Current account deficit of Georgia narrows by half

Finance Materials 9 October 2019 19:07 (UTC +04:00)

Baku, Azerbaijan, October 9

By Tamilla Mammadova – Trend:

The current account deficit of Georgia narrowed by half to 4.5 percent of GDP in the first half of the year, Trend reports citing the World Bank report.

Goods exports increased by 12.4 percent year on year in the first seven months of 2019, while imports contracted by 4.7 percent.

Money transfers (including remittances) rose by 7 percent. Tourism proceeds growth declined to 7.8 percent in January-July from 21 percent growth in 2018.

With the financing requirement declining and healthy portfolio inflows, the central bank was able to accumulate reserves in the first half of the year despite a drop in foreign direct investment (FDI). However, sentiments have deteriorated markedly since, resulting in rising pressure on the exchange rate.

A faster outturn in government spending supported economic growth in the first half of 2019. Revenue growth of 10 percent year on year was outpaced by spending growth of 17 percent. Public investment rose by 32 percent year on year in the same period.

As a result, the budget registered a deficit of 0.6 percent of annual GDP by end-July 2019, compared to a 0.5 percent surplus in the same period of last year. Public debt increased by 7.4 percent since the start of the year, reflecting the depreciation of the lari, the acceleration of capital spending (mostly foreign-financed) and efforts to develop the domestic debt market.

After moderating in early 2019, credit growth accelerated to 13.5 percent year on year in August, driven mainly by lari denominated loans. Deposits were up by 8 percent year on year in August, mostly on account of lari deposits.

Although prudential indicators are solid, the banking sector will remain sensitive to exchange rate depreciation on account of high levels of dollarization. Outlook Real GDP growth is projected to slow to 4.4 percent in 2019 as the ban on all flights between Russia and Georgia costs the economy around 0.6 percent of GDP.

Stronger net exports, recovery in credit growth, and some fiscal stimulus will only partly offset this loss. Growth is projected to further slow in 2020, reflecting the full year impact of lower arrivals from Russia, delays in several larger planned infrastructure projects, and easing credit growth as international financial markets tighten.

According to the report, this deceleration will be partly offset by a moderate expansion in government spending as well as rising tourist inflows from Turkey. Real GDP growth is expected to recover over the medium term as some of the constraints to growth dissipate.