Georgia on the Brink: Political Turmoil Casts a Long Shadow Over Economic Prospects

By Malkhaz Matsaberidze

Thursday, December 26, 2024

As Georgia grapples with deepening political tensions, questions are mounting about the potential economic fallout. The ruling Georgian Dream party remains steadfastly optimistic, projecting economic growth for 2025 and dismissing concerns. Meanwhile, opposition leaders and experts are raising alarms over significant challenges already emerging, warning of looming risks tied to the government's distancing from the West.

Georgian Dream is trying to ignore the ongoing protests and plans to govern the country in a one-party mode. On December 10, the Georgian Parliament, composed solely of "Dream" deputies, approved the 2025 state budget with 88 votes. Economic growth of 6% is planned for the coming year, with an average inflation rate of 1%. The total amount of state budget allocations has increased by 895.2 million GEL compared to the previous submission, reaching 27.9 billion GEL.

According to Georgian Dream's Prime Minister Irakli Kobakhidze, the exchange rate of the lari will remain stable, and the country's economic development will continue at a high pace. He stated that during the first 10 months of 2024, the average economic growth rate was 10% and will maintain this high pace moving forward. Kobakhidze also noted that over the past four years, the opposition has attempted to stage a 'Maidan', or coup, four times, but all attempts failed because, in his words, the "collective UNM" are inept revolutionaries."

Despite such government optimism, the economy faces serious challenges. The adoption of the so-called "Russian Law" had a significant negative impact on the exchange rate of the lari, forcing the National Bank to sell $168 million in a single month to prevent its sharp depreciation. By the time of the 2024 parliamentary elections, Georgia's National Bank''s foreign currency reserves had decreased by approximately $630 million and by about $1 billion over the course of a year. Through these foreign currency sales, the National Bank managed to maintain the lari's exchange rate to some extent.

Regarding Georgia's foreign currency reserves, the International Monetary Fund stated back in April 2024 that the level of reserves had fallen below the adequacy threshold and needed replenishment. A few days ago, the credit rating agency Fitch also noted that the size of Georgia's reserves is smaller compared to other countries with a BB rating.

Considering that, due to Georgian Dream's policies, Georgia will no longer receive aid from the U.S. and EU countries, this will affect investments and capital outflows as well. In such circumstances, experts believe that in even a minor crisis, the National Bank's reserves may no longer suffice to maintain the stability of the lari's exchange rate.

Foreign investments have already declined sharply. According to preliminary data, the volume of foreign direct investments in Georgia amounted to only $197.7 million in the third quarter of 2024, which is 55.2% less than the revised data for the third quarter of 2023. Moreover, statistics show that investments in the third quarter of 2024 are the lowest recorded since 2006, surpassing only the figures from the period of the war (2008) and the subsequent year (2009).

A group of economists has issued a statement regarding the ongoing developments in the country and "Georgian Dream's" suspension of Eurointegration. Along with demanding a return to the path of democratic development, they emphasize that $9 billion enters Georgia annually from Western countries. Distancing from the West, they warn, will inevitably lead to significant economic losses.

The developments in the country, particularly the announcement by the "Georgian Dream" to suspend negotiations with the European Union for four years, have also angered business circles, prompting critical statements. "We create the wealth in this country; the 27 billion is based on our taxes. In America, the government is called an administration - it is an administrator tasked with solving the problems of businesses and citizens, not making businesses its vassals," stated Giorgi Abramishvili, co-founder of DATA CENTER SOLUTIONS.

In the current situation, the idea of a business strike has emerged. A few days ago, former National Bank President Giorgi Kadagidze called on banking sector employees via social media to strike, claiming it would save the country from isolation, "which will bankrupt and collapse the banking system."

Mamuka Khazaradze, leader of "Strong Georgia," also urged businesses to strike, stating that the country needs to feel the power of business. According to him, if genuine businesses (as opposed to those colluding with the government) unite and act in an organized manner, no one will be able to oppose them.

However, the idea of a business strike has sparked outrage among some economists. They argue that business and politics should remain separate and that a business strike would constitute direct social sabotage against the state and its population.

While it may not come to a full-fledged business strike, if business leaders actively voice their demands, it could become a significant factor for the "Georgian Dream" government to reckon with. The only way out of the current crisis, however, lies in holding new parliamentary elections.