2023 February-March Analysis

PMC Research: experts praise economy’s end-of-year performance, caution it may be “temporary”

Despite uncertainty around the impact of the war in Ukraine in the early months of 2022, Georgia ended the year on a strong note with 10% annual GDP growth. PMC Research’s latest survey consulted the country’s top economists to get their take on major issues dominating the headlines at the end of 2022 and where they think the economy is headed in 2023.

Georgia’s economic climate in 2022

Georgia’s economy ended the year on a high note, says PMC Research Center’s latest economic climate survey. The assessment, which is conducted quarterly and surveys 60 of the top economists in the country, found an overwhelmingly positive assessment of the economy’s performance in the fourth quarter of 2022, with increased consumption, high levels of money transfers, strong tourism recovery, and increased trade all cited as contributing factors.

Looking back to the beginning of 2022, PMC Research analyst Anastasia Chkhenkeli says economists’ assessments throughout the year were largely shaped by concerns around the impact of the war in Ukraine on Georgia and the region. “Starting in Q4 of 2021, economists began to express more optimism about the economy and its prospects for 2022 as it seemed some of the major effects of the pandemic were fading. The first quarter of 2022, however, saw a bit of a U-turn to a negative outlook as Russia invaded Ukraine and uncertainty rose around the impact of the war on the region.” In the second and third quarters of the year, however, she notes, Georgia’s strong economic performance led experts to take a more positive stance on the economic climate.

Source: PMC Research

Long-term sustainability concerns

Despite positivity around the fourth quarter of the year, Chkheneli says that economists’ negative outlook for the coming six months indicates that Georgia may be facing “long-term sustainability concerns.”

“This was the first time in the four years we’ve been conducting this survey that our experts classified Georgia’s economy as being in a downswing, meaning they positively assessed the current quarter but expressed a negative outlook for the coming six months,” notes Chkhenkeli. “This signals to us that despite high GDP growth in 2022, economists see much of this growth as temporary.”

This echoes similar sentiments expressed in the World Bank’s recent Georgia Country Economic Memorandum: Charting Georgia’s Future: Competitive, Connected, Capable report. It notes that tourism and remittances in Georgia, which offered a major boost to the country’s economy in 2022, “could be negatively affected” in 2023 as Russia’s economy suffers a “more pronounced slump.”

And a look at the top ranked concerns expressed by economists in the fourth quarter do in fact reflect larger structural concerns. Sixty-one percent of respondents in the November survey noted that labor emigration ranked as a “high or very high threat” to the economy. Seventy-two percent of respondents ranked the “rising cost of living” and 39% ranked “high unemployment” in those same categories.

“The World Bank’s recent report really confirms what a lot of our respondents also expressed,” Chkhenkeli notes. “With Georgia’s GDP growth estimated to slow in the coming years and average only 3.5% growth in 2030, the World Bank has noted concerns around labor emigration, an aging population, and inefficiencies in business operations. Georgia’s economy has high growth potential but needs to make structural changes to address these concerns and pursue a more sustainable path of growth.”

Source: PMC Research

Inflation, the state budget, and the Estonian tax model

Asked to weigh in on some of the other major topics of debate in Georgia during the end of 2022, almost 90% of the surveyed economists ranked inflation, which registered at an annual rate of 9.8% in December, as the “highest threat to the Georgian economy.” Ninety-four percent of them indicated that they believe tighter fiscal policy would likely have a “very high,” “high,” or “moderate” effect in tackling the problem. Eighty-nine percent also indicated their support for imposing tighter monetary policy.

When assessing Georgia’s state budget for 2023, which was approved by parliament in late December, 78% of economists expressed support for the proposed government debt to GDP ratio of 38.8%, while 70% expressed support for the proposed budget deficit of 2.9% .

Source: PMC Research

Another topic leading headlines at the end of 2022 was the Georgian government’s decision to scrap the implementation of the Estonian profit tax model for the financial sector.

The model, which exempts companies from paying tax on profits they reinvest in their business and has been in place for other sectors in the country since 2018, was set to apply to the financial sector starting in 2023. Respondent economists expressed mixed reactions to the decision, with 44% expressing support for the model to be implemented as planned and another 11% supporting its implementation sometime in the future. Twenty-two percent of economists expressed support for the government’s decision to scrap the plan.

“Those supporting the government’s decision seem to agree that the loss of tax revenue from the financial sector would negatively impact the budget deficit, which is already close to reaching the 3% limit allowed by law” explains Chkhenkeli. “On the other hand,” she notes, “there is a significant percentage of economists that view these unexpected policy U-turns from the government as having a possible negative impact on Georgia’s reputation for doing business.”