The financial and economic system of Georgia

Since the 1990s, Georgia as practically all of the post-communist states started its ain way of economic reforms. Unlike the other states, nevertheless, the procedure turned particularly hard for Georgia because of economic – and more significantly – non economic factors such as 20 old ages of loyal and civil wars, an utmost rise in offense nation-wide, energy and conveyance encirclements and a revolution. It was constructing both an independent economic system and an independent province at the same clip. Through this background, it is natural that the chance of right execution of economic reforms was rather low, particularly when none of the states in the universe had the relevant experience.

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Previously, the Constitution of Georgia stated that the state was constructing a “ societal market economic system ” , but since 2003, Georgia ‘s economic reforms have become significantly “ aggressive ” and today the economic reforms are based upon broad and libertarian political orientations.

Georgia achieved high rates of economic growing during last old ages although the Russian-Georgian war – and particularly, the planetary fiscal crisis – has caused a crisp diminution in the growing rates whilst the job of economic stabilisation and farther growing still persists.

3.1. The Course of Economic Reforms of Georgia

From Independence to the Rose Revolution

After declaring its independency Georgia has launched the building of its province ; Georgian governments officially acknowledged that the execution of economic reforms would get down. Unfortunately nevertheless, neither the professional experience, nor the local environment provided the chance for implementing the economic reforms.

The first old ages of economic reforms had tragic effects for Georgia. The putsch of 1991-92 together with economic and political encirclements, a deficiency of relevant professional staff, high corruptness, a serious condemnable state of affairs and populist motions badly hampered the execution of a consistent and stable policy of economic reforms.

Georgia at the same time started fiscal stabilisation, monetary value liberalisation and the decrease of budget shortage, the execution of a rigorous recognition policy every bit good as an debut of a moderate revenue enhancement system and the decrease of province outgos. However, several of import factors were non taken into consideration. Government in general, did n’t hold existent macroeconomic tools and its ain pecuniary system or existent levers to implement a tax-budgetary policy ; and alternatively of set uping such tools it started to implement new political relations without any due readying. Because of the above mentioned grounds together with belligerencies, conveyance, economic and energy encirclements, it had no important consequence in the state ‘s development. And since Georgia had no currency of its ain and, severally, no emitter, it would hold failed to take steps necessary for reforms. Neither its single experience nor its fiscal province enabled Georgia to transport out these procedures independently, therefore it applied to international fiscal organisations for aid ; in peculiar, to the International Monetary Fund ( IMF ) and the World Bank ( WB ) , which mostly contributed to state ‘s policy formation. As a consequence, the province started to believe over a limitation of the monopolizer activities, although merely managed to set the anti-monopolist statute law into force several old ages subsequently.

Despite the aid of international organisations, Georgia have failed to implement an effectual pecuniary policy as despite the “ Cold War ” with Russia during that period ( which in 2008 exploded into existent belligerencies every bit good as suspending diplomatic and other dealingss between these two states ) , it was still the dominant power for the economic system. Money supply in Georgia depended on Russia ‘s cardinal bank and, hence, one of the cardinal levers of the state ‘s economic development remained in its custodies ( Papava, 1996 ) . Although the Georgian Government was occupied with faulting Russia for its ain jobs – and such acquisitions were frequently really just – it did non anticipate that it would be unable to have currency notes from Moscow. And when eventually Russian governments suspended money supplies to Georgia in April 1993, the Georgian governments were forced to set the voucher of the National Bank of Georgia, as a impermanent currency note into circulation. The voucher was put into circulation as a representative of Russian ruble and was declared as the lone legal payment instrument, after Russia withdraw the disintegrated Soviet Union ‘s rouble from circulation in July-August 1993.

Coupon shortly failed to execute its pecuniary maps, as its uncontrolled recognition emanation caused hyperinflation processes. The graduated tables of utilizing the Russian ruble were increasing whilst the USD besides started to increase in Georgia under conditions of a rapid lessening in the buying power of the rouble. In fact, the voucher was merely suited for paying subway menus and purchasing rationed staff of life.

In 1994 a new phase of economic reforms was followed by regenerating the cooperation with international fiscal organisations together with acceptance of the anti-crisis plan. A certain success was achieved at the really get downing. The international fiscal organisations actively began to help the Georgian governments in the successful execution of the post-communist transmutation ( Papava, 2002 ) . From spring 1994, uncontrolled recognition emanation was ruled out and in fall 1994, the National Bank of Georgia abolished the limitations on taking hard currency from Bankss. As a consequence, hard currency and non hard currency money were drawn much closer. In September 1994, the monetary values on gas and electricity increased up to an international degree, while the monetary value of staff of life increased by 285 times. The metro menu besides increased significantly. The wages of public functionaries and pensions besides increased although the rate of their growing meaningly dragged behind the growing rates.

