Despite a great deal of political turmoil over the past 12 months and a government that has seemingly set a course incompatible with the country’s hitherto unshakable ambition of one day joining the European Union, Georgia’s economy has shown remarkable resilience in recent years, positioning itself as a promising, dynamic emerging market in the South Caucasus.
Nevertheless, as it approaches pivotal parliamentary elections in October, ongoing concerns about political uncertainty and its potential impact on Georgia’s EU trajectory and economic prospects loom large and could pose a threat to its robust growth.
Georgia’s strong economic growth in recent years has been supported by a combination of factors including tourism, export growth, and substantial foreign investment.
In 2023, the Georgian economy expanded by 7.5 per cent, according to the country’s national statistics office, driven by a return to traditional economic sectors and boosted by a surge in foreign capital inflows, notably in real estate and logistics.
The impressive numbers follow the country’s economic recovery from the Covid-19 pandemic was swift, with double-digit growth rates in both 2021 and 2022. This recovery was bolstered by increased tourism, a growing export sector, remittances from the Georgian diaspora, and inward migration of Russians looking for a base from which to continue providing services to western firms, or simply fleeing military service.
The Georgian lari has remained stable, supported by solid external inflows and a favourable trade balance. Inflation, which was a concern during the pandemic, moderated to a barely noticeable 0.4 per cent in 2023. This economic stability has been underpinned by strong fiscal policies, with the government maintaining low deficits and a floating exchange rate to absorb external shocks.
Key industries contributing to this growth include tourism, agriculture, and logistics. Georgia’s strategic location on the crossroads of Europe and Asia has made it a vital player in the so-called Middle Corridor, a transport route connecting China and Central Asia to Europe, bypassing Russia.
This transit role, especially amid the geopolitical shifts caused by the Russia-Ukraine conflict, has driven the soild growth in logistics, positioning Georgia as a regional hub for east-west trade.
Nevertheless, according to the World Bank, structural challenges persist, notably weak productivity and limited high-quality job creation.
“About a third of workers remain engaged in low-productivity agriculture, and Georgia also has a large share of self-employed in other sectors. Access to finance remains a major obstacle for SMEs, while skills mismatches are reported to be an impediment for most firms. Due to its high degree of trade openness and dependence on tourism, Georgia is vulnerable to external shocks,” says the bank.
The year so far
Forecasts for Georgia’s economy in 2024 remain optimistic but are tempered by global and local uncertainties.
The Georgian government projects GDP growth of 5.2 per cent in 2024, while international financial institutions such as the International Monetary Fund (IMF), World Bank, and Asian Development Bank offer similar forecasts, ranging from 4.8 per cent to 5.2 per cent. Galt and Taggart, a leading Georgian investment firm, estimates growth of around five per cent for the current year.
However, much of this growth is expected to be driven by continued foreign investment, which fell 34 per cent year-on-year to 768.6 million US dollars in January-June 2024, according to national statistics service, infrastructure development, and tourism.
The Georgian government has committed to significant infrastructure projects, including (more than a decade after it was first proposed) the development of the Anaklia deep-sea port, key part of the Middle Corridor. However, the country’s opposition has condemned the selection of China to complete the project.
Georgia’s agricultural sector meanwhile is set to benefit from increased export demand, particularly from China, which has shown growing interest in Georgian agricultural products such as nuts and wine. This demand is expected to spur further development in the sector, creating more jobs and increasing rural incomes.
Global economic uncertainties, including potential recessions in key trading partners like the EU and continued geopolitical tensions, could nevertheless dampen demand for Georgian exports.
Additionally, any deterioration in the global financial environment could further negatively affect the flow of foreign capital into the country.
EU integration
Georgia’s EU aspirations are arguably the central theme in its political and economic narrative. The country has made significant strides toward EU membership, receiving candidate status from the European Commission in November 2023.
This has been a major boost to both consumer and business confidence, enhancing the overall investment climate.
However, Georgia’s path to EU membership is littered with obstacles (some, like the ‘Russian law’, of the country’s own making; the law, designed to muffle NGOs, has been described as ‘incompatible with EU values’ by several European officials), and the forthcoming parliamentary elections (scheduled for October 26) are seen as a referendum on Georgia’s European future.
Should the ruling Georgian Dream party win and go ahead with plans it has mulled to outlaw some opposition parties, or if more political instability emerges, Georgia’s EU accession process could be derailed. This uncertainty is of particular concern to investors and businesses who view EU membership as a guarantee of regulatory stability and long-term growth prospects.
Public support in Georgia for EU membership remains strong, with polls consistently showing that over 80 per cent of the population favors closer ties with Europe. However, divisions within the political elite and ongoing tensions between pro-EU and pro-Russian factions create a volatile political landscape.
The investment climate
Georgia’s favourable business environment has been widely recognised for some time by international organisations. It consistently performed well in the World Bank’s Ease of Doing Business ranking, before the ranking was discontinued amid accusations of data irregularities in 2020.
The country also ranks highly in terms of economic freedom, transparency, and competitiveness. The US State Department, in its 2024 investment climate report, highlighted Georgia’s robust legal and regulatory framework for businesses, along with its strategic location as key advantages.
“Overall, business and investment conditions are sound, and Georgia favourably compares to regional peers,” the report said.
The sectors attracting the most investment include real estate, tourism, and infrastructure. Notably, the UK has been a major source of FDI, accounting for nearly half of all investments in recent years. This influx of foreign capital has helped to modernise Georgia’s urban infrastructure, particularly in the capital Tbilisi, where high-rise developments and luxury hotels cater to both local and international demand.
Logistics and transportation are also priority sectors for the Georgian government, with a particular focus on leveraging the country’s strategic position along the Middle Corridor. The development of the Anaklia port is expected to play a crucial role in expanding Georgia’s transit capacity, further solidifying its role as a regional trade hub.
The challenges ahead
Despite the broadly positive outlook, Georgia faces several economic and political challenges.
Top of the list is the upcoming parliamentary election, which could significantly alter the country’s economic direction, especially if the election results in a shift away from pro-EU policies. Investors are watching closely, as any deviation from the EU integration path could lead to economic volatility, reduced foreign investment, and potential sanctions or loss of aid from the EU.
Additionally, while Georgia’s public debt remains manageable, the country’s dependence on external financing for infrastructure projects poses risks, particularly in the event of global financial tightening. Inflation, although currently low, could re-emerge as a concern if global energy prices rise or if domestic demand accelerates faster than supply.
Another area of concern is unemployment, particularly among the country’s youth. Although overall unemployment has been gradually declining (from 20.6 per cent in 2021 to 16.4 per cent in 2023), it remains a structural issue that could hinder long-term growth.
Addressing this challenge will require significant investments in education and vocational training to better align the workforce with the needs of a modern economy.
First, however, comes the election. The outcome could either restart and accelerate Georgia’s progress toward becoming a fully integrated member of the European community or, in the worst case, set the country back, delaying much-needed reforms and jeopardising its economic future.
