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 Georgia Country Brief 2003
Overview
Georgia is a low income country which had Gross National Income (GNI) per capita of US$ 730. The country is located as a transit corridor in the Caucasus, between Europe and the land-locked countries of Central Asia, and between Russia and the Middle East. Agriculture is the leading sector of the economy. The country has strong export potential because of its competitive labor force, good natural resources, and strategic location.
Georgia’s economy has been struggling to rebound from the economic collapse of the early 1990’s, following independence in 1991. Although the economy has suffered a series of economic shocks, there have been periods of strong economic growth between these shocks. The economy has undergone a cumulative expansion of 45 percent since 1995, largely due to the expansion of the private sector as a result of liberalization.
In 2003, the economy grew at some 5 percent. Although most indicators of the business environment are at least as good as in the neighboring low-income countries, bribery and crime are considerably higher, and the country's governance index is significantly below that of other CIS countries.
Sporadic growth since independence has reduced incomes to 40 percent of 1991 levels, the worst performance among the CIS countries. Unemployment remains high, with agriculture and industry, traditionally major sources of exports and employment, having made little recovery from their post-independence collapse. Moreover, the incidence, depth, and severity of poverty remains high, particularly among families with children. Although poverty rates are relatively low - 20 percent - over 40 percent of the people are economically vulnerable and remain at risk of falling into poverty.
The health of the poor is also deteriorating, with a rise in the prevalence of chronic diseases. The quality of education is widely perceived to have declined, and attendance rates have fallen. Although enrollment rates in basic education remain fairly close to 100 percent, the drop-out rate of the poor is increasing at the basic and upper secondary levels. The formal social safety net has not been able to cope with the number of families at risk, and current systems do not provide for resilience when shocks occur.
Events since independence
Georgia was among the first republics of the former Soviet Union to declare independence in 1991. Before independence, the country had a relatively strong economy, with a prosperous agricultural sector, and specialized in the export of agricultural products (almost exclusively to the other Soviet Republics), and energy-intensive industrial products. A number of armed internal conflicts broke out after independence, precipitated by secessionist movements in South Ossetia and Abkhazia, and were compounded by a brief civil war. The economy collapsed under the impact of the civil war and the loss of both preferential access to the markets of the former Soviet Union, and large budget transfers from Moscow.
The conflicts abated by the end of 1993, when a cease-fire came into effect. In mid 1994, the government embarked on a comprehensive reform program to rebuild the economy, with the support of the World Bank and the IMF. Drastic fiscal adjustments and a tight monetary policy, together with the introduction of a new currency (the Lari) in 1995, helped to achieve a remarkable turnaround. Since 1996, the economy has stabilized and modest growth has resumed. Foreign Direct Investment flowed in, with the largest investment in the construction of the new Baku-Tbilisi-Ceyhan oil pipeline, the rehabilitation of an existing oil pipeline, and the construction of a new terminal facility for the transit of Caspian Sea oil to the Black Sea coast at Supsa.
Recent economic performance
In the last five years Georgia has been further buffeted by the Russian crisis, droughts, and an earthquake. On the positive side, some progress has been made in structural reform, including trade liberalization, legal and regulatory reform, privatization and competition, banking sector restructuring, and judicial and health sector reforms. However, these successes have been diluted by weak fiscal management and poor public sector capacity, which have affected the implementation of second-generation reforms. Budget management is a particular problem, and overall resource allocation is not well linked to sector objectives, programs or policies.
Because of the country's economic collapse and weak governance that followed, by 2002 real GDP was only 30 - 35 percent of its 1990 level. In 2002, the slowdown in global economic activities and the currency crisis in Turkey significantly reduced the demand for the country's exports. This had a strong impact on industry as exports consist mainly of industrial products, including raw materials and semi - processed goods. At the same time the relatively favorable weather conditions that followed the severe drought of 2000, provided a strong impetus for agriculture, compensating for the adverse external factors.