These developments were followed by a important strengthening of the Georgian voucher rate. If before the addition in the monetary value of bread one dollar was equal to 5.3 million vouchers, after the addition one dollar equaled 2.4 million vouchers. This procedure continued. By the terminal of 1994, the monetary value of staff of life increased by 40 per centum which was the consequence of more stabilising the voucher rate, when one dollar was equal to 1.3 million vouchers and with this rate maintained until the terminal of its being.

The procedure of the simplification of the bing licensing mechanism began from January 1995, when the quota system was abolished whilst licensing was maintained merely on little scope of merchandises. This promoted the constitution of a broad trade policy and the restriction of a corrupted environment. Together with this, it laid for the constitution of existent market dealingss in which come ining or go forthing the markets no longer depended upon any functionary.

The procedure of “ vaucherisation ” was launched in Georgia in 1995. This can be considered as a traditional measure in the denationalization procedure which has been carried out in many post-communist states. This procedure played a farther negative function in respects to economic resurgence. Fabrication and production was non transferred to those who would be able to present and supply for the betterment of technological procedures in industry and stimulate production. Alternatively, workss and mills were given to those who were non able to pull investings for seting them into operation.

Important stairss have taken towards the formation of independent economic system in Georgia in 1995. A legal model relevant to market economic rules was created, a two-tier banking system, revenue enhancement and imposts services were established ; fiscal stabilisation was achieved and eventually the national currency was introduced ; order and subject were restored, the procedure of “ little denationalization ” was fundamentally completed and monetary values, trade and foreign economic dealingss were liberalized. These led to the creative activity of a concern environment – finally necessary for advancing the development of entrepreneurship in Georgia – which in bend, provided farther accelerated development of the state ‘s economic system.

The successful execution of pecuniary and financial reforms started with presenting Georgian national currency – the lari – in September 1995. The lari was introduced with a fixed exchange rate of 1 lari equal to 1 million vouchers, as 1 USD equal to 1.3 lari. The pecuniary reform did non reiterate the same errors as in the period of vouchers. No arrogation step was used during the reform which promoted assurance edifice amongst the people the lari gained its foothold really quickly. A month after presenting the national currency, the lari ‘s rate increased at the Tbilisi Interbank Currency Exchange from 1.3 to 1.25 against the USD. As a consequence of a flexible policy, Georgia managed to get the better of the multi-rate pattern and completed currency rate fusion.

Unfortunately, 1998 was marked with certain holds in the procedure of the execution of economic reforms which reduced economic growing rates and resulted in the start of a period of stagnancy for the Georgian economic system. However, the 2003 Rose Revolution brought an terminal to this period with economic procedures, including reforms, get downing to develop really rapidly.

Economic Reforms after the Rose Revolution

From the beginning of 2004 Georgia had been set uping the institutional base for market economic system ordinance which was similar to those in other European provinces. Georgia has experienced extremist economic reforms which were often expressed by the abolishing of ordinance mechanisms by the province. Several province bureaus were abolished in 2004, including the Road Fund, The Ministry of Communication, Transport and Post ; the Ministry of Urbanization and Construction ; the Ministry of Foreign Trade and Foreign Economic Relations ; the Ministry of State Property Management ; the Service for Food Expertise and Monitoring ; the Service for Plant Protection, Livestock Pedigree Department of Georgia ; Precious Stones and Metals Department ; the State employment Service, Food Safety Inspection ; Phyto-Sanitary Control and the Transport Regulatory Commission, amongst others. Simultaneously, building processs were besides significantly simplified. The list of those activities which required licensing in Georgia besides decreased significantly from 900 activities to merely 114. Size and weight control, licence and license on veterinary activity every bit good as licence on production and trade in pesticides were abolished.

An analysis of the structural alterations which were carried out in Georgia during last seven old ages shows that the end of these alterations has been full economic deregulating. A expression through the history of the development of independent Georgia ‘s economic establishments shows that National Bank of Georgia has been one of the most successful regulative establishments. The fact, that Georgia has a national currency, which maintains its places, and that the Georgian banking system has managed to get the better of a great trade of troubles is one of the virtues of the National Bank.

