IMF: Georgia’s Economy Bounces Back, Reforms Needed

Georgia’s economy is poised to return close to pre-pandemic 2019 levels this year, said a recent report published by the International Monetary Fund.

IMF noted that the economy is “bouncing back” following an impressive momentum “supported by robust growth in remittances and exports, early signs of a faster than expected rebound in tourism, and pent-up demand.”

• Georgia’s Foreign Trade Up 22.3% in January-August
• Q2’21 GDP Up by 29.9%

But, the report said amid the ongoing recovery it is necessary for Georgia to maintain a strong pace of vaccinations, reduce the fiscal deficit and debt, unwind crisis support measures and further tighten the key refinancing rate in case of high inflation risks.

The 84-page staff report, published on September 21 also called for reinvigorating Georgia’s structural reforms, including by policies to tackle “entrenched” unemployment and with tax system reforms. 

Tax system

IMF said Georgia’s simple flat tax system, despite being “business-friendly,” is “also highly rigid, regressive, and subject to loopholes.” The Washington-based fund asserted that the 20% flat personal income tax “disproportionately high burden for low-income earners.” 

Meanwhile, IMF noted the 2010 Economic Liberty Act hinders the government’s ability to mobilize revenues, as the legislation requires holding a referendum to either permanently raise top tax rates or impose new taxes altogether. 

Labor market

The Washington-based fund said there is “a mismatch between the drivers of GDP growth and the drivers of employment.” IMF pointed out that although Georgia’s GDP growth averaged 4.7% between 2011 and 2019, the increase did not lead to a significant rise in employment. 

The report said the growth was mostly accounted for by financial, insurance and real estate activities, which it said are not labor-intensive. Meanwhile, according to IMF, nearly 20% of all employed people work in agriculture, but the sector’s share in GDP is just 2%. Trade was the only sector that “combined healthy contributions to GDP and employment growth in recent years (before COVID-19),” the report noted.

IMF highlighted that job creation between 2015 and 2019 was “anemic,” as the number of employed individuals declined by 12,600. It added that COVID-19 exacerbated the issue as the number further shrunk by 62,000 between Q4’2019 and Q2’2021.

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