Economic update for Georgia:
World Bank projects 3.4% economic growth

The World Bank has upgraded its economic outlook for Georgia, projecting 3.4 percent economic growth in 2016 instead of 3 percent it earlier predicted.

Furthermore, the World Bank estimated Georgia’s economy will grow 5.2 percent in 2017 and 5.3 percent in 2018, while in its annual report Global Economic Prospects published at the beginning of this year the Bank said Georgia’s economy would hit three percent in 2016, 4.5 percent in 2017 and five percent in 2018.

From next year we expect the external environment will improve and we expect Georgia will continue to receive sustained foreign investments. These factors will allow Georgia to improve its growth prospects from next year,” World Bank Program Leader and Lead Economist Genevieve Boyreau told Agenda.ge.

With more than a month left of 2016, Georgia’s economy has already hit its projected target of three percent growth. Georgia’s economy grew 2.9 percent in the first half of 2016.

With the significant increase in Government spending in the run-up to the October Parliamentary Elections, growth is likely to pick up to 3.4 percent this year,” read the latest report released by the World Bank.

Therefore, the World Bank projected the fiscal deficit to increase further from 3.8 percent of Gross Domestic Product (GDP) in 2015 to 4-5 percent in 2016 because of "increased social spending and expenditures that have been announced but not budgeted”.

The report also stated poverty was expected to decrease in 2016 as economic growth translated into more dynamic labour markets.

The poverty rate is projected to continue declining through to 2018. Construction activity and growth of tourism-related services is expected to drive poverty reduction through increased job opportunities among the less-skilled. The rise in real wages observed since 2010 is likely to continue. The expected increase in pensions will also have positive impact on poverty reduction,” said the World Bank.

The World Bank report said poverty was expected to decrease in 2016 in Georgia. Photo by N. Alavidze/Agenda.ge. 

Meanwhile the World Bank report highlighted some risks and challenges that Georgia currently faced. A large current-account deficit, high external debt, a widening fiscal deficit, and high unemployment rates posed important challenges to the Government’s economic development and poverty reduction objectives, said the World Bank.

While the current-account deficit was named as one of the risks for Georgia, the World Bank said it would be narrowed gradually "in the outer years”.

In its new report the World Bank also mentioned Georgia’s tax reform, that aimed to align the country’s tax system with the Corporate Income Tax (CIT) – the Estonian Taxation Model. Under the Estonian Taxation Model all businesses, except profit-sharing businesses, will be exempt from income tax.

More specifically, if a company reinvested their profit they will no longer be obliged to pay income tax. In other words if a private entity does not receive a dividend from his/her company, he/she will not pay income tax meaning he/she will not pay tax for the reinvested money.

The adoption of the Estonian Tax Model, which replaces corporate tax with a tax on distributed profiles, only is expected to widen the deficit further during 2017-2019. While the new tax model could boost growth in the medium term, it is expected to cause revenues to decline by 1.5 percent of GDP in 2017,” said the report.

In addition, spending on pensions and teacher salaries will rise in 2017 due to the full-year impact of increases in 2016. In the absence of major consolidation measures the deficit is expected to remain elevated over the medium term, increasing the public debt stock,” the report added.

Experts from the World Bank Group said they would continue revising their outlook following developments in Georgia. Photo by N. Alavidze/Agenda.ge.

While talking about the reforms the Government of Georgia planned to implement next year, Genevieve Boyreau of the World Bank said the future reforms, combined with a better external environment, would further improve Georgia’s economic growth.

Firstly the Georgian Government needs to get its 2017 budget right in terms of sustainability of the fiscal part. Providing the right reforms for Georgia to extend its own market will be quiet important. We will support the Government in the fiscal consolidation measure that will be in the 2017 budget. It is very important for Georgia to be on the sustainable fiscal path. We will also support the Government in different reforms and especially while implementing its four-point reform agenda,” Boyreau said.

We want to protect the most vulnerable and poor segment of the society. We will also stand by the Government to help improve the Universal Healthcare reform, where we are going to share some findings and the analysis of the Universal Healthcare and provide concrete recommendations for the Government to move forward,” she added.

In general we expect better economic growth in Georgia thanks to a better external environment and also thanks to some of the reforms Georgia has been making. We had good news recently where the Doing Business Report was released and Georgia was number 16, right ahead of Germany, so it is a nice achievement,” Boyreau concluded.

While Georgia’s economic growth in the coming years was dependent on a better external environment, it was important to see how the environment has been changing in Europe and Central Asia.

The World Bank said growth was forecast to remain positive in Eastern Europe and Central Asia with a GDP growth of 0.7 percent in 2016, 2.3 percent in 2017 and 2.6 percent in 2018. Meanwhile, growth in the European Union was expected to decline slightly, while growth in the Western Balkans was forecast to grow from an expected 2.7 percent in 2016 to 3.2 percent in 2017 and 3.5 percent in 2018.

The Brexit vote and the refugee crisis are testing European cooperation while the eastern half of the region is still grappling to adjust to lower oil prices. Failure in the whole region to unleash new sources of growth is contributing to an increase in populism and polarisation as well as mistrust in institutions,” said Hans Timmer, World Bank Chief Economist for Europe and Central Asia.