The Soviet Socialist Republic of Georgia was one of the most prosperous areas of the Soviet Union. Political turmoil following Georgia’s independence had a catastrophic effect on the country’s economy. The cumulative decline in real GDP is estimated to have been more than 70% between 1990 and 1994, and by the end of 1996, Georgia's economy had shrunk to around one-third of its size in 1989. Today, the largest share of Georgia's GDP is produced by agriculture, followed by trade, manufacturing, and transport. Georgia's main exports are metals and ores, wine, and nuts.
Although Georgia experienced some years of growth in the mid-1990s, it was significantly affected by the Russian economic crisis of 1998-99. The later years of former President Shevardnadze's administration were marked by rampant cronyism, corruption, and mismanagement. Public disaffection resulted in the Rose Revolution of 2003. The new government, led by Mikheil Saakashvili, promised to combat corruption, stabilize the economy, bring order to the budget, and reorient the government and the economy toward privatization and free markets.
The government has reduced the number of taxes from 21 to six: a flat personal income tax of 20%, profit tax of 15%, 18% value added tax (VAT), a variable customs tax, and property taxes up to 1% of self-assessed value of property. Based on this simplified system and low rates, Forbes rates Georgia fourth best in the world in terms of tax burden on its citizens. It has significantly reduced the number of licenses a business requires, and introduced a "one-window" system that allows an entrepreneur to open a business relatively quickly. Strict deadlines for agency action on permits have been introduced, and consent is assumed if the agency fails to act within the time limit.
The World Bank has recognized Georgia as one of the world's fastest-reforming economies, and in 2010 ranked it as the world's 11th-easiest place to do business, an improvement from 115th in 2005 and now in the same tier as countries such as Australia, Norway, and Japan. The World Bank's "Anti-Corruption in Transition 3" report places Georgia among the countries showing the most dramatic improvement in the struggle against corruption, due to implementation of key economic and institutional reforms, and reported reduction in the bribes paid by firms in the course of doing business.
Estimated economic growth was 6.5% in 2010; inflation reached 10.5% in the same year. The economy contracted by 4% in 2009 as a result of the global economic crisis and the 2008 Georgia-Russia conflict. In response to the damage suffered during the conflict, 38 countries and 15 international organizations pledged to provide U.S. $4.55 billion to Georgia at the Brussels donors’ conference on October 22, 2008. The pledges amounted to approximately U.S. $3.7 billion to meet the urgent post-conflict and priority infrastructure investment needs from 2008 to 2010, with the balance going to shore up the financial and banking sector, support improvements in health and education, and promote democratic governance and free media. This package includes U.S. $1 billion pledged by the United States.
Official unemployment was 16.9% in 2009. A strongly negative balance of trade has been offset by inflows of investment and assistance from international donors. Although net investment inflows decreased in the immediate aftermath of the August 2008 conflict, private investment is returning. The Brussels aid package mitigated loss of private investment in the short term, allowing the government to continue to run a current account deficit of roughly 15%-20% of GDP. In 2009, foreign direct investment (FDI) fell to $759.1 million, down from $1.56 billion in 2008 and $2.01 billion in 2007. Over 44% of FDI came from the United Arab Emirates (U.A.E.) and Egypt. The sectors with the highest levels of FDI were industry ($204.1 million), transportation and communications ($153.6 million), hotels and restaurants ($134 million), and real estate ($132 million).
From 2004 to 2009, improved collection and administration of taxes and the widespread privatization of state-owned assets greatly increased government revenues. During that period, tax collections went up from 17.8% of GDP to 24.5%. The government was able to pay off wage and pension arrears and increase spending on desperately needed infrastructure such as roads and electric energy supply systems. However, tax revenues declined commensurate with the reduction in overall growth in 2008 and 2009. As Georgia’s economy has begun to recover, government revenues have grown concurrently, reaching approximately $2.2 billion in the first three quarters of 2010, up 13.8% from 1 year previous.
Prior to 2004, electricity blackouts were common throughout the country. Since late 2005, however, distribution has been much more reliable, approaching consistent 24-hour-a-day service due to increased metering, better billing and collection practices, reduced theft, and management reforms. Investments in infrastructure have been made as well. Hydroelectricity output increased by almost 27%, and thermal by 28%, from 2005 to 2006. Through conservation, new hydroelectricity sources, and the availability of new sources of natural gas in Azerbaijan, Georgia has significantly reduced its historical dependence on Russia for energy supplies. Although the Enguri hydroelectric power plant, which supplies up to 40% of Georgia’s winter electricity supply, is located in Abkhazia with the dam located in undisputed Georgia, there have not been any significant disruptions in transmission to undisputed Georgia since the 2008 conflict.
