Georgia WT/TPR/S/224/Rev.1 
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I. ECONOMIC ENVIRONMENT 
(1) INTRODUCTION  
1. Georgia, a small, strategically located middle- income country in the South Caucasus, has a 
population of 4.5 million and a natural resource base that  offers strong economic growth potential.  In 
Soviet times, Georgia exported agricultural and ener gy–intensive industrial products to the Soviet 
Union and was a popular tourist destination for the region.  After independence in 1991, the economy 
collapsed under the impact of civil war and the lo ss of preferential access to Former Soviet Union 
(FSU) markets;  output fell by 70% and exports by  90%, the worst decline suffered by any transition 
economy with sustained growth only resuming in 2003.1 
2. In 2008, Georgia had an estimated per capita in come of US$2,900, over three times its level 
at the beginning of the review period in 2003.  Du ring most of this period,  economic performance was 
impressive.  Driven by rapidly rising foreign di rect investment flows, annual economic growth 
averaged between 9% and 10% from 2003 to mid-2008.  With the Georgian economy on a strong growth track for most of the review period, risi ng public expenditures, financed by a substantial 
increase in the tax to GDP ratio, were being directed  at improvements in education and health services 
and in targeted social assistance fo r the poor as well as infrastructure. 
3. In 2008, the economy was hit by the twin shocks  of the brief but disastrous armed conflict
2 
with the Russian Federation in A ugust and the global financial cris is in September, which brought 
about a reduction in FDI and workers' remittanc es, a collapse in export demand, and a sharp 
contraction in bank lending.  Damage to infrastructure, caused by the conflict, as well as disruption to 
activity in several sectors – including construction, trade, and tourism – severely dampened growth.  
With the sudden deceleration in capital inflows and the onset of a credit drought, the economy contracted in the second half of the year with GDP growth for the full year of only 2.1%, the weakest result since 2000. 
4. Economic policies have been guided by reliance on the private sector for growth in a 
liberalized trade, investment, and business e nvironment, and these policies have met with 
considerable success;  the World Bank recognized Georgia as one of the world's fastest reforming 
economies.  Georgia has implemented far-reaching structural reforms, aimed at developing a 
competitive private sector as the main engine of growth, but it has only partially succeeded in 
improving the productivity, and thus the external competitiveness, of the private sector.  The rapid economic growth since 2003 has not been associated  with growth of exports in GDP, its share 
remaining  moderately low at about 20%, less than half the share of imports.  
5. Although there has been some diversification away from foodstuffs to high-technology 
products, Georgia's export structure remains quite c oncentrated in traditional sectors like base metals, 
minerals, and agriculture, whose produc tivity is relatively low.  Continuing structural reforms will be 
key to strengthening Georgia’s resilience to shoc ks, sustaining growth, attracting investment into 
export activities, and improving productivity:  in sh ort, in developing an enabling environment for 
export diversification in terms of  both composition and direction.  
                                                     
 
1 Asian Development Bank (2007), pp. 7-8. 
2 In December 2008 the EU Council established an Independent International Fact-Finding Mission on 
the Conflict in Georgia to investigate the origins and the course of the conflict in Ge orgia.  In September 2009, 
the results of the investigation were presented in the form of a Report. WT/TPR/S/224/Rev.1 Trade Policy Review 
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(2) MAIN FEATURES OF THE GEORGIAN ECONOMY  
(i) 1991 to 2003:  from independence to the Rose Revolution   
6. Georgia was among the first republics of the FSU to proclaim independence in 1991.  During 
the four years of upheaval that followed, the country  experienced civil unrest and internal conflicts, in 
particular the war in the Abkhazian region, which created serious refugee problems and closure of its 
trade routes.  Prior to independence, the Georgian economy had been closely integrated with that of 
the Soviet Union with trade accounting for an estimat ed 40% of GDP, and nearly all exports directed 
to, and three quarters of imports coming from, the Soviet republics.  The industrial sector accounted for about one third of the economy and although Geor gia lacked cheap sources of energy, it produced 
steel pipes, locomotives, and other energy-inten sive products for export.  The competitiveness of 
Georgia's heavy industry was dependent on the supply of  natural gas from Turkmenistan at artificially 
low prices and on inflated prices for final products.   
7. The dissolution of the FSU had serious effects on the Georgian economy:  the price of gas and 
oil rose dramatically in the early 1990s, making Georgia's heavy industry uncompetitive and halting 
production in Georgia's industrial centres.  In add ition, Russia's economic problems led to a collapse 
of demand for Georgia's agricultural goods (in whic h it had comparative advantage), and tourism, 
formerly an important source of income, virtua lly disappeared.  Thus, like other CIS countries, 
Georgia had thousands of unemployed engineers a nd scientists but no industry that could employ 
them.  In response, large numbers of skilled people withdrew from the market, many becoming attached to low productivity activities in agricultu ral and rural areas, some resorted to the public 
sector, and others migrated abroad.  By 1994, Georgi a's GDP was estimated at 17% of its 1990 level - 
the greatest fall among the countries of the FSU.  Robust and sustained growth resumed in 2003 but the level of output in 2007 was still only an estimated  70% of the 1990 level, in stark contrast to the 
performance of most of the CIS countries.
