Following the peaceful Rose Revolution in 2005, Georgia enacted in-depth reforms aimed at reducing corruption and improving the business environment. The country faced enormous challenges, however, including weak public finances, poor public services, limited and unreliable electricity service, constrained private sector activities, and a weak social safety net. During the ensuing years, Georgia suffered through an unusually severe series of shocks— including the 2005 floods, energy price increases, and trade and economic sanctions since 2006. In 2008, Georgia’s economy dipped because of the ongoing conflict with Russia and the global economic crisis.

Despite several shocks, Georgia grew at an average annual rate of 9.4 percent during the past five years. A sharp decline in corruption led to a better perception of the state by the citizens and to an increase in state coffers from US$600 million in 2003 to US$4.6 billion in 2007. Stronger public finances have allowed Georgia to start addressing neglected areas such as education, health care, the social safety net, and basic infrastructure.

Highlights:
- Public finances were strengthened. Public resource allocation improved, supported by a better treasury system and financial reporting framework. These measures, along with bold anti-corruption reforms, restored Georgia’s public finances.

- Business environment improved. Simplification of procedures for registering a business, paying taxes and labor regulations, and customs administration reform, have significantly improved the investment climate. In 2005, Georgia was ranked 132nd by Doing Business, and by 2007 its ranking had improved to 15th place.

- Foreign Direct Investment skyrocketed, growing 18-fold. Improvements in the business environment attracted foreign direct investment inflows, which increased from under US$100 million in 2003 to US$1.8 billion in 2007. These inflows have transformed Georgia into a dynamic and competitive market economy.

- Energy sector vastly improved. In 2003 Georgia had a national average of 7 hours of electricity per day per household. The collection rate was 35 percent. Since 2006, electricity service has been provided 24 hours per day and the collection rate has reached 80 percent.

- Social and health care assistance targeted the poor. In 2006, Georgia introduced a poverty benefit program targeting the extreme poor who represent about 11 percent of the population. This is the first social assistance program of its kind.

- Education finances became more transparent. A more transparent funding mechanism was adopted for the education system. The quality of educational services improved through the adoption of national and international assessment systems.

IDA has embarked on a series of three further development policy operations, the first of which was approved in mid-2009. These operations will advance the reforms already in motion, including public finance reform, social sector reform, and competitiveness.