The banking sector remains relatively stable, though it was challenged by the 2008 conflict and global financial crisis. The sector is open to foreign banks, and several are operating in Georgia, including ProCredit Bank, HSBC, and Bank Republic. International financial institutions and international banking institutions own equity shares in several of Georgia’s banks. Interest on commercial loans remains high, though has started to drop as competition for credit-worthy customers has increased. The economy continues to be credit-challenged, as the price of loans remains high and borrower eligibility requirements remain strict.
Georgia faces many challenges in expanding trade. The major market to which Georgia has traditionally been linked is Russia. (For example, at one time nearly 100% of the Soviet Union's citrus fruits were grown in Georgia.) In 2006, Russia imposed bans on all Georgian exports of wine, fruits and vegetables, and mineral water; severed all direct transportation links; and eliminated postal service and visa issuance. (Since January 2009, direct charter flights between Tbilisi and Moscow have taken place intermittently.) Georgia has since reoriented its trade relations toward the EU, Eastern Europe, the Middle East, North America, and elsewhere. Georgia’s foreign trade turnover in the first three quarters of 2010 was $4.61 billion, up 17% from 1 year earlier. The value of exports was $1.09 billion, up 33.6% from 1 year earlier, and the value of imports was $3.51 billion, up 12.6 % from 1 year earlier. Georgia’s trade deficit for the first three quarters of 2010 stood at $2.4 billion, up 5% from 1 year earlier. Turkey remains Georgia’s largest trading partner, accounting for $212 million in the first quarter of 2010, followed by Azerbaijan ($137 million) and Ukraine ($127 million). Georgian trade with the United States accounted for $39.44 million in the same quarter. During the same period, Georgia’s largest export was ferro-alloys, amounting to $57 million; oil products were its largest import, totaling $119 million.
The government has made considerable strides in controlling corruption, although challenges still remain. Shortly after President Saakashvili took office, his administration dismissed nearly the entire police force and replaced its ranks with better-paid and better-trained officers, immediately decreasing the largest source for daily corruption among the population. Several high-level officials have been prosecuted for corruption-related offenses. The government continues to make anti-corruption initiatives a priority, and Georgia’s global ranking in Transparency International’s Corruption Perceptions Index improved overall from 133rd in 2004 to 68th best in 2010. Limited confidence in the Georgian court system remains a major obstacle to both foreign and domestic investment. The government publicly recognizes the importance of addressing these concerns, which requires the combination of judicial independence and informed, honest, fair, and competent judicial decision making.
International donors have targeted foreign assistance to promote democratic reform, resolve regional conflicts, foster energy independence, assist economic development, and reduce poverty. In 2004, Georgia's debt to the Paris Club was restructured. An International Monetary Fund (IMF) Stand-By Arrangement (SBA) was approved in September 2008 to limit the shock of the August 2008 conflict on the economy through fiscal stimulus financed by donors and liquidity injections into the banking system; it fills part of Georgia’s balance of payments gap that opened as a result of the conflict and global economic downturn. The SBA makes $1.17 billion of credit available and has been extended through June 2011. Other donors such as the World Bank and European Bank for Reconstruction and Development (EBRD) assist in energy and transportation development, legal and administrative reform, health, and many other areas.
GDP (2010, first 9 months): $14.733 billion.
GDP per capita (nominal 2009): $2,455.
GDP growth (2010 estimate): 6.5%.
Inflation rate (2010): 10.5%.
Natural resources: Forests, hydropower, nonferrous metals, manganese, iron ore, copper, citrus fruits, tea, wine.
Industry: Types--steel, aircraft, machine tools, foundry equipment (automobiles, trucks, and tractors), tower cranes, electric welding equipment, fuel re-exports, machinery for food packing, electric motors, textiles, shoes, chemicals, wood products, bottled water, tourism, and wine.
Trade (2010 est.): Exports--$3.8 billion. Partners--Turkey, United States, Azerbaijan, United Kingdom, Bulgaria, Ukraine, Russia, Armenia, Turkmenistan. Imports--$6.1 billion. Partners--Turkey, Russia, Ukraine, Azerbaijan, Germany, United States, Bulgaria.
Work force (1.99 million as of January 1, 2010): Agriculture--53.5%, industry--8.9%, services--35.5%. Unemployment (as of January 1, 2010): 16.9%.