It is highly of import to further open up the state ‘s economic policy so that investors are willing to put in Georgia. Those enterprises, which were unveiled by the President of Georgia last October, are efforts to develop events in this way.

Analysis of Macroeconomic Indexs

Before the decomposition of the Soviet Union, Georgia had one of the highest criterions of life. Later, in 1990, the economic state of affairs significantly worsened. Georgian economic system had a 21.9 per centum diminution in 1991as compared to 1990. The procedure of decomposition of the Soviet Union continued in 1992, accompanied by the most serious socio-economic, condemnable internal political and other negative developments in Georgia. As a consequence the existent GDP farther decreased by 44.9 per centum as compared to 1991 and amounted to 43.47 per centum as compared to 1990. It should besides be noted that the procedure of economic diminution became irreversible from 1989. The state of affairs did non alteration in 1993 when Georgia passed through an highly hard period of armed struggle in Abkhazia, a conveyance encirclement, the uncontrolled emanation of vouchers, hyperinflation and a farther diminution of GDP by 29.3 per centum. Finally, the GDP amounted to merely 30.73 per centum as compared to 1990.

In 1990, the degree of employment reached 100 per centum in Georgia. In 1991, the official figure of unemployed was 3,500, it increased 32 times and amounted 113,000 individuals in 1992 and rose farther by 60 per centum and amounted to 180,000 individuals in 1993. Harmonizing to the current functionary informations, there are 330,000 unemployed individuals in Georgia. Harmonizing to the same official statistical informations, the rising prices rate exceeded 7,840 % in 1994, while after a 3.5 fold lessening in GDP during 1989-1993 it decreased by 10.4 per centum once more and equaled to a backward diminution by 25-30 old ages. In 1995, farther production outgo was stopped and GDP was achieved to increase by 2.6 per centum. And what is more of import, from 7,841 per centum rising prices, as it was in 1994, in 1995 it amounted 157.4 per centum merely. Particularly high rates of development is socio-economic domain was achieved in 1996-1997, when GDP increased about by 24 per centum.

More convincing consequences were achieved during 1996-1997 sing rising prices, whose parametric quantities significantly determine the cardinal consequences of a state ‘s economic development. In peculiar, the rate of rising prices was 13.5 per centum in 1996 and 7.3 per centum in 1997 which was 1.1 per centum and 0.6 per centum per month, severally. All of these had a positive consequence upon set uping a favourable economic environment for concern development.

Table 1. Key Macroeconomic Parameters









GDP at Market Prices ( million GEL )

3 868,5

4 554,9

5 022,1

5 668,7

6 043,1

6 674,0

7 456,0

8 564,1

GDP per capita ( GEL )



1 114,8

1 268,2

1 362,5

1 516,3

1 705,6

1 972,1

GDP per capita ( USD )









GDP million USD

3 064,6

3 510,7

3 606,9

2 814,1

3 059,1

3 221,0

3 397,8

3 990,8

Exchange rate ( GEL USD )









Economic Growth








GDP deflator














GDP at Market Prices ( million GEL )

9 824,3

11 620,9

13 789,9

16 993,8

19 074,9

17 948,6

GDP per capita ( GEL )

2 276,7

2 689,1

3 133,1

3 866,9

4 352,9

4 092,8

GDP per capita ( USD )

1 187,6

1 483,5

1 763,5

2 314,6

2 921,1

2 450,1

GDP million USD

5 124,7

6 411,0

7 761,7

10 171,9

12 800,5

10 744,7

Exchange rate ( GEL USD )







Economic Growth







GDP deflator







State Debt of Georgia ( million GEL )







Beginning: National Statistics Office of Georgia

In 1998-2002, the rates of economic growing decreased to an mean 2 per centum per twelvemonth. However, despite the most hard state of affairs, in 2003, the economic growing rate exceeded 10 per centum. In the undermentioned old ages, if we do non see the period 2008-2009, the economic growing rates were highly high. As a consequence of the Russian aggression in August 2008, the state ‘s economic system still increased by 1.9 per centum, but the undermentioned twelvemonth – 2009 was distinguished by the economic lessening of 3.9 per centum for the first clip since 1995. It should be noted that province and private givers pledged 4.5 billion USD by which significantly reduced the extent of the economic recession.4

Chart 1. Dynamicss of Key Macroeconomic Parameters

Beginning: National Statistics Office of Georgia

Monetary values were more or less stable from 1995. As for the exchange rate, if before 1995 the voucher exchange rate was equal to 1 USD against 5.3 million vouchers, the lari has been characterized with a important stableness. The inclination of the addition in its rate was seen in 2004, although the exchange rate started to fall once more from 2007.

