38 countries and 15 international organizations pledged to provide approximately US$4.5 billion (€3.4 billion) to Georgia. Without counting funding going to the financial sector, pledges amounted to some US$3.7 billion, or €2.8 billion, to meet the urgent post-conflict and priority investment needs of Georgia over the coming three years (2008, 2009, and 2010). This level is even higher than the basic needs outlined in the Joint Needs Assessment (JNA) presented to the conference.
The World Bank Group Country Partnership Strategy (CPS) for FY06–09
The World Bank Group Country Partnership Strategy (CPS) for FY06–09 was 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 targeted 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.
A new Country Partnership Strategy for the years FY 2010-2013 is being prepared by the World Bank and will tentatively be discussed by the Board of Directors in September 2009.
Impact on the Ground
Some of the results of World Bank assistance to Georgia include the following:
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. Financing road civil works is part of the Governments fiscal stimulus package in order to improve infrastructure and create temporary employment throughout country. The Bank's ongoing road projects are part of Government's strategy to withstand negative impact of post-August crises and global financial crises."
Improved Municipal Infrastructure and Services: Local governments throughout Georgia benefited from the municipal loans available through the Municipal Development Fund under the Municipal Development and Decentralization Project II. Water and sewerage infrastructure, municipal roads and lightning has been rehabilitated in the eleven cities. This physical investments and the technical assistance for municipal development has resulted in improved infrastructure and improved delivery of basic municipal services. The project activities made substantial positive impact on the ground in improving the living conditions of citizens in nine cities where almost 50% of Georgia’s total population and up to 80% of the country’s urban population lives.
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 that has been restructured recently, about 71% of rural population have access to the PHC clinic within 15 minutes in project target areas (Imereti, Adjara, Shida Kartli regions) and national average utilization of PHC services increased from 1.4 (2003) to 1.8 (2007) visits/capita (3/capita target). The utilization of PHC services in the project target regions is higher than national average: in Adjara region by 18%, in Imereti by 31% and in Shida Kartli by 6% (2007). Number of population covered with re-trained family medicine providers increased by 7% in 2008 and amounting 28% coverage rate (0.6 baseline). A twenty percent nationwide increase in the proportion of infants that receive timely immunization (DPT3) was observed amounting to a 97.6% coverage rate (2007). There was a 2.6 % increase in the proportion of pregnant women having at least 4 perinatal visits in 2007 compared to 2006.
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. Changes were introduced in curricula, teaching methods and student assessment systems, including participation in international assessments of student learning achievement (PIRLS, TIMSS). 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.
Georgia is benefiting from the transit of oil and gas while the respective environmental and social risks have been mitigated. The countrys' capacity to negotiate and implement oil and gas transit agreements has been enhanced through technical assistance funded by the Bank. This enhanced capacity has led to a more favorable financial terms and contingent environmental liabilities in its transit agreements. The Baku–Tbilisi–Ceyhan oil transit pipeline and Baku–Tbilisi–Erzurum gas transit pipeline provide additional revenue to the country and cheap gas which is important elements the countries energy supply security. 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 Commitments (US$ millions)
NB: Lending is per fiscal year, July 1-June 30
Active Portfolio by Sector as of September, 2009 (US$ millions)
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$ 2, 090. 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.
Although Georgia is likely to require significant external financing during 2008-2011, its external debt is expected to remain sustainable in the medium term. As a result of appropriate debt management and effective macroeconomic policies, Georgia had a low level of indebtedness prior to the economic downturn, with external public debt declining from 44.9 percent in 2003 to 34.5 percent in 2004, to 26.6 percent in 2005, 22 percent in 2006, and a record low of 17.6 percent in 2007. Following the August 2008 conflict, as Georgia has been receiving significant foreign financing for post conflict rehabilitation and economic recovery, with much of the assistance is in the form of grants and concessional loans, its debt ratios are projected to rise, though should remain significantly below relevant performance thresholds.
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. Financing road civil works is part of the Governments fiscal stimulus package in order to improve infrastructure and create temporary employment throughout country. The Bank's ongoing road projects are part of Government's strategy to withstand negative impact of post-August crises and global financial crises."
Better access to health care now available. Under the Primary Health Care Development project that has been restructured recently, about 71% of rural population have access to the PHC clinic within 15 minutes in project target areas (Imereti, Adjara, Shida Kartli regions) and national average utilization of PHC services increased from 1.4 (2003) to 1.8 (2007) visits/capita (3/capita target). The utilization of PHC services in the project target regions is higher than national average: in Adjara region by 18%, in Imereti by 31% and in Shida Kartli by 6% (2007). Number of population covered with re-trained family medicine providers increased by 7% in 2008 and amounting 28% coverage rate (0.6 baseline). A twenty percent nationwide increase in the proportion of infants that receive timely immunization (DPT3) was observed amounting to a 97.6% coverage rate (2007). There was a 2.6 % increase in the proportion of pregnant women having at least 4 perinatal visits in 2007 compared to 2006.
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.
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