In Georgia, Initial Successes Fighting COVID-19 Could Lead to Long-Term Gains
As Georgia’s economy gradually restarts, it has a unique opportunity to initiate a new era of growth that is more diversified and inclusive.
As a major regional trade hub and international tourism destination, Georgia is particularly vulnerable to COVID-19. Despite this, the country has responded remarkably well to the pandemic and has among the lowest rates of new infections in the Caucasus and Central Asia. Its long-standing commitment to openness and good governance appear to be paying off. As Georgia’s economy gradually restarts, it has a unique opportunity to initiate a new era of growth that is more diversified and inclusive.
Georgia’s relative success in containing the spread is thanks to its early action and effective enforcement. From the outset the country-imposed health checks on incoming airline passengers and ramped up restrictions on movement as the first cases emerged. The National Bank of Georgia quickly eased regulations and successfully stabilized the exchange rate, while commercial banks postponed repayments from borrowers.
The economic impact has been severe, especially for households and small businesses. Yet Georgia has been able to draw lessons on the importance of supporting households, the unemployed and businesses from the previous downturns including the global financial crisis and tensions with Russia in 2008.
Although the response to the pandemic will contribute to a fiscal gap reaching about 8% of GDP, Georgia has built up fiscal and foreign exchange buffers to help it weather economic shocks. Its economic policymaking institutions have also established a reputation for competence and strong governance.
Confidence in Georgia helped its development partners quickly assemble a financing package to support the government’s response, including a $100 million countercyclical loan from ADB that is helping finance the government’s comprehensive program to contain the pandemic, safeguard the livelihoods of vulnerable groups, and support the private sector.
The government wants assistance to reach those who need it most and is drawing on existing means-testing procedures to identify households eligible for cash transfers and certain in-kind benefits, and using the pension system to channel higher payments to those over 70. ADB and other development partners are working with the authorities to strengthen these mechanisms so that they prevent vulnerable households from backsliding into poverty during future economic downturns.
As already noted, the impact on public finances will be significant, and Georgia’s public debt-to-GDP ratio is expected to rise – from 44.5% in 2019 to 62.5% in 2020. Ever more attention must be paid to debt sustainability going forward, underscoring the importance of efficient expenditure programs and ongoing reforms to improve public services.
All of this sets the stage for a recovery that can build on Georgia’s strengths and forge a new path toward greater resilience and inclusiveness. Here are five ways to help reshape the economy going forward.
First, Georgia must support the private sector by maintaining a resilient financial system. The National Bank of Georgia has already allowed banks to make better use of existing capital buffers for lending operations and as a cushion against losses. Other tools are being used to deliver liquidity, thereby preventing interest rates from increasing, especially for small and medium enterprises. This ensures critical resources continue to flow to the real economy.
Second, a broader based recovery can be achieved by improving access to finance for micro, small and medium sized enterprises. Some 43% of Georgians live in rural areas with a vast number working in small enterprises or subsistence farming. The government is already introducing grants and other means of helping small and medium enterprises that make an outsized contribution to employment, and it continues to support vital infrastructure projects that enable transport of goods and better access to electricity and water. Greater support for export-oriented sectors could capitalize on free trade agreements with EU, the People’s Republic of China and Turkey, helping Georgia to diversify and tap larger markets.
Third, boosting access to finance is also key to initiating an agricultural transformation. Agriculture accounts for around 10% of GDP but is the source of livelihoods for nearly half the population. Yet, the sector suffers from low productivity as a result of dilapidated irrigation infrastructure, underinvestment in new technology, an absence of cooperatives, and land fragmentation. It has also been deprived of funds as banks have focused on lending to large enterprises. Production can be increased on a significant scale if more land is readied for irrigation, and improved infrastructure and logistics can better link farmers with markets and open opportunities for local processing. Lifting living standards in rural areas will help the poorest and most vulnerable communities.
Fourth, it is critical that Georgia boost employment skills that are relevant to the modern economy. The country suffers from a skills gap that prevents many people from accessing well-paid jobs and constrains employers. The system can be improved to attract more students, partner with the private sector, and use on-the-job training to launch new careers. Greater investments in curriculum and facilities would make a positive difference, especially when combined with other initiatives to match job seekers and employers under the new National Labor and Employment Strategy.
Finally, Georgia can seize the opportunity to develop more livable cities. Uneven development in rural areas has increased migration to urban areas and Tbilisi in particular, which is a driver of growth for the Georgian economy. Tourism and community infrastructure that is spread more evenly across the country in regional clusters, could lead to a more balanced pattern of growth. Designated “Green and Healthy City” areas including new parks and recreation areas in Tbilisi and other towns could link green transport corridors that prioritize pedestrians and public transit.
Georgia has done remarkably well to avoid the worst health impacts of COVID-19, but the pandemic has shown that the country remains dependent on tourism and trade, highlighted an uneven pattern of growth especially in rural areas, and given urbanites a taste for clean air, pedestrian-friendly streets and open spaces.
While the processes of restarting the economy requires continuing vigilance, Georgia now has a unique opportunity to build on its strengths and initiate a new era of growth that is more resilient and delivers for all Georgians.
This was originally published in Forbes Georgia.