The Policy Panel: Current Economic Challenges and Opportunities in Georgia was sponsored and organized by ISET Policy Institute as part of the 1st International Conference of the Georgian Economic Association on July 2, 2024, at Stamba. 

It brought together a distinguished group of economists to discuss the pressing issues facing Georgia's economy. The panel was moderated by Tamar Sulukhia, Director, ISET Policy Institute and featured: 

• Eva Bochorishvili, Head of Research, Galt and Taggart
• Miguel Eduardo Sanchez Martin, Program Leader for Equitable Growth, Finance, and Institutions in the South Caucasus, World Bank
• Davit Keshelava, Lead Economist, ISET Policy Institute
• Tinatin Akhvlediani, Research Fellow, CEPS, Brussels
• Shalva Mkhatrishvili, Head of Macroeconomics and Statistics Department, National Bank of Georgia

Moderator's Opening Remarks and Questions

Tamar Sulukhia opened the panel and set the tone by acknowledging the complexity of the current economic landscape in Georgia. She highlighted the challenges faced by the country, emphasizing the importance of addressing these issues through informed and strategic discussions.   She highlighted that the country which ended 2023 with recently obtained EU candidate status, with impressive GDP growth and economic fundamentals largely in place, has found itself in a very different situation just half-year later.  It failed to progress towards declared EU priority and has damaged its image as a trusted EU neighbour. Besides the adoption of the Russian-style law on agents of foreign influence raising major questions about the state of democracy in the country, there have been concerning violence against civil society and questionable actions on the economic governance side, specifically related to the independence of key institutions, good governance, and overall partnership vector – away from West towards very risky minefield. Western strategic partners of Georgia at the official political level US and EU have reacted to the latest developments in Georgia and expressed concerns over the state of democracy but also about the independence of key institutions, about governance. Besides the straightforward official reactions like US sanctions, the EU has stated officially that the country’s current course is not aligned with EU approximation.  

The moderator noted that the development partners are confused, investors are worried, and partners are concerned. Sulukhia directed the panellists to explore key factors driving economic growth and to discuss uncertainties impacting Georgia's economic outlook. In this context, how does the current uncertainty affect investors, partners, and domestic players? How do these uncertainties impact your economic growth forecasts, development priorities, external economic linkages, and productivity improvements? Furthermore, how might this uncertainty influence Georgia's reputation and sovereign credit rating developments, given that local savings alone are insufficient and attracting foreign capital is crucial? 

Eva Bochorishvili on External Economic Boosts

Eva Bochorishvili from Galt & Taggart indicated that Georgia’s economic success is largely a story of reform-driven growth, supported by good governance indicators and productivity improvements. Foreign direct investment (FDI), particularly from Western countries, has been a key driver for a knowledge-based economy. Additionally, economic diversification and diversification of external economic linkages have strengthened the economy, all underpinned by various reforms. 

She analyzed Georgia's economic sectors, emphasizing that the growth of new industries like IT underscores the importance of a favourable business environment. Bochorishvili stressed the need to attract foreign capital, highlighting that improving Georgia's credit rating and maintaining robust governance are crucial. 

She recommended leveraging digital transformation to enhance competitiveness and called for sustained reform momentum to streamline business operations, thereby making Georgia a more appealing investment destination.

Shalva Mkhatrishvili on Central Bank Policies

Next, the moderator asked Shalva Mkhatrishvili, "What steps is the National Bank of Georgia taking to ensure financial stability, and what needs to be done to renew the suspended IMF program?

Shalva Mkhatrishvili, from the National Bank of Georgia, provided an overview of monetary policy frameworks and their impact on economic stability. Addressing the challenges of inflation management and exchange rate volatility, Mkhatrishvili highlighted the central bank's proactive measures to safeguard macroeconomic stability and investor confidence. He emphasized the importance of financial sector reforms and regulatory transparency in enhancing Georgia's resilience to external economic shocks. Mkhatrishvili underscored that, in today’s environment where political and geopolitical uncertainty is high, a central bank can best contribute to macroeconomic stability by reducing at least the policy uncertainty. This, in turn, is best achieved by making sure the market understands the central bank’s so-called reaction function – when and how the central bank will use its instruments in different scenarios of the future. Shalva also emphasized how much investors value political and geopolitical certainty, citing the reduction in Georgian sovereign risk premium late last year when Georgia received the EU candidacy status.

He also talked about the uncertainty around the IMF program, which was temporarily suspended due to changes in the central bank law. The program might conclude naturally next year, and discussions are ongoing about its resumption or the initiation of a new program.