Focus of World Bank Assistance
Georgia joined the World Bank in 1992 and the International Development Association (IDA) in 1993. The Bank's new Country Assistance Strategy (CAS), for FY 04-06, has been adopted after a gap of 4 years due to a need to reassess priorities in the wake of a major change in the cabinet, and to await the finalization of the Government's Economic Development and Poverty Reduction Program (EDPRP).
The Bank’s overall program focuses on four key objectives in support of reducing poverty. The Bank Group assists the Government to:
Attain faster and more broad-based growth, through the removal of policy, institutional and infrastructure obstacles to private sector development.
Develop and strengthen human capital, and provide some minimum social protection in the short term, as well as begin to put in place longer-term programs to protect the most vulnerable.
Strengthen public expenditure management, through annual public expenditure reviews.
Improve governance and institutional capacity. On the macro-level this involves fiscal consolidation, transparency and coordination as well as restructuring of administrations, while on the micro-level the focus is on local government empowerment, as well as administrative streamlining, accountability and disclosure, and training of staff and managers.
Impact on the Ground
 More favorable terms secured under hydrocarbon transit agreements. Georgia’s capacity to negotiate international agreements on oil and gas transit through the South Caucasus corridor has been enhanced through technical assistance funding by the Bank that enabled the country to retain legal, financial, and technical advisors. This enhanced capacity has enabled the country to secure more favorable financial terms and contingent environmental liabilities in its transit agreements.
 Private businesses assisted to expand. Private businesses have acquired new technologies, expanded their sales and exports, and created over 1,500 new jobs. Bank financed projects have supported numerous private enterprises through improved access to credit funds, management and restructuring of advisory services, and extensive training of managers in Georgia and abroad.
 New private land market emerged. An active private land market has been created with the support of the Agricultural Development Project, co-financed by the World Bank and the International Fund for Agricultural Development. The legal framework for development of a private land market has been created, surveys of over 180,000 plots completed, and modern land registration offices established. Some 31,000 secondary land transactions have been registered by these offices.
 Basic social services improved. Some one million people have benefited from the rehabilitation of 400 schools, health facilities, cultural centers, water systems, irrigation systems, roads and bridges, under the Georgia Social Investment Fund project. In some cases, the physical rehabilitation of facilities has been accompanied by improvements in the delivery of basic services. The communities themselves have been encouraged to participate actively in managing the rehabilitation and operation of these facilities.
 Maternal mortality reduced and more children immunized. These health indicators have improved as a result of health sector reforms supported by the World Bank which have laid the foundations of a new health care system. Primary care now receives emphasis in the provision of services. Competition between providers has been introduced, and payment is now made through new public financial intermediary agencies.
 Public awareness of judicial system increased. Public awareness of the working of the judicial system is improving, as is the awareness of people’s individual rights as a result of the Bank financed Judicial Reform Project. This shift has promoted more willingness by Georgians to solve issues in court. Extensive media outreach activities and training programs for journalists on court reporting have led to better coverage of legal and judicial issues by the media. Court employees have also been trained in client relations.
 Foundation laid for efficient operation of power sector. Despite the country's deteriorating economic performance which has impeded the improvement of the power sector, Bank assistance has helped implement transparent collection and distribution of funds, and the efficient operation of the power system.
Challenges Ahead
The country faces five strategic challenges ahead, which are the focus of the CAS and the EDPRP:
- Improving governance and reducing corruption. Despite far reaching economic and financial liberalization, little sustained improvement in economic or social indicators is possible until governance improves. Moreover, better governance, including less bribe - seeking and less tolerance of crime, is essential for the country to reach its full economic potential.
- Enhancing fiscal management to maintain macroeconomic stability. Fiscal performance has significantly deteriorated this year, with tax revenues falling short of the targets agreed with the IMF, and the accumulation of substantial new budget arrears. It is essential that Georgia improve its performance in revenue collection given the country's need to cover the cost of basic social services and economic rehabilitation while meeting its debt servicing obligations. In addition, improved public expenditure management is essential to ensure that scarce public funds are spent on areas of high priority. While the Ministry of Finance has begun a program to improve budgetary processes, a more systematic approach is needed.
