2023 June-July Analysis

What’s behind the Georgian economy’s continued growth?

Growth drivers

Despite widespread predictions of slowed growth and external inflows following 10.5% GDP growth in 2022, the Georgian economy continued to post strong numbers in the first quarter of 2023, registering 7.2% real GDP growth. This, says economists, was largely on the back of continued strong numbers in tourism, trade, and remittances.

“Despite continued geopolitical tensions, external demand did not decelerate as we had anticipated at the end of last year,” says Galt and Taggart’s (G&T) Head of Research Eva Bochoroshvili. “Exports and remittances, for instance, have remained resilient, causing us to revise our expectations for growth this year upward from 4.8% up to 5.8%.”

In its latest macroeconomic report released in the end of April, G&T notes that tourism revenues reached $795 million in 1Q 2023, a 102% YoY increase and 38% higher than 2019 levels, adding that analysts expect “tourism revenues to reach $4 billion, a 15% YoY increase, in 2023.” And the latest data from the National Bank of Georgia shows that money transfers into the country equaled $1.25 billion in the first quarter of the year, a 130% YoY increase from 2022. “These figures,” says Bochoroshvili, “indicate to us that the continued impact of migration may be greater than we originally estimated.”

TBC Capital’s Vice President Irina Kvakhadze agrees that the “migrant effect,” caused by an influx of Ukrainians, Belarusians, and Russians in 2022, is continuing to have a marked impact on the Georgian economy. At a macro-sectoral presentation in early May, she noted that the original projections of a slowdown in 2023 were, in part, based on expectations that a portion of these war-affected migrants would leave the country in 2023.

“We estimate there were around 115,000 war-affected migrants in Georgia in 2022, and we initially expected that about 30% of them may leave the country in 2023; however, we now see a significant outflow of migrants in 2023 as much more unlikely. We also expect that expenditures by these migrants will increase in 2023, fueling increased domestic consumption.”

The National Bank of Georgia’s (NBG) Head of Macroeconomics and Statistics Shalva Mkhatrishvili says that he sees domestic consumption, in part due to migrants, as playing the key driving role in Georgia’s economic growth in 2023. “If you look at 2022 and compare it to 2023, we already see some different drivers,” he says.

“In 2022, we had growth mostly driven by external inflows, particularly revenue from international travelers. This led to GEL appreciation and an increase in imports. Now, as we see continued heavy reliance on imports, we expect net exports will actually have a negative contribution to GDP growth this year. Instead, we expect mostly growth from domestic consumption and investments, which are ticking up.”

And while the idea of a growing dependence on migrant expenditures and inflows has caused some unease, TBC Capital’s Chief Economist Otar Nadaraia says he currently views this as no more than “a moderate risk.”

“Based on surveys conducted by TBC and the German Economic Team, we don’t expect a large outflow of migrants in the near term,” he explained at the May macro-sectoral presentation, noting that 35% of migrants polled by TBC said they plan to stay in Georgia for two years or longer. “Our surveys also indicated that the majority of migrants are not employed by Russian companies,” he said, adding that 77% of those surveyed indicated they are currently employed by an international or Georgian company.


April numbers showed inflation in Georgia decreasing faster than anticipated in earlier forecasts by both the NBG and major financial institutions. Headline inflation, which measures total inflation in the economy and includes prices of commodities that are often volatile like food and fuel, came in at 2.7%, a sharp decrease from its 9.4% level in January and slightly under the NBG’s 3% target rate. This, says the NBG’s Mkhatrishvili, was largely due to a significant drop in imported inflation.

“If you break down inflation into its domestic and imported elements, you see that imported inflation actually reached negative levels in April coming in at -6.4%,” says Mkhatrishvili. “This means that imported goods have gotten cheaper thanks to several factors. These include the appreciation of the lari in recent months and decreasing prices for international commodities and shipping. Prices for food and fuel, for instance, are coming down globally and are helping to lessen inflationary pressure from international markets.”

On the back of these encouraging numbers came an announcement by the NBG on May 10 that it would be cutting the monetary policy rate by 50 bps from 11% to 10.5%, its first rate cut in two years. With it came an updated forecast by the central bank of 1% inflation by year’s end and indications that it intends to continue slowly cutting rates another 100 bps to 150 bps throughout the rest of 2023.

And while the NBG expressed optimism that domestic inflation would also continue to decline throughout the remainder of the year, Mkhatrishvili says the central bank is planning a very gradual loosening of its monetary policy to ensure this indeed occurs. “Domestic inflation, though down from earlier in the year, still stood at 10.6% in April,” he notes. “This is due to continued demand side pressures, in part due to the influx of migrants and strong tourism recovery. We do see this coming down now, albeit slower than imported inflation, which is why we remain cautious.”

“We’re also watching closely to ensure a wage-price spiral doesn’t occur,” he adds, noting this can be of concern when coming off high inflationary periods such as those Georgia has seen over the last two years. “We saw wages grow substantially last year at a faster rate than productivity, which is a warning sign,” says Mkhatrishvili, explaining that this phenomenon occurs when workers bargain for wage increase as inflation rises, fueling higher demand and pushing companies to raise prices to compensate for steeper expenses.

