Page 13 - Caucasus Outlook 2023

Persistent inflation, coupled with the tightening of global financial
conditions, could impact the Georgian lari in the next year, potentially
affecting macro-financial stability due to the high levels of dollarisation.
The Russian economy could also suffer a more pronounced slump in
2023, affected by protracted conflict and sanctions, which would
negatively affect tourism and remittances in Georgia.

Domestic political uncertainty could increase volatility and affect
business confidence, as well as the pace of planned reforms. However,
money inflows could last longer than initially expected, and Georgia
could benefit from some trade diversion as transport corridors are
reconfigured.

Due to trade openness and reliance on income from tourism, Georgia is
vulnerable to external and global shocks. High dollarisation and
dependency on external savings increase the risks associated with
currency depreciation. Still, Georgia’s swift post-pandemic rebound and
the recovery from the initial impact of the Ukraine war and associated
sanctions have demonstrated the growing resilience of the economy.

2.1.3 Inflation and monetary policy

Georgia lucked out fighting inflation in 2022. The huge influx of Russian
migrants that first arrived after Russia invaded Ukraine in February and
a second more recent wave escaping the mobilisation actually pushed
Georgia’s inflation down. The appreciation of the lari mitigated some of
the pressure from imported prices of food and energy.

After peaking at 13.3% in 2Q, inflation gradually began to ease,
resulting in a moderation of inflation from a peak of 12.5% in June. By
November, Georgia’s consumer price index increased by 0.5% m/m
compared to the previous month, while the annual inflation rate fell
modestly to 10.4% compared to 10.6% in October.

The National Bank of Georgia steadily hiked rates steadily since the
start of the year to the current 11%, but against the deflationary
backdrop, the regulator has left interest rates more or less flat. The
National Bank of Georgia has been able to keep its refinancing rate at
11% since March, after a 300 basis points increase in the preceding 12
months.

Higher food and energy prices (as well as utility costs) accounted for
most of Georgia’s inflation in 2022. According to high-frequency
surveys from May 2022, about three-quarters of the respondents from
low-income households reported having reduced food consumption in
response to rising prices.

The World Bank predicts Georgia’s inflation to decline in 2023 and
beyond, as international oil prices and supply-side bottlenecks ease.

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