- Refining business environment. It is critical to remove constraints to private sector development and improve the institutional framework, including the reform of the legal, regulatory, and tax administration systems. It is also necessary to improve the policy-making capacity of government officials, complete the restructuring of the economy and improve access to finance.
- Building human capital. The development of human capital is key to achieving sustained poverty reduction. While the EDPRP envisages a wide range of measures to improve the effectiveness of education and health programs, the Government will need to prioritize and sequence the measures in more detail, and allocate adequate budget resources.
- Reducing the vulnerability of the poor. Improved social protection is essential to reduce poverty. In order avoid a further run-up of pension and social assistance payment arrears, and ensure the long-term sustainability of the social protection system, Georgia will need to develop a system that is well-targeted, affordable, fiscally sustainable, and simple to administer and monitor. Priority should be given to assisting the most vulnerable such as single pensioners, children in institutions, and the disabled. In addition, child welfare policies need to be improved, and community based social services developed.
World Bank Partners in Georgia
| SECTOR | LEAD NATIONAL AGENCY | PARTNERS |
| Agriculture | Ministry of Agriculture and Food | IFAD, FAO, DFID, UNDP, KFW |
| Culture | Ministry of Culture
Fund for Cultural Heritage Protection | EU |
| Education | Ministry of Education | SOROS |
| Energy | Ministry of Fuel and Energy
Georgian National Energy Regulatory Commission | USAID, KFW, EBRD |
| Financial Sector | Ministry of Finance and Tax Revenues National Bank of Georgia
National Securities Commission
Foreign Investment Advisory Council | IMF |
| Forestry | State Department of Forestry | FAO, WWF, CIDA |
| Health | Ministry of Labor, Health and Social Affairs | SIDA, DFID, WHO |
| Judicial | Ministry of Justice
Supreme Court
ALPE (Association of Legal Public Education) | EU, USAID, SOROS, ABA, DOJ |
| Municipal Development and Decentralization | Georgian Municipal Development Fund (MDF) |  |
| Poverty Reduction | Secretariat of Governmental Commission on PREGP (Poverty reduction and Economic Growth Program) | IMF, UNDP, DFID, USAID
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| Private Sector | Ministry of Economy, Industry and Trade | GG&MW Borjomi Mineral Water Producer, TBC Bank, Bank of Georgia, Ksani Glass Factory, AES Telasi Electricity Distributor, BP |
| Protected Areas | State Department of Protected Territories, Preserves and Hunting Grounds | UNDP |
| Roads | Ministry of Transport, Telecommunications and Post
State Department of Roads | |
| Social Infrastructure | Georgian Social Investment Fund (GSIF) | KFW |
| Transport and Communications | Ministry of Transport, Telecommunications and Post
National Commission of Telecommunications and Transport | |
World Bank Lending to Georgia
The Bank has a diverse portfolio in Georgia.
Currently under implementation : 19 IDA credits totaling US$ 304.2 million
Closed : 15 operations totaling US $421 million
Total IBRD / IDA Commitments from FY95 to FY03: US$ 725 million for 34 IDA credits
(by fiscal year *, in nearest US$ millions)
| up to1996 | 1997 | 1998 | 1999 | 2000 | 2001 | 2002 | 2003 | Total |
| Commitments | 193 | 69 | 110 | 137 | 48 | 90 | 3 | 75 | 725 |
| Disbursements | 123 | 46 | 75 | 70 | 51 | 26 | 69 | 58 | 518 |
Total Commitments by Sector since 1995
(in nearest US$ millions)
* Fiscal year from July 1-June 30.
For more information please contact:
In Tbilisi: Inga Paichadze phone: + (995 - 32) 94 - 22 - 13
E-mail: ipaichadze@worldbank.org
September 2003
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