“However, if we look at a wider period over the last few years, overall productivity growth outpaced wages and companies were, on average, operating with greater profit margins,” he continues. “Meaning real wages weren’t keeping up with inflation. This recent boost in wages could be more of a correction, so we don’t see an immediate risk of related price increases. While we are actively monitoring this, we aren’t overly concerned at the moment.”

FX trends

In FX trends, the lari registered one of its strongest first quarters on record in 2023, appreciating more than 8% against the dollar and ending April at a value of 2.49 GEL/USD. This continued appreciation, says TBC Capital’s latest macro-sectoral report, is in large part due to continued net currency inflows on the back of continued strong export, tourism, and remittances.

In terms of the real effective exchange rate (REER), an index that weighs a country’s currency against a basket of other currencies by the percentage of trade that each currency represents to that nation, the lari hit a record high in the first quarter of 2023, says the NBG’s Mkhatrishvili.

TBC Capital’s latest report adds: “improved sentiments are also having a notable impact on the lari’s strengthening,” reflected in a considerable uptick in GEL deposits. The NBG’s Mkhatrishvili says that expectations of a seasonality effect (it is commonly believed that the lari’s value peaks during the summer tourism season when demand is traditionally higher) may have also helped to improve sentiments around the lari’s continued strengthening.

“It’s a bit of a self-fulfilling prophecy in that as people expect seasonality, they tend to let it dictate their positions in advance. So, if people expect the lari will be worth more in dollar terms in the summer, they may buy lari in anticipation during the spring months, thus pushing this appreciation and creating the effect,” he says, adding that this “seasonality” may already be priced in but further appreciation could continue depending on whether inflows and sentiments in the coming months will be better than currently expected.

Galt and Taggart’s Bochorishvili says she expects the lari will continue to further appreciate before depreciating slightly at the end of the year. “We think on the back of strong tourism and net currency inflows that the lari may appreciate even slightly higher in the summer months before ending the year around 2.55 GEL/USD.”

TBC Capital’s weekly update from mid-May also predicts a similar end of year value for the lari at 2.50 GEL/USD. However, it cautions that according to the GEL REER assessment, which looks at the current REER value for the lari and compares it to the REER long-term trend (estimated based on GDP per capita growth differential between Georgia and its main trading partners using relative trade weights and adjusted for the share of the non-tradable sector), the lari is currently overvalued by about 3%. This, along with lowered inflation, it argues, could push the lari’s value down slightly in the coming months.

Furthermore, it notes that the NBG’s continued FX interventions and net purchases of more than $1 billion in foreign currency over the last year has muted the lari’s appreciation. The NBG’s Mkhatrishvil says these FX interventions, which amounted to purchases of $460.5 million in the first quarter of the year alone and allowed the central bank to accumulate foreign currency reserves at a record-high $5.1 billion level in April, are providing a strong buffer against external risks. “After continued buying of foreign currency reserves during this period, we now have reserves that fall in line with what the IMF characterizes as ‘adequate’ to mitigate major unexpected shocks.”

Looking forward

In its latest monthly macro insight report, aptly entitled “Gradually Back to Trends,” TBC Capital analysts note that a “normalization of growth, sizable GEL rate cuts and its slight weakening appear to be the baseline scenario” looking forward. While it notes that second quarter growth may slow in annual terms “mainly on the back of a high base effect,” it also contends that “continued strong inflows not only from Russia” have caused an upward revision in its annual GDP growth projection for 2023 to 6%, up from its previous forecast of 3.5% in December 2022.

G&T’s Bochoroshvili says she also expects continued growth throughout the end of 2023 and into 2024. “The gradual decrease of the monetary policy rate this year should continue to boost growth,” she notes, adding that investments into Georgia’s viability as a transport hub also offer promise. “We know that the Middle Corridor is not the most competitive transport route, but the continued war and redirection of some cargo flows from the northern route through Russia offer an important opportunity for Georgia in terms of transport, which should spur additional investment and growth opportunities in the country.”

For the central bank, the NBG’s Mkhatrishvili says that it’s keeping an eye on inflation but also watching another important metric: the dollarization rate of loans. “Inflation was a major challenge for us last year. In the near term, we expect inflation to continue decreasing – it may even drift into negative territory, depending on how the exchange rate behaves going forward.”

“But we are also closely watching credit growth. Lari-denominated loans are increasing at a relatively stable rate but slower than 2022, thanks to the delayed effect of our increases in the monetary policy rate last year. However, as lari loans got more expensive last year, we saw an inadvertent uptick in dollar-denominated loans,” warns Mkhatrishvili.

“We instituted some macroprudential policy tools like decreasing mortgage maturities from 15 years to 10 years for FX-denominated loans to moderate their growth,” he says, noting that these moves also complement the NBG’s long-term efforts aimed at de-dollarization. “We’ll certainly be monitoring these FX loans in the coming months to watch for further increases and will implement additional macroprudential measures as needed.”