ISET

This research paper intended to supplement and complement the following economic policy strategies and plans of the Georgian government in the areas of sustainable and balanced growth:

• “Georgia 2020”, a broad agenda directed at long-run growth of most economic sectors with validity beyond the 2020 date

• A “4 point plan” and a broader “14 point plan” of economic reform proposals of the government announced right before and right after the parliamentary elections of 2016.

Our research team conducted a SWOT (strengths, weaknesses, opportunities, threats) analysis of the Georgian economy. We concluded that the broad economic policy priorities Georgia should tackle in the present legislative term. We also made suggestions on policy priorities, first in macroeconomic policy fields and finally for priority sectors in order to achieve more balanced growth.

Economic reforms announced in the run-up to the parliamentary elections in October 2016 raised concerns about whether Georgia was departing from its path of prudent fiscal policy. A reform of the corporate profit tax and increased infrastructure investment were driving expectations of a 6% of GDP budget deficit in 2017, endangering Georgia’s macroeconomic stability and its reputation with investors.

After winning the elections, the “Georgian Dream” coalition has undertaken significant efforts towards keeping the budget deficit at bay. The deficit in 2017 is now expected to remain at around 4% of GDP and to decrease in the coming years. This was achieved by increasing excises on goods such as fuel, cars, tobacco and gas and by further savings in administration expenditures. Immediate worries about Georgia’s economic stability are hence allayed. At the same time it is important to monitor the economic and the fiscal effect of the new fiscal measures in the coming years.

Both Georgia and Armenia have been subject to negative external economic shocks, particularly through remittances and exports, in 2014 and 2015, yet the macroeconomic adjustment of the countries appears to have been different. While the GDP growth of both countries remained relatively stable at around 3% in both years, the exchange rate of the Georgian Lari (GEL) depreciated by a 29% in 2014-2015 compared to 15% for the Armenian Dram (AMD). While the depreciation of the AMD was initially quicker than that of the GEL, the GEL depreciation lasted much longer into 2015.

Comparing the external shocks faced by the economies of Armenia and Georgia, it appears that Armenia was hit earlier, with remittances and FDI clearly dropping off stronger in the end of 2014 than in Georgia. However, Georgia was subject to a much larger and prolonged fall in exports – a 6% of GDP decrease in Georgia compared to 1.7% of GDP in Armenia in 2015. Also, the reaction of imports to reduced income and lower exchange rates appears much quicker in Armenia, partially explaining why the exchange rate may have behaved more stable in 2015.

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