Georgia’s Cost-of-Living Crunch

Author: Bachana Anasashvili, Civil Georgia’s outgoing news editor. He has served in since September 2020. 

Russia’s brutal, all-out invasion of Ukraine dealt a major blow to the global economy, further upping inflationary pressures that were already prevalent amid the major disruptions of the COVID-19 pandemic. And Georgia has been no exception.

Following a record-busting streak of high annual inflation in the second part of 2021, Georgia’s citizens are now tightening their already tight belts as the country faces possibly the toughest cost-of-living crunch witnessed in nearly two decades.

Consumer Prices Soar

The latest inflation data published by the National Statistics Office (Geostat) for May 2022, showed the grim state of things. Consumer prices were up 13.3% across the board, annually. Among all consumer goods and services, the biggest increases were largely observed in food items.

Georgians paid 22% more for food and non-alcoholic beverages than the previous year, with vegetable prices spiking 51.1% and the cost of bread and cereals hiking by 34.5%. Cabbage cost 297.4% more than May 2021; cucumber — 110.3%; margarine — 67.3%; corn flour — 56.4%; buckwheat — 37.5%; wheat flour — 31.6%.

The other two key drivers of the overall annual inflation were price spikes in transport — up 20%, and housing payments and key utilities (water, electricity gas, etc.) — up 16.1%. Georgians paid 12.9% more for transport services, 28.2% more for rent, and 11.2% more for electricity, gas and other fuels.

The inflation, spiraling out of control, has hit Georgians hard, and precisely where it hurts the most.

It should come as no surprise that Georgian households spend most of their disposable income on essential expenditures such as food, housing and utilities, transport, and healthcare — precisely the goods and services affected by spiking prices. After all, Georgia is a country where in 2021 the unemployment rate stood at 20.6% and while 17.5% lived under the absolute poverty line; where in 2021 only 1.53 million (50.9%) people of the total three million 15+ population participated in the labor force; where 387.1 thousand people (32%) of 1.22 million with jobs were self-employed.

In 2021*, the average Georgian household spent GEL 890.7 (77%) of its total expenditure of GEL 1,158 (USD 400) on consumption. Expenses on food, beverages and tobacco; housing payments and utilities; healthcare, and transport — the essentials — made up 72% of all consumption expenditures.

The Case of Russian Influx

While a significant influx of Russians — fleeing the economic or political consequences of the Ukraine invasion — into Georgia has become largely apparent, Georgians still have been unable to pinpoint an exact scale of the inflow, and to what extent the resulting rise in aggregate demand could further exacerbate the soaring consumer prices.

Several Georgian agencies report the relevant migration data differently, making it impossible to paint a broader picture of the influx.

Geostat data shows that in total 63.9 thousand Russian visitors arrived in Georgia in the first quarter of 2022. Meanwhile, monthly data from the National Tourism Administration counted 128,529 visits by Russian residents in February-May, and monthly data from the Ministry of Interior reported 120,567 border crossings from Russia from February through April.

There is no reporting available on how many Russian nationals have actually stayed behind. But Interior Minister Vakhtang Gomelauri has said earlier that of the 30,439 Russians that arrived in Georgia between February 24 and March 16, 12,638 had stayed behind, a significant growth from 2019 — before the pandemic disrupted travels — when 64,008 Russians entered Georgia but only 911 stayed.

The resulting squeeze is there, however. Pent-up demand for housing, particularly in Tbilisi, has pushed rent prices in the capital to record highs, with asking rent prices increasing by 21.5% month-over-month and by an overwhelming 83.3% year-over-year in April 2022, research by TBC Capital, Georgia’s leading investment bank showed.

Asking sale prices were also “noticeably higher” than April 2021, spiking 10.7%, and than March 2022, spiking 7.3%, the research revealed.

Income Growth Fails to Beat Inflation

While the rising prices eat away at the purchasing power of everyday Georgian people, a relatively broader, concerning trend has emerged over the previous years, particularly amid the pandemic-related downturn — the nominal** growth of the households’ average monthly disposable income lags slowly along or falls behind inflation.

Average monthly disposable income per household — excluding borrowing — grew from GEL 1,028 in 2020 by 9.9% to GEL 1,130 in 2021. The nominal growth narrowly beat the 9.6% average annual increase in consumer prices of 2021. Previously in 2020, the 3.3% decrease in income significantly fell behind the CPI rise of 5.2%, and in 2017, the 1.1% growth fell behind the inflation rate of 6%.

