Macroeconomic performance

Economic growth decelerated in 2013, but picked up significantly towards the end of the year and remained strong in the first half of 2014. After averaging 6.5 per cent between 2010 and 2012, growth slowed to 3.2 per cent in 2013 due to lower public and private investments, and policy uncertainty related to the post-election political transition and the presidential elections. In 2013 agriculture, manufacturing, trade and transport were the main drivers of growth, benefiting from the reopening of the Russian market for foodstuffs exports and from stronger EU-based demand. Meanwhile, construction slowed on the back of lower infrastructure investments. In the first half of 2014 growth reached 6.2 per cent, driven by recovery in domestic demand and export growth.

Inflation averaged -0.5 per cent in 2013 and has picked up since October 2013, after almost two years of price deflation. Inflation reached 3.4 per cent year-on-year in August 2014 bringing it closer to the National Bank of Georgia’s (NBG) target rate of 6 per cent. In 2013 the lari remained broadly stable against the US dollar, although some pressure emerged towards the year-end, following the US Federal Reserve’s “tapering” and the year-end fiscal liquidity injection, prompting the central bank to sell US$ 440 million between November 2013 and January 2014. In February 2014 the NBG raised its policy rate for the first time since early 2011, by 25 basis points to 4 per cent.

The current account and fiscal balances narrowed in 2013, but are expected to widen in 2014. The current account deficit has narrowed substantially from 12 per cent of GDP in 2012 to 5.9 per cent of GDP in 2013. This was mainly driven by a slow-down in imports in line with weaker domestic demand and a strong performance in exports due to renewed access to Russian markets. The external deficit is expected to widen again as growth picks up. The fiscal deficit shrank to 2.6 per cent of GDP in 2013 as a result of lower capital spending and the review process of public contracts. It is expected to widen to 3.7 per cent of GDP in 2014, with a pick-up in social and capital expenditures and relatively lower revenues, due to the lagged effect of the growth slow-down in 2013.

Growth is expected to recover in 2014. The growth rebound from last year continued, as lower political uncertainty and the signing of the Association Agreement with the EU paved the way to recovery in domestic demand. Growth was, however, constrained as a result of the Ukraine crisis and regional uncertainties, with external demand subdued in a number of export partners, such as Armenia and Ukraine. There is some uncertainty with regard to the current free trade agreement with Russia, which has become a relatively important new market for exports of agricultural products and labour-intensive beverages. Growth in 2015 is expected to stay at the current level. The enactment of the DCFTA will provide a basis for increased economic activity, but the Ukraine crisis will continue to weigh on growth in the near term.

Major structural reform developments

Georgia’s investment climate remains among the best in the region. Large-scale privatisation is very advanced, tax and customs bodies are generally well run, and tangible results have been achieved in fighting corruption. At number 15, Georgia is a top-rated transition country in the World Bank Doing Business 2015 report. The new government has pursued various policies to strengthen regulatory frameworks for markets and to improve the business environment. For example, the Entrepreneurship Development Agency (EDA) was established, which will begin operating in the second half of 2014. The EDA will provide training to entrepreneurs and start-ups, support export promotion, and adapt small and medium-sized enterprises (SMEs) to meet DCFTA requirements. In June 2014 the government also launched the Produce in Georgia programme, which aims to support SMEs and stimulate local production.

Georgia signed an Association Agreement, including a DCFTA, with the EU. The agreement with the EU was officially signed in Brussels on 27 June 2014 and then ratified by parliament in July 2014. The aim of this agreement is to provide better access for Georgian goods and services to the EU by creating a modern, transparent and predictable trade and investment regime, and by enhancing institutional capacity through the adoption of European standards. Trade relations with the EU will likely be reinforced as a result of the DCFTA. The EU is one of Georgia’s main trading partners, accounting for 21 per cent of exports in 2013. As part of the agreement, Georgia will also receive technical and financial support from the European Union. The AA/DCFTA covers a broad range of cooperation areas and provides for further development and strengthening of political dialogue, including foreign and security matters, as well as domestic reform. Priority is given to reforms in public administration, agriculture, rural development and the judicial system. In August 2014 Moody’s changed the outlook on Georgia’s Ba3 sovereign rating to positive from stable, driven by the expectations that the DCFTA, which will enter into force in September 2014, will attract further foreign direct investment and bolster the country’s export performance.

The government approved the Georgia 2020 Socio-economic Development Strategy in June 2014. The main objective of the strategy is to achieve faster, inclusive and sustainable growth by maintaining a stable macroeconomic environment and strengthening human capital – health, education and social safety nets. The strategy also aims to improve private sector competitiveness by building on past successes and further enhancing the investment climate, especially for SMEs. The government is expected to formulate a specific action plan to achieve long-term development objectives.

New amendments to the law on free trade and competition were adopted in March 2014. This law was developed as part of the anti-monopoly reform and aims to strengthen the institutional framework for promoting free trade and competition. The government also issued a decree to set up a competition agency. In addition, the law on food safety underwent amendments, which were approved by parliament in April 2014.

Reforms in the agricultural sector have been passed. In July 2014 the President signed amendments to the law on ownership of agricultural land. Pursuant to the law, agricultural land in Georgia can no longer be acquired by a foreigner, a legal entity registered abroad or a legal entity incorporated by a foreigner in Georgia. This moratorium will remain in effect until 31 December 2014. Meanwhile, the government of Georgia is developing a policy on the ownership of agricultural land.

Further efforts have been made to promote local currency lending and to reduce dollarisation. Parliament approved changes to the tax legislation in late December 2013. Under the new laws, the tax treatment of lari non-sovereign bonds, such as the EBRD’s first issue of lari bonds in March 2014, will be the same as the tax treatment for public debt.

The electricity regulatory authority approved the new Transmission Grid Code in April 2014. The document detailing the grid code fully meets EU requirements. The development of these codes is part of the government’s commitment to a broader set of sector reforms within the Georgian Electricity Market Model 2015. In addition, the Ministry of Energy amended the Electricity Market Rules in January 2014 to enable the adoption of the grid code by the electricity regulatory authority, and to give new hydropower and renewable energy projects priority access to the transmission grid.