Table 2. Exchange Ratess




End of period

Middle of period

End of period

Middle of period

End of period

Middle of period
































































Beginning: National Statistics Office of Georgia

Despite the

Growth and External Performance

Economic recovery is acquiring stronger, with existent GDP growing of 6.6 per centum in the first half of 2010. This follows a contraction of 3.9 per centum in 2009 because of the dazes of the August 2008 struggle and the planetary economic crisis. Real economic activity is deriving strength in 2010, with growing in exports, worker remittals, existent estate minutess, building licenses and vehicle enrollments. Compared with the last twelvemonth, VAT turnover increased by 7 per centum and amounted 27 per centum.

During the first half of 2010 exports were up to 40 per centum while imports amounted merely 12 per centum. At the same period private investings have benefited from a pickup in bank landing, while FDI influxs are still below pre crisis degrees, but betterments are expected. The economic system is predicted to turn by 4-5 per centum during 2011-2013, where growing is expected to come from higher exports and private investing supported by a pickup in bank loaning. Exports will be chiefly with metal merchandises, vinos, fruits and nuts, besides repaired and re-exported autos and expected to play a cardinal function in its recovery – from 29.8 per centum of GDP in 2009 to 38 per centum during 2011-2013 ; As for the services side conveyance and touristry will besides play a important function ( World Bank, 2010 ) .

4. Finance and the Role of Banking

In Georgia fiscal system is chiefly based on the banking sector, which is reflected with the mobilisation of the fundss and their formation into investing beginnings by agencies of the banking establishments. Harmonizing to this, banking system plays an of import function in increasing the gait of Georgian economic system. The Bankss operate in conformity with modern market theoretical account in every regard. An active engagement of the Georgian Bankss helps the little and average sized concern development in the state.

Georgia have done lost of success in developing its fiscal sector during last old ages after its independency, nevertheless external factors have hampered states development to some extent late, which reflected on Georgia ‘s economic system and accordingly on its fiscal sector. Nowadays, positive alterations are being implemented which gives us the possibility to assume, that the fiscal system will farther develop and advance county ‘s economic development.

Development of the Financial System in Georgia

For the last 10 old ages, the fiscal system of Georgia has experienced important alterations. After declaring its independency, really from zero, began creative activity of fiscal substructure. The National Bank of Georgia ( NBG ) has been created ; the national currency – Georgian Lari ( GEL ) has been issued ; the commercial Bankss have been certified ( At the same clip the figure of Bankss was decreased 10 times ) . Except banking system, the fiscal system includes other fiscal establishments. In 2010 in Georgia 19 Commercial Bankss operated, from which 16 are runing with the foreign capital engagement. As for non-banking depositary establishments, there are 47 microfinance organisations ( MFO ) , 18 recognition brotherhoods ; 1,334 exchange agency ; 24 money remittal service suppliers ; 16 insurance companies ; 6 pension financess and 1 stock exchange. Among these fiscal establishments most profitable and of import for fiscal sector is the banking system.

Banking in Georgia

In order to make the conditions for the right operation of the banking sector NBG cares about the execution of demands set by the Euro directives and Basel rules. Besides, for the straight-forward development of the banking sector, the changeless betterment of the different hazards administration mechanisms by the market participants – commercial Bankss is besides indispensable. As a whole, the present state of affairs provides maximal chances for implementing new banking merchandises. Banking system, sing its gait of development and inclinations, could be regarded as dynamically developing system.

Compared to other sections of fiscal sector of Georgian economic system, the banking system is instead more developed. Nowadays, recognition is allocated on market footings, and the authorities does non have commercial Banks. Hence, the competition in banking domain is strong plenty. Banks try to offer as big spectrum of services as possible.

The fiscal system is get downing to mend. Refer about systematic hazard has been diminished. And overall loaning conditions have started to better. We have already seen a significant sum of accommodation in our fiscal system. Leverage has declined. Banks are funding themselves more cautiously. These are necessary alterations, and there is more reconstituting in front for the fiscal sector as a whole. But a significant portion of the accommodation procedure is now behind us.

Fiscal establishments constitute an of import portion of Georgian economic system.


NBG the National Bank of Georgia

GEL Georgian Lari

MFO Microfinance Organizations

VAT Value Added Tax

FDI Foreign Direct Investment

IMF International Monetary Fund

WB World Bank