The data looks more pessimistic when compared to price rises in individual components of the CPI. Namely, the nominal growth in disposable income has lagged behind spikes in the prices of food and non-alcoholic drinks in 2019, 2020, and 2021.

Meanwhile, the growth in disposable income has regularly fallen behind the price rises in healthcare since 2015, excluding 2018 and 2019. In 2021, the hiked prices of transport also beat the nominal growth in income.

“Unfortunately, the income of the majority of Georgian population often cannot catch up with the [rises] in expenditure,” Giorgi Kepuladze, Founder and Chair of the Board at Society and Banks, a nonprofit closely watching the Georgian economy, told Civil Georgia.

Kepuladze argued it is characteristic of “poor countries that each year the disposable income of consumers and citizens decreases because their key expenditures are on food, utilities, medicine.”

He pointed out that prices of the essential products — such as food and oil — are soaring globally, inflation that Georgia subsequently imports, as “a large chunk, about 70%, of our consumer basket is made up of imported products.”

Seeing the spiraling prices in the first five months of 2022, it would even be tougher to maintain a positive outlook.

While the uncertainties accompanying Russia’s prolonged conflict in Ukraine could make any forecast largely unreliable, it would be safe to assume that the growth in disposable income of Georgians will not catch up with the higher prices in the coming months. This would be true in theory as well, as income — particularly its key component, wages — tend to be more rigid than prices in food, drinks and housing, which are easily prone to fluctuations.

Whatever future trend of the income may be, this cost-of-living crunch further highlights a broader problem that is declining real growth in the income and the overall welfare of Georgians.

The average monthly disposable income (excluding borrowing) of December 2016, GEL 944, when adjusted for inflation in December 2021 comes in at GEL 1,277, some 13% more than the monthly average of GEL 1,130 recorded in 2021.

That means an 11.5% real decline in the average disposable income per household over the five-year span in Georgia. The drop comes all the while real GDP growth from 2016 through 2021 came in at 18.7%.

Where did the economic gains of the country go? Apparently not in the pockets of the regular, everyday people. Experts have highlighted, among others, a “mismatch between drivers of GDP growth and the drivers of employment,” which could be one of the reasons for the lacking progress in income growth.

A 2021 IMF staff report on Georgia stressed that the main drivers of growth in 2011-2019 were financial, insurance and real estate activities — which “created barely any jobs between 2017 and 2019.” That could be the key reason why the real growth in the economy has failed to translate into tangible progress in the growth of disposable incomes, as more jobs could promote higher participation, fiercer competition for workers and subsequently, higher wages. But there is a catch as well, as the IMF has also stressed there is a mismatch between the skills the labor market demands, and the skills the Georgian laborers have.

The issue ties into a wider scope of structural challenges, which are weak productivity, the need to create high-quality growth, and weak measures of human capital, including education, as laid out by the World Bank. The international financial institution has also argued that Georgia’s trade openness and reliance on income from tourism have made the country further vulnerable to external and global shocks, which there are plenty of lately.

What Now?

Amid the global disruptions, the Georgian central bank’s attempts at keeping to keep inflation at bay have been largely unsuccessful. While the National Bank of Georgia has steadily hiked the policy rate, the inflation rate of May 2022, 13.3%, far exceeded the targeted 3%. But central bankers have a point, when arguing that much of the causes of the soaring prices are outside the scope of monetary policy.

Addressing the root causes of Georgia’s cost-of-living crunch would likely require sweeping efforts by the state toward inclusive and sustainable growth, increasing the labor force participation of women, and providing better education, among others.

But Georgian politics, marred by a series of controversies and tumultuous developments over the past few years, has rarely put the country’s economic woes under the microscope. While the public has, again and again, made clear in public opinion polls that the economy remains their top concern, their calls have apparently fallen on deaf ears on the political elite from all sides of the divide.

Meanwhile, Georgia has not seen a significant grassroots protest movement that would largely focus on the social and economic hardships of the people across the country.

* Geostat publishes household income and expenditure data annually, with 2022 numbers due after the first quarter of 2023.

** Geostat does not publish data on real growth in disposable income.