IMF: Georgia’s economic recovery will continue in case of strong vaccination rate

By Khatia Bzhalava

Thursday, September 23

Every employed citizen in Georgia pays income tax in the form of 20% of their salary - IMF estimates this a disproportionately high tax burden for low-income and vulnerable populations.

Moody's gave Georgia a Ba2 level credit rating at the end of 2017. The Georgian government had hoped the country would be able to improve its rating by another step, but due to the pandemic this expectation has lost much of its real basis for at least a few years.

The International Monetary Fund (IMF) published a new review, assessing the risk factors in Georgia. According to the document, the economic recovery in Georgia will be maintained only if a strong pace of life vaccination is achieved. Fund notes that Georgia has launched a more delayed and slower vaccination campaign than neighboring countries, but with the increase in COVID-19 cases in August has accelerated.

According to the IMF mission, encouraging vaccination is critical to maintaining the current pace of economic growth. Based on the assumption that this year the target 60% of the country's population will get vaccinated, IMF estimates that Georgia's economy will grow by 7.7% in 2021 and by 5.8% in 2022 - both forecasts are.

According to the NCDC, the rate of primary vaccination has decreased and currently 2/3 of vaccinations come from second doses. As of September 22 - 956,417 people have been vaccinated with at least 1 dose, 25.6% of the total population, and 729,995 people (19.6%) - with 2 doses.

The IMF does not make its own forecast for the GEL exchange rate, although the review says that due to the strengthening of the GEL, the NBG has suspended foreign exchange interventions in the country.

Given the high dollarization, the GEL exchange rate is a key indicator impacting financial stability and inflation expectations. From February 2020 to April 2021, the lari depreciated against the dollar by 20.5%, and since then, from May to July, it has strengthened by 9%.

The NBG sold $248.1 million in foreign exchange reserves in January-April 2020, after which foreign exchange interventions were almost halted and the only intervention was the sale of $30 million in August. By the end of July 2021, Georgia's international foreign exchange reserves amounted to $3.9 billion.

“Significant assistance from Georgian donors has helped to balance spent foreign exchange reserves,” the IMF review said.

The IMF considers the high level of unemployment in the country to be a critical issue. The report says that as a result of COVID-19 pandemic, the situation in this regard has worsened.

From the 4th quarter of 2019 to the 2nd quarter of 2021, the number of employees in Georgia decreased by 62,000. 90,000 people became unemployed during this period, while approximately 27,000 joined the workforce. As a result, unemployment in Georgia rose by about 5 percentage points to 22.1%. Unemployment among youth in Georgia is one of the highest in the region and almost half of the unemployed are under 34 years old.

Significantly, with an unemployment rate of 18.5% by 2020, Georgia was ranked among the top 10 countries with the highest unemployment rate by the International Labor Organization (ILO) . Against the background of the current 22.1% unemployment rate, Georgia would have advanced even further in this regard, although this rating has not yet been updated by the ILO.

The IMF review also reminds that Georgia has committed to implementing several key reforms under the IMF's 3-year program, underlining the low pace of implementation of these reforms, including judicial and education reforms. The review discusses the need for judicial reform, which the IMF considers necessary preconditions for good governance and a transparent business environment in Georgia. The IMF team reiterates the importance of legal system reform.

Review reads that the government has taken a number of steps to modify the system and introduce more transparent rules for the appointment of judges in line with the Venice Commission's recommendations.

“The implementation of the existing recommendations for structural reforms is slow. The government launched a large-scale education reform in 2019, which aimed to improve the qualifications of teachers and provide compensation to teachers who did not intend to upgrade their competencies, which is why they left schools.” The education reform, as the IMF points out, began under Prime Minister Mamuka Bakhtadze, but since his ouster, the government's vision has shifted to a smaller scale.

In terms of capital market development, a pension agency has been launched and it should help create local savings nominated in GEL, although the pension agency is still in the early stages of development and has so far only invested in bank deposits. Relatively more diversified investments are expected in the future. In addition, there was an attempt to develop a mediation system as an alternative dispute resolution space.

Meanwhile, the international rating agency Moody's also published another report, affirming Georgia's sovereign credit rating unchanged at Ba2, while rating expectations are still ‘stable’. Agency believes that in 2021 the Georgian economy will grow by 7.3%, and in the coming years economic growth of 4-5% is expected.

According to Moody's, Georgia's implementation of reforms such as improving the governance of state-owned enterprises, education reform and the reform of the insolvency proceedings will improve the country's economic situation despite political difficulties. However, it noted that in the event that the country's fiscal performance deteriorates and external vulnerabilities increase, the country's credit rating expectations may be revised to ‘negative’.

The statement reads that the pandemic effect is gradually decreasing and the volume of public debt in Georgia will be reduced from 60% of GDP in 2020, to 53% of GDP by 2024. A reduction in the current account deficit is also expected, which should return to the pre-pandemic level in the next period. In terms of inflation, Moody's agrees with the NBG's assessment that currently sharply increased inflation (12.8%) from 2022 will return to its target of 3%.

Among the negative factors affecting the rating, Moody's names the tense political situation. It is emphasized that the annulment of the Charles Michel Agreement by the ruling party may have a negative impact on relations of Georgia and its key technical and financial supporting international institutions.