Until autumn 2016, the Government of Georgia was forecasting that the annual economic growth would reach 3%; however, ultimately the economic growth forecast was reduced to 2.7% and even that was not implemented. According to the preliminary data, the Georgian Economy grew by 2.2% in 2016 whilst the economic growth rate in 2015 was 2.9%.
Economic growth rate of 2.2% is a low indicator for a developing country. Given this pace, it will take 32 years for the economy to double. As an objective reason for a low economic growth rate the government was citing a difficult international situation in the region. According to the preliminary data, the Russian Economy reduced by 0.6% in 2016 whilst that of Azerbaijan reduced by 2.4%. This had negative influence on Georgia as well. The economic growth rates of other neighbouring countries also reduced. The Armenian Economy grew by 2.4% whilst Turkey saw a 3% growth. The Ukrainian Economy started growing last year and grew by 1.5%.
Economic Growth RateSource: National Statistics Office of Georgia
The level of inflation reached 2.1% in January-December 2016; however, it grew faster by the end of the year which was mainly due to the increasing amount of GEL in circulation and its depreciation. Cigarettes and alcoholic beverages saw the largest increase in prices in the past year – 13.1%. The prices of healthcare grew by 2.1% which was mainly due to the growth of the prices of imported medications as well as the growth of demand on healthcare services. The price of telecommunications saw an increase of 4.3%. As for the reduction of prices, the prices of clothes reduced by 5.7% and the prices of household equipment dropped by 2.5%.
External Trade and Tourism
The exports of Georgia started reducing in 2014 (reduced by 2%). The trend deepened in 2015 with 23% reduction in exports. In 2016 exports reduced by 4% whilst imports increased by 28% (however, if we exclude the Hepatitis C medications which are given to Georgia in the form of a grant, imports reduced by 0.4%).
A total of 6.4 million visitors entered Georgia in 2016 which is 7.6% more than in 2015. As for the number of tourists (visitors who stayed in Georgia for more than 24 hours), it increased by 19%, reaching a total of 2.7%. The growth of tourism was due to the simplification of getting entry visas and activation of advertisement campaigns.
GEL Exchange Rate and Monetary Policy
GEL continued depreciating in 2016 and lost about 10% of its value (25 tetri).
GEL started depreciating with regard to USD in November 2014 and reached record low by the end of 2016. The exchange rate of GEL with regard to USD was 2.40 at the beginning of 2016. It reached 2.50 by the end of January. The exchange rate started strengthening during spring and summer; however, it returned to the trend of depreciation from the end of August. In autumn, the National Bank of Georgia sold a total of USD 180 million in order to stop the exchange rate from depreciating; however, the trend continued and the exchange rate with regard to USD exceeded the threshold of 2.7.
The National Bank of Georgia was exercising a rather strict monetary policy in the beginning of the year, with the interest rate on refinancing loans set at 8%. This strict policy started to change from the end of April and by September 2016 the interest rate had gone down to 6.5%, leaving it the same until the end of the year. The reduction of the interest rate was due to the reducing inflation level; however, this was followed by the growth of the amount of GEL in circulation by about GEL 1 billion (M2 aggregate). Despite the fact that the growth of the amount of GEL in circulation negatively influences the exchange rate, the steps taken by the National Bank of Georgia were justified as otherwise the economy would experience recession, reducing income and jobs.
The foreign currency reserves of the National Bank of Georgia increased by USD 242 million in 2016 which is very important for the financial stability of the country.
State Budget and Debt
In 2016, the state budget could not be implemented as it was initially planned. Some of the government structures spend much more than originally planned. These included the Ministry of Labour, Health and Social Affairs of Georgia, Ministry of Energy of Georgia and the Ministry of Defence of Georgia. Together, these Ministries used up GEL 200 million more than originally allocated for them.
Until December 2016, the government was practically unable to make use of the grants and loans supporting the budget, compensating the deficit by getting more domestic loans and using the leftover money from the previous years. The grants and loans were finally received in December.
The main problem throughout the year was the uneven spending of the budget. There were months (April, June and October) when the deficit spending from the budget exceeded even GEL 100 million. All other conditions being constant, the deficit spending from the budget negatively influences the exchange rate of GEL.
The state debt of Georgia reached GEL 15.2 billion by the end of November 2016. The growth of the state debt was mainly due to the increase in domestic debts as well as the depreciation of GEL. The state domestic debt increased by GEL 355 million (the growth of GEL 200 million was initially planned) whilst the state external debt increased by USD 201 million. The size of the state debt reached 46% of the Gross Domestic Product.