Page 17 - GEORptOct22

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.
Recent developments
Economic activity has been stronger than expected, with real GDP growth estimated at 10.5 percent y/y in the first half of 2022. This growth has been driven by transportation, energy, hotels and restaurants, and industry. Construction permits increased by 15.6% during the first half of 2022 y/y, suggesting a recovery in domestic investment.
After peaking in June, inflation has eased slightly, reaching 10.9% y/y in August. Higher food and energy prices (as well as utility costs) account for most of the inflation this year. 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 National Bank of Georgia (NBG) has kept the monetary policy rate unchanged since March, at 11%, after gradually increasing the rate since March 2021 by a total of 300 bps.
In January-July, exports grew by 36% y/y in nominal terms. Merchandise exports growth was driven by both increased demand for key commodities (copper ore, ferroalloys, nitrogen fertilisers) and higher prices. Imports expanded by 34% y/y, leading to the widening of the trade deficit by 33% y/y. This has been partly compensated by the recovery in tourism arrivals and a surge in net volume of money transfers (69% y/y) driven by inflows from Russia.
Georgia’s banking sector indicators remain healthy. By the end of July, return on assets and return on equity reached 3.1% and 24.9%, respectively. Public expenditures grew by 9.3% y/y in nominal terms during the first half of 2022, (a reduction in real terms). The fiscal deficit during January-June was about 0.6% of GDP, overperforming the fiscal consolidation path planned for the year. The public debt stock has continued to decline, benefiting from the contained deficit and the appreciation of the Georgian lari.
Outlook
The World Bank upgraded its forecasts for Georgia on account of the strong performance recorded during 2022, with growth projected to reach 8.8% by the end of 2022.
Inflation is expected to remain in double digits in 2022, although price pressures are likely to diminish towards the end of the year. Inflation is expected to decline in 2023 and beyond, as international oil prices and supply-side bottlenecks ease. The long-term fixed-price contracts for gas supply and a shared border with Russia are expected to help offset any commodity price spikes.
Monetary policy is expected to remain tight until inflationary pressures subside. Inflation is likely to have regressive impacts, disproportionately affecting lower-income households and those reliant on incomes from social assistance. These may have longer-term welfare impacts through losses in human capital and other assets.
17 GEORGIA Country Report October 2022 www.intellinews.com