Georgia

More moderate growth in 2025, after three years of strong expansion

Economic growth is set to moderate in 2025 after expanding robustly since 2022 thanks to the arrival of Russians and their capital, as well as re-exports to Russia. Trade with Russia will shrink, reflecting both the slowdown in Russia and greater vigilance on the part of Western countries to prevent the circumvention of sanctions. A base effect may also explain lower growth in 2025. From a production standpoint, growth will continue to be driven by domestic trade (15.6% of GDP in 2023), real estate (10.2%) and construction (7.9%). Other service activities, such as transport and warehousing, information and communication, and financial services will continue to be driven by the surplus demand generated by Russia's presence. Under the demand approach, final consumption (82% of GDP at constant 2019 prices) will remain the main driver of growth. Low inflation (just short of the National Bank of Georgia's target of 3% in 2025) will help fuel household demand, particularly for foreign products.

Inflation will in turn be fuelled by strong household demand. The share of investment in GDP will continue to rise (26% of GDP in 2023, versus 19% in 2021). Foreign direct investment represented 6% of GDP in 2023. The Netherlands was the leading investor country in 2023 (20.3%), ahead of the UK (19.2%) and the US (9.6%). Nearly one third went into financial and insurance activities, trade (16.5%) and manufacturing (15.9%). Net exports of goods will continue to make a negative contribution to GDP growth: imports will grow faster than exports due to the presence of Russian immigrants.

On the monetary front, the National Bank of Georgia has maintained its key rate at 8% since May 2024. Even in the absence of significant inflationary pressures, the NBG is aware of the uncertain global economic environment and does not rule out supply chain disruptions that could lead to a rise in the price of imported products. Another factor is the robustness of domestic demand, stimulated by credit. The high level of real interest rates (taking inflation into account) also reflects a concern to boost the lari in order to keep imported inflation under control.

Current account balance dependent on tourism and transfers from expatriates, and a reduction in the public deficit

The current account will remain in deficit in 2025. Trade in goods will remain largely in deficit (at 9% of GDP in 2023), unlike trade in services, which will once again be buoyed by tourism (12%) and information and communication technologies (6%). Apart from wine, water, precious metals and ferrous alloys, which are locally sourced, mainly for Russia, Turkey, China and Armenia, motor vehicles are re-exported to CIS countries. The balance of primary income (6% of GDP) will remain negative: income from cross-border workers, which is a positive component, will be more than offset by negative investment income. Despite a slight slowdown, expatriate remittances will continue to ensure a positive secondary balance (11% of GDP). The pace of expatriate remittances from Russia is slowing down (-39% year-on-year in July 2024), although the country remains one of the top three remittance-sending countries, along with Italy and the US. The budget deficit will remain stable, with revenues and expenditure rising at the same pace, as will the public debt/GDP ratio.

Contested parliamentary elections, pushing the country further away from EU membership

The October 2024 parliamentary election rekindled tensions between the ruling “pro-Russian” Georgian Dream party (RG-DG), declared the winner with 53.9% of the vote, and the “pro-European” opposition, made up of the Coalition of Change (11%), the United National Movement (10.2%) Strong Georgia (8.81%) and For Georgia (7.77%). The opposition rejected the results, claiming major irregularities and the accusations triggered massive demonstrations in the capital. In its report, the Organisation for Security and Cooperation in Europe (OSCE) considers that the elections were well organised, but points to “reports of intimidation, coercion and pressure on voters”, raising doubts about the freedom to vote. The EU appears reluctant to comment on the legitimacy of the result as a common position would require unanimity – a difficult goal.

Georgia was granted EU candidate status in December 2023 subject to nine conditions, including the fight against disinformation and alignment with the EU's Common Foreign and Security Policy. However, its government has been accused of authoritarian drift, with allegations of imprisoning opponents, cracking down on the independent media and collaborating with Russia. The controversial law passed in August 2024 (already introduced in 2023) requiring civil organisations and the media to register as foreign agents if more than 20% of their income comes from international sources turns out to be a copy of the Russian law. The law was passed despite massive demonstrations in the main cities and the veto of President Salome Nino Zourabichvili. In a press release published in May 2024, the EU already regretted Georgia's decision to pass the law which contradicts the fundamental principles and values of the EU. According to the press release, this law will lead to a halt in the accession process.

More recently, in October 2024, a law restricting the rights of LGBTQIA+ people was enacted. The October 2024 election appears to be pushing Georgia further away from EU membership. In response, Emmanuel Macron, Olaf Scholz and Donald Tusk warned in a joint statement that without concrete reforms, including the repeal of recent laws contrary to European values, they would not support the resumption of accession negotiations. EU accession nevertheless is supported by 80% of Georgians, including the Georgian Dream (RD-DG) and its voters, who, with the fate of Ukraine in mind, want to maintain ties with Russia, which occupies 20% of the territory.

Last updated: September 2024