Georgia - Economy

Over a decade after its emergence from the Soviet Union as an independent state, Georgia's economy has not fully recovered from the hyperinflation and economic collapse that by 1994 had reduced its GDP to 20% of its 1990 levels. In 2002 its GDP levels were still only at 40% of what they were in the 1980s. Continued civil strife and unresolved separatist struggles with Abkhazia and South Ossetia have combined with pervasive corruption, tax evasion and a "shadow economy" larger than the legitimate one to stifle the country's economic progress. Shortfalls in revenues have caused the government to turn to external as well as domestic financing to cover chronic budget deficits. Foreign borrowing has in turn led to balance of payments problems and resort to IMF facilities. Georgia has entered into three programs with the IMF since independence. A short standby arrangement, June 1995 to February 1996, was followed on expiration by a multi-year program under the Extended Structural Adjustment Facility (ESAF), which was in effect to 13 August 1999 when the the IMF withdrew due to the failure of Georgia to meet budgetary targets. In January 2001, a revised program with more realistic targets was approved under the Poverty Reduction and Growth Facility (PRGF). In March 2001, having an IMF-supervised program underway, Georgia was able to reach an agreement with the Paris Club for rescheduling some of its sovereign debt owed to Paris Club members. From May to October 2001, the IMF again suspended disbursements to Georgia because of its failure to meet the program's conditionals. The PRGF program was due to expire in January 2004.

Georgia's mild climate makes it an important agricultural producer, raising a growing range of subtropical crops (including tea, tobacco, citrus fruits, and flowers) in the coastal region and exporting them to the northern republics in return for manufactured goods. Georgia supplied almost all of the former Soviet Union's citrus fruits and tea, and much of its grape crop. In 1996, the government embarked on a program for the privatization of land holdings. The country also has deposits of manganese, coal, iron ore, and lead, plus a skilled, educated work force. There are several oil refineries operating at the Black Sea port of Batumi. Since low points in 1994 and 1995, there has been sustained growth, although not in all sectors, and inflation has been brought substantially under control. Inflation fell from 163 % (consumer prices) in 1995 to 39% in 1996 and 7% in 1997. The growth in GDP reached double digits, 11.2% (1996) and 10.6% (1997), stimulated in part by work on the Baku-Supsa pipeline (opened in April 1999). Since 1998, however, GDP growth slowed to about 3% a year due a combination of the effect of economic crises in Russia and Turkey (which together supply 40% of Georgia's imports and buy over 40% of its exports), an influx of refugees since 1999 from neighboring wartorn Chechnya, severe droughts affecting Georgia's agricultural output in 1998 and 2000, and, from 2001, the global economic slowdown. In 1998, overall GDP growth slowed to 3%, as agricultural production dropped 10% and industrial production dropped 2%. Growth remained at only 3% in 1999. GDP growth was even lower (2%) in 2000, despite 11% growth in industrial production, due to a recurrence of drought which caused agricultural production to fall 15% in one year. In 2001, agriculture recovered somewhat, growing 6%, but industrial production fell back 5%, reflecting in part an 11% decrease in exports to countries outside the CIS. Exports to CIS countries, by contrast, rose 23% in 2000 and 9% in 2001. Georgia official statistics report that the GDP grew overall by 4.5% in 2001, while the US CIA estimated growth at 8.4%. Inflation, which spurted to 19% in 1999, fell to moderate levels of between 4% and 5% in 2000 and 2001.

In 2002, the economy was hampered by the necessity of importing over 90% of the petroleum products consumed due to the shutting down of its only two remaining refineries. The larger 106,000-barrels-per-day refinery at Batumi was closed for modernization and expansion under an agreement with Japan's Mitsui Corp. A small 4,000 barrels-per-day refinery, built in 1998 and idle for much of 2001, was closed permanently in 2002 by its operation company, CanArgo, in favor of a plan to replace it with a larger 30,100-barrels-per-day facility. Georgia's future economic prospects were thought to have improved greatly in December 2002 however, with the announcement of an agreement on the Georgia portion of the Baku-Tbilisi-Ceyhan (BTC) pipeline, with work scheduled to begin in March 2003. In addition to the BTC project, which is to pipe oil from the Caspian Sea to the Turkish port of Ceyhan on the Mediterranean to supply Western European markets, Georgia and Turkey concluded another agreement to build a railway from Tbilisi to Kars, Turkey. The railway would transport oil to Turkish refineries. Plans also exist to develop Georgia into a transit center for natural gas.

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