Georgia Sees Early Signs of Recovery, But Risks Linger

• Author: Maureen Burke
• Position: IMF Survey online

Until mid-2008, the Georgian economy was growing rapidly, fueled by high levels of foreign direct investment and strong credit growth. But in August of that year, the armed conflict with Russia over the disputed region of South Ossetia proved a devastating setback for Georgia’s economy, prompting the authorities to request a $750 million Stand-By Arrangement (SBA) from the IMF and to secure emergency financing from donors.

In the months that followed, Georgia’s difficulties were compounded by the impact of the global economic crisis. In August 2009, nearly a year after the original IMF-supported program was agreed, Georgia received a $420 million increase in IMF financing and an extension of the program to June 2011.

In an interview on the occasion of the program’s fourth review, Gardner discusses Georgia’s progress to date.

IMF Survey online: Could you describe Georgia’s economy today?

Gardner: The economy is slowly turning the corner. The immediate objectives of the IMF-supported program were to restore confidence and stabilize the financial situation, and I think these objectives have been met. We see that in the steady growth of deposits since mid-2009-deposits that had shrunk quite sizably right after the war and then again in early 2009. And we see it in the narrowing of Eurobond spreads, which have come down by about 1500 basis points since the end of 2008 and are now back to the level they were at the time of issue in April 2008. We also see that foreign direct investment is still coming in-about $500 million in the first three quarters of 2009-and this is a particularly encouraging sign.

Are these signs of improvement in confidence translating into higher economic activity? We have some indications that the economy started recovering around mid-2009, such as renewed growth in imports, stabilization of exports, and growth in the turnover of enterprises, as measured by value-added tax declarations.

IMF Survey online: Since the slowdown started much earlier in Georgia than in the rest of the region, can it be expected to emerge from the crisis earlier?

Gardner: If the war alone had been the cause for the slowdown, I would probably say yes. But the global financial crisis dealt Georgia a second blow. As a result, Georgia is now at a similar point in the cycle as other emerging market countries in the region. Its economy is being weighed down by a common set of factors-the drying up of private capital inflows, lower remittances, and...