On 31 December 2019, China notified the World Health Organisation (WHO) about several cases of people being infected by an unknown virus in November 2019 in Hubei province. The novel virus, with the official name COVID-19, spread rapidly and the WHO officially declared the pandemic on 11 March 2020. As of 26 March 2020, there are 473,266 confirmed cases of the infection. Of this amount 21,344 people have died and 114,779 patients have recovered.

General Economic Aspect of the Pandemic

Given the scale of the virus spread, apart from human lives, global economic stability has also come under threat. According to the current forecasts (McKinsey&Company), an optimistic scenario is that a recession in the world economy is indeed inevitable although it would be fully overcome by the end of 2020. In the case of a more negative scenario, the expected results will be nearly as grave as the 2008-2009 world financial crisis and recovery will start only from the second quarter of 2021. According to the International Monetary Fund’s assessment, the pandemic-induced crisis will be at least as hard as the 2008-2009 crisis or maybe even worse although the recovery process is still expected from 2021.

Of interest is that in contrast to the previous crises which were studied multiple times, the pandemic-induced shock has simultaneously reached all of the world’s leading economies and several sectors together. Of note is that the pandemic-caused impact on the economy is a combination of both demand (direct impact and impact from the standby regime) and supply shocks. The auto industry can serve as an example of a supply shock. In the initial phase of the virus spread (before restrictions were imposed outside China) and as a result of the inability to receive auto parts from Chinese factories as well as the complications of transportation via Chinese ports, automobile producers were forced to partially limit their production. Electronics producers are in the same situation. On top of that, uncertainty naturally has an impact – economic agents are in a standby mode and are observing how events are unfolding which is reflected in “postponed investments.”

Of particular mention is the price war on the world oil market. Decreased economic activity in light of the pandemic is naturally translated into a decreased demand for oil which, other things being equal, causes a drop in prices. However, it is not a secret that the oil market is an oligopoly and it was expected that oil suppliers (OPEC member countries and Russia) would cut production to keep prices at the existing level. However, producer countries failed to reach an agreement. The Russian Federation rejected the volumes offered by OPEC on 5 March 2020. Saudi Arabia, the world’s largest oil exporter, responded to that by ordering oil production at full capacity and offering an unprecedented 20% discount for major markets. As a result on 8 March 2020, oil prices collapsed by 30% to USD 31.1 (WTI). Currently, oil (WTI) is traded at USD 23.

Impact of the Pandemic on the Georgian Economy

The first case of a COVID-19 infection in Georgia was confirmed on 26 February 2020. This was preceded by banning flights to and from China (29.01.2020) and Iran (23.02.2020). In addition, wildlife imports from China (the initial spread of the virus is linked to the dismal sanitary conditions at China’s wildlife markets) was also banned. Together with the spread of the virus, the list of countries under restriction has become larger. Currently, Georgia’s border is closed for foreign nationals with certain exceptions (diplomatic and humanitarian missions, foreign family members of Georgian citizens, cargo truck drivers, etc.). Social distance requirements have gradually become stricter. Shops were closed (except for grocery stores and pharmacies), recommendations were issued to limit movement and mini-buses were stopped. After declaring the state of emergency, crowded gatherings (more than 10 people) were further forbidden whilst the Bolnisi and Marneuli municipalities were put under lockdown from 23 March 2020. As of 26 March 2020, there are 77 confirmed cases of the coronavirus in Georgia. Ten patients have recovered, 4,346 persons are quarantined and 247 remain in hospital.

Certainly, any prohibition or interference which limits activity negatively affects the economy. In this case, at the initial stage of the pandemic, some people decided to abandon their tourist plans and cancelled their reservations. Further restrictions on travel caused the collapse of the tourist sector (tourist companies, hotel and restaurant chains, etc.) which resulted in almost fully halting tourist activity. Travel restrictions as well as partial limits on trade resulted in a drop for transport companies and, consequently, the transport sector has been inflicted with substantial damage. Of note is that the aforementioned sectors constitute 11-12% of the country’s GDP annually.

Apart from the aforementioned, as a result on trade restrictions (trade constituted 14.4% of the GDP in 2019), entities involved in the trade of goods and services had their activity significantly reduced. From the body of trade entities, only food and pharmacy chains function without restrictions. These fields are most vulnerable vis-à-vis the ongoing events. In addition, the decreased activity in a certain sector of the economy is reflected on the decreased turnover of other sectors where the aforementioned fields are direct or indirect consumers.

The ongoing events have significantly affected the GEL exchange rate. The National Bank responded to the exchange rate depreciation trend by currency interventions although, as expected, the attempt was not enough to keep the exchange rate at the existing level. The lost revenues of the service industries and decreased remittances significantly affect the currency market. In particular, reduced economic activity in foreign countries also decreases the incomes of Georgian emigrants (particularly in Italy) which should be reflected in the decreased volume of remittances. As a result of halted tourism, foreign currency does not come from international tourism which is an important factor in terms of its impact on the exchange rate.

