Page 30 - GEORptOct22

Georgia’s current account deficit fell to 9.8% of GDP in 2021
Georgia’s current account deficit was reduced to 9.8% of GDP in 2021, according to broker Galt & Taggart.
The current account deficit fell by 6.4% y/y to 9.8% of GDP in 2021, down from 12.4% of GDP in 2020, according to NBG. The improvement in the balance was supported by strong growth in transfers (up 27.2% y/y to $2.3bn, 12.3% of GDP), followed by a recovery in the service balance (reflecting the gradual rebound in tourism revenues, amounting to $1.2bn in 2021, 38.1% of the 2019 level).
Meanwhile, the merchandise trade deficit, traditionally the major contributor to deficit creation, widened by 18.8% y/y to $3.8bn, as exports increased by 27.4% y/y and imports were up 23.8% y/y. Notably, other investments at $1.8bn (9.5% of GDP) and net FDI at $830.8mn (4.4% of GDP) exceeded the current account deficit by 1.4x y/y, resulting in reserves accumulation of $452.6mn in 2021.
5.1.3 Capital flows
Russian migrants bring half a billion dollars into Georgia in Q2 alone
Money transfers from Russia to Georgia soared 6.5 times in Q2 to $678mn, equivalent to 3.6% of the country’s GDP recorded last year, the National Bank of Georgia (BNM) has announced.
Transfers from Russia in the year's second quarter usually amount to around $100mn.
The spike in financial flows can safely be attributed to the flow of migrants from Russia who have found at least temporary shelter in Georgia from consequences of the Ukraine war. Roughly, half of the Russians who arrived in Georgia - one of the few destinations left available to them after the European Union banned Russian airlines - are expected to move on to third countries. For the time being, though, there is no significant increase in migrant outflows. The macroeconomic impact made by financial flows of such a magnitude cannot be ignored. It should be seen in retail sales, GDP growth and exchange rate.
Georgia’s statistics office does not release short-term indicators on retail sales. The country’s GDP growth, meanwhile, has already shown a robust 14.4% in the first quarter of the year and it remained solid in April and May.
The exchange rate captures the effects of the foreign exchange inflows. Thus, the local currency weakened from around GEL 3 to USD before the war began in Ukraine to GEL 3.4 to USD within a couple of weeks after February 24. Afterwards, however, it gained ground and strengthened to GEL 2.8 to USD. This has to some extent helped the central bank in fighting inflation.
The National Bank of Georgia (NBG) brought in a 50bp rate hike at the end of March to bring the refinancing rate to 11% - it subsequently kept the policy rate flat in the entire quarter that followed. Indeed, NBG acted quickly in 2021 when addressing rising inflation with hawkish monetary policy that surprisingly left the growth rate intact. Standing at around 13% y/y during Q2, headline inflation is expected to decline during the second half of the year.
30 GEORGIA Country Report October 2022 www.intellinews.com