Georgia — Harnessing Reforms to Boost Inclusive Growth

IMF News, May 20, 2019

Source details

Speech by Christine Lagarde, IMF Managing Director, delivered in Tbilisi, Georgia, May 20, 2019. "As prepared for Delivery."
Theme: Georgia’s transformation since 1991 from agriculture to services, tourism, and trade driven by economic reforms and openness.
Core questions: How can Georgia strengthen resilience to economic headwinds? What new ingredients are needed for a more inclusive and sustainable economy?

Findings and context

Two years ago, "75 percent of the world economy experienced an upswing." For this year, "we expect 70 percent to experience a slowdown in growth."
Global growth expected to rebound into 2020, but major risks remain from trade disputes and geopolitical tensions.
Over the past two decades: "extreme poverty levels have declined by nearly three-quarters"; "life expectancy has increased by about 6 percent"; "real per capita income has almost tripled."
Recent domestic outcomes: fiscal deficits are contained; inflation is subdued; banks are well-capitalized; the unemployment rate has reached a "15-year low."
Georgia remains vulnerable to shocks from escalating trade tensions and financial market volatility.

Policy priorities and recommendations

Maintain exchange rate flexibility.
Further increase foreign exchange reserves.
Implement prudent economic and financial policies to guard against external shocks.
Reduce the amount of loans and deposits denominated in US dollars to lower dollarization risks.
Further develop the local capital market and promote institutional investors to support demand for long-term, local-currency bonds and other financial assets.
Further reduce debt levels, especially among low-income households; sustain tightened lending standards to support more sustainable credit growth.
Address high economic inequality as a policy priority—IMF research links less inequality with stronger, more sustainable growth.

IMF engagement

IMF provides policy advice, financial support, and hands-on training and capacity building in partnership with Georgia.

Overview

Objective: more higher-quality jobs and higher productivity to boost potential growth and living standards.
Constraint: rapid population aging and emigration of workers abroad slow growth potential.
At the current, long-term GDP growth rate of "5.2 percent," it would take "more than 10 years for Georgian living standards to reach those of emerging European nations."

Key ingredients and specific recommendations

Connectivity

Scale up public investment in high-quality infrastructure to transform Georgia into a transport and logistics hub connecting Europe and Asia.
Ongoing project: East-West highway connecting Azerbaijan to the Black Sea; consider upgrading port infrastructure, including new ports.
Benefits: lift productivity by connecting businesses to global value chains; encourage foreign direct investment in tradable goods and services.
Unlock full potential of the tourism sector and build on recent trade agreements with the European Union and China.

Education reform and labor market

Implement a comprehensive, fiscally sustainable education reform aligned with best practices to resolve shortages of higher-level skills.
Short-term measures: more active labor market policies, better vocational training, and cutting-edge online tools for jobs matching.
Encourage greater participation of women in the workforce; differences in labor force participation between men and women "result in significant economic losses for Georgia—equivalent to about 11 percent of GDP per capita."
Policy options to increase female participation: more flexible working hours and more affordable, high-quality childcare.

Good governance and institutional reform

Continue anti-corruption efforts and strengthen public institutions to provide a level-playing field for the private sector.
Modernize the judiciary to boost transparency and accountability.
Build a more efficient insolvency regime to simplify winding down businesses and free up capital for productive investment.
Historical impact: tax revenues rose "from 12 percent of GDP in 2003 to 25 percent only five years later" following anti-corruption and administrative reforms.
Emphasis: fighting corruption requires consistent, continuous effort.

Role of broader stakeholders and youth

Government actions alone are insufficient; bring together policymakers, entrepreneurs, civil society, development partners.
Leverage the creativity and energy of young people across disciplines (literature, arts, languages, STEM) to create new products and services.
Mobilize youth leadership on climate-related issues (sea-level rise including the Black Sea, water resources, air quality, forests).
Connect with international peers and institutions (including the IMF) to promote economic and financial stability.

Quotation: Ilia Chavchavadze: "A man creates his own destiny, but destiny does not create a man."
Message: Georgia is creating its own destiny through reforms that can produce a more resilient and inclusive economy for current and future generations.
Call to action: take the right policy steps now to create a better economic vintage not just for this year but for generations to come.

Source: Christine Lagarde, IMF Managing Director; Tbilisi, May 20, 2019.

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- Staff Paper (Markdown version)
- Staff Paper (PDF)
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- Fiscal Monitor: Curbing Corruption (Markdown version)
- Fiscal Monitor: Curbing Corruption (PDF)
Caucasus and Central Asia Update to the Regional Economic Outlook APRIL 2019
- Caucasus and Central Asia Update to the Regional Economic Outlook APRIL 2019 (Markdown version)
- Caucasus and Central Asia Update to the Regional Economic Outlook APRIL 2019 (PDF)