The Factors Having Impact on Real GDP in Georgia

What is GDP? GDP – Gross domestic product representing the value of goods and services produced within the country. It is the indicator demonstrating the performance of the country, i.e. when growth of GDP is strong, it means the economy to expand or if it is low, it means it to contract. Economists use GDP to define if economy of a country grows or experiences recession. Countries with larger GDPs have a higher standard of living. That’s why ordinary people, economists, scientist, politicians and other specialists consider GDP as an important measure of the country’s success. When states are unable to adjust GDPs experience negative inflation, it makes great impact on real GDP of a state. Investors learn the GDP of the country before making investments.

Today we shall overview real GDP in Georgia and see the state of Georgia’s economy, factors making positive and negative impact on the country’s real GDP.

The provisional estimates on the real GDP growth for quarters 1 and 2 of 2021 in Georgia  have been published recently by Geostat. Hence, the growth rates for these quarters were adjusted upward to -4.1% (by 0.4ppt) and downward to 28.9% (by 1 ppt).

ISET-PI has presented updated data on real GDP growth estimation for quarter 4 of 2021 and quarter 1 of 2022. ISET Policy Institute being one of the first universities based on brain tanks in the South Caucasus is based at the International School of Economics (ISET) of Ivane Javakhishvili Tbilisi State University in Georgia and  was established in 2006.  

For October of 2021 real GDP growth is assessed as 6.9% in comparison with the same period of the previous year. Thus, prognosticated GDP for the ten months of the 2021 was 10.5%.

According to the update the estimated growth for the fourth quarter of 2021 reduced by 0.1 ppt to 10.8%. From the perspective of ISET-PI estimated forecast  for the first quarter of 2022  GDP growth will be at 7.3%.

The national currency deposits grew  in October (exception  were urgent deposits with maturity of less than 3 months).  Annual growth for national currency demand was 7.9% and time deposits were 5.9%. Thus, annual national currency total deposits rose by 17.3%, but  demand deposits reduced by 3.4%.  Time deposits and current account increased by 1.4% and 3.5% accordingly.

Concerning the foreign currency, there was demand for foreign currency deposits and it increased by more than 15% leading to 0.1% monthly rise and reached 61%.

The annual VAT turnover increase was by 9.2%  and monthly by 2% and led to real GDP growth.

Consumer credit had a significant impact on GDP growth connected with consumer credit. Consumer credit’s share in commercial banks increased by 27% yearly and 2.8% monthly consequently. While short-term consumer credit’s volume decreased by 9.8% yearly and it  increased by 1.3% monthly. Decrease of short-term consumer credit in national currency by 15.6% caused  negative annual growth. Short -term deposits in currency increased by 23% yearly, but long-term consumer credits of commercial banks increased by 28.7% yearly and 2.9% monthly.

Currency in circulation increased by 3% yearly, but it was observed  a slight monthly decrease of currency in circulation, M0 and M1.Totally, money supply connected with variables had a little negative impact to real GDP growth both the last quarter of 2021 and the first one of 2022.

The annual inflation of consumer prices was 12.8%, much higher than expected 3%.  There was 19.2% increase of food prices annually caused by the rise of food prices globally and it caused 5.3 % of CPI inflation. Rise of oil prices made a significant positive impact to the annual inflation measure. As well as, increased prices for healthcare (0.6 ppt), tobacco (0.2 ppt) and utilities (1.7 ppt) were important factors reflected in inflation.

Taking into account the rate of annual inflation  versus with targeted one, i.e. 3%, National Bank of Georgia (NBG) increased Monetary Policy Rate (MPR) by 0.5% to 10.5% in December of 2021.

ISET-PI’s Business Confidence Index (BCI) declined by 5.8 reaching 30.6 points  in the fourth quarter of 2021. Construction (-21.0), services (-15.3), agriculture (-8.8) sectors were at the top of decrease in business confidence. The reason for negative change in BCI  were worsened future expectations and insufficient past performance in quarter 4 of 2021. But BCI was high in retail trade (+20,9), manufacturing (+9.8) and financial sectors (+6.7) in the third quarter of  2021.

Increase of consumer confidence in September led the Consumer Confidence Index (CCI) to go to the level of June 2021. CCI declined from -29.5 in September  to –32.5 in October in the Present Situation Index , as well as the Expectations Index went downwards. The reasons of this decline were: (1) despaired hopes of people caused by the results of the first municipal elections; (2) the fifth wave of COVID-19; (3) the highest point of inflation (12.8%) causing rise of oil and food prices in October.

Georgia’s export  had 31/4% annual growth in October, as a result of increased export/re-export of ferro-alloys (contributing by 13.9% points), copper ores and concentrates (by 2.2. ppts), motor cars (by 1.2 ppt), natural grape wines (by 0.8 ppt), alcohol spirits (by 0.9 ppt), mineral and chemical fertilizers (by 2.8 ppts). While exports of raw gold significantly decreased (by -1.1 ppts).

The import of goods  rise by 24 % caused by import of petroleum and oil products (by 4.1 ppts), packaged medicines (by 2.6 ppts), computing machines and their blocks (by 0.9 ppt), immune serums (by 1.8 ppts) and so on. While import of motor cars, copper ores , telephones decreased.

As a result of increase and decline of export and import goods annual trade deficit rose by 18,3% and amounted to 492.8 million US dollars.

Increase of money transfer was by 13.7 % and reached to 206,7million USD. Transfers from Italy, Kazakhstan, the Kyrgyz Republic, Germany, the USA, the Azerbaijan Republic, Israel and the Russian Federation rose, but from Turkey, Ukraine and Greece declined. The result was positive.

Tourism partially recovered in October 2021 in the comparison with sharp decrease of 2020. Though the number of visitors and tourists is not as high as it was a few years ago, but the tourism has made positive contribution( even not big) to the growth forecast.

Georgia’s metal export and their prices have been risen lately. The prices for metals increased by 42% in October. Thus,  it will have positive impact on the improvement of country’s economy.

Foreign direct investment was 299.0 million USD in quarter 3 of 2020, which is lower by 25.95 than in 2019. FDI increased in a number of fields, including agriculture, fishing, manufacturing, energy, construction, hotels, restaurants, transport, health, while it decreased in mining, communications, real estate, financial and other sectors.

That was overview to the economic development of Georgia experiencing inflation and trying to overcome both its reasons, i.e. COVID-19 and its negative influence to the country’s economy.

All countries experience inflation and but manage with it only those who actually strive for it.  

“As sure as the spring will follow the winter, prosperity and economic growth will follow recession. (Robert Foster Bennet, former member of the United States Senate)