The World Bank publishes new report “Europe and Central Asia Economic Update - SLUGGISH GROWTH, RISING RISKS”.

“The economy performed strongly in H1 2023, with growth at 7.6% (yoy), and projected at 5.9% for 2023 as a whole. Buoyed by strong domestic consumption, employment recovered, and poverty continued to fall. Growth is expected to slow in H2 due to monetary tightening in advanced economies and to easing in money inflows from Russia putting pressure on the currency and increasing financing needs. Georgia has made notable gains in income growth and poverty reduction over the past decade. A robust economic management framework saw the GNI per capita (constant 2015 USD) increase from USD 3,048 in 2010 to USD 5,424 in 2022. Poverty (measured by the USD6.85 poverty line in 2017 PPP) is also down from 70% at the start of the decade to 55.4% in 2021.

Growth remained robust in H1 2023, although it eased to an estimated 7.6%, compared to 10.1% in H1 2022, driven by a rebound in private consumption. Service exports remained supported by continued recovery in tourism. Unemployment continued to fall, reaching 16.7% in June 2023, below pre-pandemic levels. Inflation has declined sharply. Headline inflation fell to 0.3% (yoy) in July 2023, from 9.4% in January. The decline was driven by lower commodity prices, particularly for food and fuel, along with a strong Georgian lari (GEL). On the other hand, the price of financial services, personal care, and utilities have continued to put pressure on inflation. Core inflation, which excludes food and energy components, dropped from 7.1% (yoy) in January to 3.2% (yoy) in July. In response, in August, the National Bank of Georgia (NBG) reduced the monetary policy rate by 25 bps, to 10.25%. The banking sector has remained healthy. Returns on assets and equity reached 3.7% and 26.7% in June 2023, respectively. Share of non-performing loans (NPLs) stood at 1.5% by the end of June, down from 2% in June2022. Current account deficit declined to 3.2% of GDP in Q1 2023, from 4% in 2022. During H1 2023, exports grew by 19.3% (yoy) in USD value, mostly driven by re-exports of used cars. Conversely, exports of raw materials (copper, ferroalloys, and nitrogen fertilizers) produced in Georgia declined, as international prices fell considerably, and domestic production declined. Meanwhile, imports expanded by 19.6% (yoy), driven by growth in used car imports, whose share of total imports almost doubled to 18%. FDI inflows recorded an improvement in H1 2023 with an 11% increase compared to the same period in 2022, driven by the financial, energy, and manufacturing sectors. Money transfers, primarily from Russia, continued to support Georgia’s external position and increased by 32.5% in H1 2023 compared to H1 2022. International reserves increased to USD 5.4 billion, or approximately 4.4 months of import cover. Total revenue increased by 13.3% (yoy) in real terms in H1 2023, supported by higher collection across the board, except for profits tax. Current expenditures grew by 6.7% (yoy), reflecting increases in the wage bill, higher spending on goods and services, and increased (yoy) subsidies to SOEs and social assistance for the most vulnerable. Capital expenditure surged by 20.3 percent yoy in real terms as the pace of project implementation accelerated. Outturns for H1 2023 showed a small overall surplus and a primary surplus at 0.7% of GDP, due to the strong revenue performance. The public debt-to-GDP ratio continued to fall due to rapid economic growth and appreciation of GEL. Strong economic growth and improved employment rates resulted in higher real wages, contributing to increased household consumption. Steady remittance inflows and lower food inflation also bolstered the population’s purchasing power. The poverty rate (below USD 6.85 a day, 2017 PPP terms) is estimated to decrease to 48.7% in 2023.

Growth is expected to slow in H2 2023 due to a slowdown in trading partners and an easing of money transfer inflows, reaching 5.9% this year. Looking ahead, growth is expected to stabilize at around 5% of GDP in 2024–2025, supported by robust investments and tourism. Inflation is expected to end the year below the 3% target rate. Monetary policy is expected to be eased to support economic growth while remaining prudent. Prospects for poverty reduction are positive. The overall poverty rate (measured below USD 6.85 per day, in 2017 PPP terms) is expected to continue declining and reach 45.2% in 2024 and 42.1% in 2025, driven by higher wages and improvements in the labor market. On the external side, given the widening trade deficit, the current account is projected to deteriorate to 6 percent by the end of 2023. The inflow in money transfers in the aftermath of Russia’s invasion of Ukraine is expected to ease in the second half of 2023 and subside further in 2024. The current account deficit is expected to remain below pre-war levels in the medium term, due to continued recovery in tourism and continued strong export performance. The deficit is projected to reach 2.9% of GDP in 2023. The government is expected to comply with the GDP fiscal rule deficit ceiling in 2023 and in the medium term. To boost revenue collection, the authorities are committed to the rationalization of tax expenditures. Substantial risks remain, reflecting Russia’s invasion of Ukraine and broader uncertainties. A faster reduction in money inflows, a decline in tourism inflows, further monetary tightening in advanced economies, or an increase in global commodity prices, could hinder growth, put pressure on the currency, and increase debt levels and financing needs. Currency mismatches due to dollarization and a high exchange rate pass-through would also exacerbate vulnerability to currency depreciation. On the upside, money transfer inflows could remain stronger than expected, lifting economic growth”, - reads the report.