In such unstable circumstances, where the world economy currently finds itself, investors are moving into a standby regime. According to the International Monetary Fund’s data, investors have already withdrawn USD 83 billion from developing markets (Georgia, too, is a developing market) which is the highest figure of capital outflow registered thus far. Therefore, the situation would not be propitious in terms of investments as well. Georgia has been experiencing difficulties in attracting investments prior to the crisis. In particular, the volume of foreign direct investments in 2019 almost did not increase (0.2%) as compared to the previous year and 2018-2019’s FDI figure was higher as compared to 2013 figure only. Export, which is another source of foreign currency, is negatively affected by the reduced foreign demand from trade partners. Therefore, in light of the reduced trade turnover which is characteristic to a crisis, the export volume will also decrease as a result of both natural volume reduction and a drop in the prices of goods. On the other hand, Georgia’s demand on import also declines which in turn impedes the outflow of foreign currency and serves as an anchor of the GEL exchange rate (albeit, a seemingly insufficient one).

Government Response

Under the current circumstances, there could be different assessments stemming from different ideologies about the role of government or the ways and scale of its interference. However, it is obvious that the authorities have to make a step to deal with both the economic downturn and the accompanying social problems.[1] Therefore, on the one hand, it is important to prepare a plan for social assistance for those people who were left without an income, firstly, because of the direct results of the pandemic and, secondly, because of the restrictions imposed by the authorities in response to pandemic.[2] At the same time, in order to support operational business under the decreased supply and demand, it is important to take measures to keep liquidity and cut the number of organisations which would not survive the economic slowdown to an absolute minimum. Therefore, it is important that as many resource as possible stay in the business sector[3] (taxes should be cut or postponed) and simultaneously government expenses should be increased in certain directions. In order to cope with decreased budget revenues, on the one hand, and ensure additional spending, on the other hand, it is important for the government to free as much funds allocated for inefficient budget programmes and activities as possible.[4] In addition, authorities should not fund the misbalance between incomes and expenses by taking more obligations. On top of that, it is also important to work actively to secure financial assistance from international organisations in order to eradicate the crisis. For instance, the IMF has already expressed the desire to allocate all credit resource at its disposal (USD 1.45 trillion). Eighty countries have already submitted such a request to the IMF.

The world’s leading countries have traditionally opted to respond with the combination of fiscal and monetary policies. However, a certain inflexibility on the part of developing countries in terms of monetary policy was stipulated by the already low monetary policy rate prior to the crisis.

In the case of Georgia, resources to decrease the refinancing rate are much higher although the current high level of inflation is an impediment to stimulate the economy in this manner. It is known that cutting the refinancing rate, together with stimulating economic activity, also affects the growth of the level of prices. Therefore, according to a shared assessment (government and opposition), the National Bank made the right decision not to relax the monetary policy. However, the National Bank eased existing lending regulations (maximum maturity for loans were amended, thresholds for PTI[5] and LTV[6] ratio were eased, etc.) which resulted in more freedom to issue new loans or increase the amount of current ones.

In terms of fiscal policy, the Government of Georgia, similar to the Western countries, plans to increase direct budget assistance (utility vouchers, subsidies for hotels) and the postponement of tax collection at the expense of deepening the budget deficit. More detailed data on response steps will become available after submitting the draft budget amendments. On 12 March 2020, the Minister of Finance clarified that the corrected budget will be submitted “very soon.” Therefore, it is expected that changes will be unveiled in the upcoming days.[7] Currently, it was reported that the budget’s component of expenses will increase.

[1] There are discussions to hand out vouchers to pay for utilities as well as enact changes in income tax. However, there is no final decision on all aspects. Currently, we are aware of the agreement reached between commercial banks to only postpone debt payments and other non-systemic social activities.

[2] Partial compensation of incomes which were not received because of the restrictions or/and decrease in payments or/and the postponement of payments.

[3] In this regard, the government has announced that businesses will receive surplus paid VAT at the beginning of a year in a doubled amount (1.2 billion) as compared to the planned (600 million) amount. In addition, certain business entities will have their taxes postponed for four months.

[4] This concerns certain sport and cultural events, etc. At the same time, it is desirable that cuts do not apply to the labour remuneration component. Bloated employment in the public sector is a problem in general. However, in a crisis it would not expedient to facilitate unemployment.

[5] The payments-to-income (PTI) ratio sets limits on maximum loan payments which are determined proportionally to a borrower’s disposable income.

[6] The loan-to-value ratiodetermines the maximum value of a loan according to the market value of the real estate used as the collateral for the loan. This instrument ensures the sustainability of the financial sector in the event of real estate price reductions and also restricts the formation of a real estate price bubble.

[7] The government works with international organisations to secure financial resources and agreed volumes should naturally be reflected in the draft budget. Therefore, it is likely that the corrected budget will be unveiled after reaching final agreements on those volumes. Given the volume of those funds, the debt to GDP ratio might exceed the legally allowed 60% threshold and submitting an emergency budget could be required.

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