Miguel Eduardo Sanchez Martin on Macroeconomic Stability

Miguel Eduardo Sanchez Martin, representing the World Bank, offered a global perspective on structural reforms essential for Georgia's economic transformation and sustainable development. 

The panellist underscored Georgia's substantial economic progress over the past two decades, stemming from reforms initiated in the early 2000s and enhancements in the business environment. However, challenges include a recent slowdown in poverty reduction and stagnant productivity outside of construction. Emphasizing the need for ongoing reform momentum, he highlighted concerns that some agreed-upon economic and structural reforms have stalled in recent months. He emphasized the EU's pivotal role as a guiding framework for Georgia's reforms, noting its standards in governance, infrastructure, and economic well-being as crucial benchmarks for sustainable development. 

Martin underscored the critical role of education and skills development in enhancing workforce productivity and reducing youth unemployment. He advocated for comprehensive reforms in digital infrastructure and innovation ecosystems to harness Georgia's potential as a regional hub for technology and entrepreneurship.

In the end, Martin discussed how it is paramount that Georgia maintains its sound economic management, insulated from political cycles, and improves the enforcement and predictability of law and regulations as key foundations to ensure strong, inclusive, and sustainable growth going forward. 

Davit Keshelava on Internal Challenges

Davit Keshelava, representing ISET Policy Institute, emphasized two critical aspects regarding recent governmental decisions and institutional developments. Firstly, he highlighted concerns over how legislative changes, such as the offshore law and amendments to pension legislation, were implemented without sufficient public consultation or civil society engagement. This lack of transparency and participation raises significant risks, potentially undermining long-term governance and economic stability in Georgia.

He noted that while there have been short-term impacts like fluctuations in the stock exchange and exchange rates due to these legislative changes, the more substantial concern lies in their potential long-term consequences. Davit stressed the importance of civil society's role in monitoring and improving governance, suggesting that overlooking these impacts could lead to weakened institutional independence and less evidence-based policymaking in the future.

Overall, Davit Keshelava's assessment underscores the critical need for transparent, inclusive decision-making processes and robust institutional frameworks to sustain Georgia's economic and governance improvements over time.

Tinatin Akhvlediani on Trade and External Relations

Addressing Tinatin Akhvlediani, Sulukhia posed, "How do Georgia's trade relationships and external economic policies impact its economic prospects?"

Tinatin Akhvlediani, based in Brussels, provided a broader European perspective on Georgia's economic challenges. Akhvlediani emphasized the importance of economic integration with the European Union (EU). She reflected on the success of the EU in fostering economic convergence among its member states, highlighting the significant strides made by Central and Eastern European countries since their accession. Akhvlediani pointed out that Georgia's integration into the EU could bring similar benefits, but this requires robust institutional reforms, proper domestic economic policy and adherence to EU standards. She stressed that the current economic agreements between Georgia and the EU have not yet realized their full potential due to structural issues within the Georgian economy. For Georgia to benefit from these agreements, it must expand its production capacity and align its economic policies with EU standards.

Akhvlediani also raised concerns about the current geopolitical environment and its implications for Georgia and its economic development. She mentioned that recent developments, including the war in Ukraine, have underscored the importance of stability and strong governance. Investors are wary of uncertainties, and without clear and stable economic policies, Georgia could struggle to attract the necessary investments for its development. Akhvlediani warned that Georgia's drift away from EU integration could jeopardize the financial and technical assistance needed for its economic reforms. 

Closing

In closing, Sulukhia highlighted that from the commentaries of the panellists ‘EU’ comes out as a keyword - will Georgia get back on track on the EU path and be an EU-aspiring country or a small satellite in Russia’s orbit clearly is the key criteria for the defining economic development.  

She also crucial role of civil society, think tanks, and research institutions in shaping informed policy debates and decisions. She emphasized the need for rigorous research to guide effective policymaking, especially in the run-up to elections, to ensure that public discourse is grounded in factual analysis rather than mere rhetoric.

Tamar Sulukhia, the moderator, wrapped up the discussion by thanking the panellists for their thought-provoking contributions and the audience for their engagement.

Conclusion

The panel provided a comprehensive overview of the economic landscape in Georgia, highlighting both challenges and opportunities for the country’s sustainable economic growth. Discussions on structural reforms, EU integration, and demographic trends underscored the complex interplay of factors shaping Georgia's economic future. The event concluded with a call for continued dialogue and evidence-based policymaking to foster inclusive economic development and prosperity in Georgia.