3 
8. Despite the problems, the overriding objective of Georgia's economic policies during the 
1990s was to create and develop a market economy th rough privatization of state-owned commercial 
enterprises, deregulation of prices, and liberalization of its trade and investment regimes.  This 
included in particular:  the establishment of a legislative basis for economic reform; the creation of an independent monetary and credit system; the introd uction of a national currency; and the complete 
liberalization of prices, which entailed removing fro m State regulation more than 90% of the retail 
prices of consumer goods and services and 95% of the prices of industrial goods. Additional 
government resolutions substantially removed all energy, transport, and other public utility prices 
from State administration, replacing control with tari ff regulation either by local governments or, in 
the cases of electricity and natural gas, by indepe ndent departments set up for this purpose. The 
Government rescinded exclusive rights granted to ce rtain economic agents, abolished restrictions on 
competition in certain activities, and cut subsidi zed credits to state-owned enterprises.  The 
Government also took substantial steps towards the transformation of property via mass privatization 
through which State enterprises began to be tr ansformed into joint stock companies.   
9. After a brief period of stabilization in the late 1990s, Georgia lost its reform momentum as its 
governance capacity deteriorated and public trust in  the Government dissipated.  The Government 
became increasingly incapable of resisting pres sure from vested interests, with negative  
consequences for the provision of basic public services.  Following the Rose Revolution in 
November 2003, the policy environment was transfor med, with the new administration demonstrating 
a strong political will to carry through reforms on sev eral fronts:  effective anticorruption measures, 
                                                     
 
3 World Bank (2009b), p. 15. Georgia WT/TPR/S/224/Rev.1 
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strong macroeconomic management, and follow-through on structural and selected sector reforms.  
However, growth has not been a ccompanied by net job creation, and unemployment is on the rise, 
topping 16% in 2008 and contributing to the persistence of poverty.   
10. In terms of foreign trade, the state-planni ng system with its preponderance of bilateral 
countertrade agreements was brought to an end.  Mu ch of the transformation to a market economy had 
been achieved by the time of Georgia's accession to the WTO in 2000 and, broadly speaking, trade 
and trade-related policies pursued during the review period have built on those achievements.  Partly 
with a view to eventual membership of the EU4, the Government has focused on harmonizing  
Georgia's legal system to international norms, by  introducing or amending legislation in key trade-
related areas such as customs;  banking and other ser vices;  intellectual property;  standardization and 
certification;  government procurement;  privatiza tion;  competition;  and business legislation.  
(ii) Structure of the economy 
11. Fertile land and a favourable climate enable di verse agricultural production, including a range 
of fruits and vegetables, livestock, dairy products, nuts, and tea.  The country has a long history of 
viticulture and some 500 varieties of grapes are cultiv ated.  Recent investments in oil exploration have 
indicated oil and gas potential.  Other physical r esources include manganese, iron, coal, copper, gold, 
granite, limestone, marble, and mine ral waters.  Dense forests cover one third of the country and 
numerous fast-lowing rivers offe r good hydropower potential although the country imports the bulk of 
its energy needs, including natural gas and oil.  Its location on the "Silk Road" between Europe and 
Asia makes it a transit conduit for goods  being shipped through the Caucasus.  
12. Georgia's economy has undergone significant struct ural change since independence.  Around 
15 years ago, shares of agriculture, industry, and ser vices in GDP were more or less evenly split.  The 
share of agriculture has since dec lined significantly and stood at an  estimated 10.3% of GDP in 2008 
(Table I.1) although the sector remains critical fo r the Georgian economy.  Over 53% of the labour 
force (including wage labour and the self-employe d) depend on agriculture for their livelihood and 
agriculture accounts for 18% of exports although Geor gia's net trade in agriculture and food products 
remains negative.   
Table I.1 
Basic economic indicators, 2002-08 
    2002 2003 2004 2005 2006 2007 2008 
Real GDP at 2003 market prices (lari milli on) .. 8,564.1 9, 065.9 9,935.6 10,868. 0 12,208.8 12,460.7 
Real GDP at 2003 market price (US$ million)  .. 3,990.8 4,729.1 5,481. 2 6,117.1 7, 307.8 8,362.0 
Current GDP at factor prices (lari million) 6,960.7 8,041.9 8,989.6 10,284.5 12,046.9 14,611.1 16,516.6 
Current GDP at market prices (lari million)  7,456.0 8,564.1 9, 824.3 11,621.0 13,789. 9 16,993.8 19,069.6 
Current GDP at market prices (US$ million) 3,398.1 3,990.8 5,124.7 6,411.0 7,761.7 10,171.9 12,797.0 
GDP per capita at current market price (lari) 1,705.6 1,972.1 2,276.7 2,689.1 3,133.1 3,866.9 4,351.7 
GDP per capita at current market price (US$) 777.3 919.0 1,187.6 1,483.5 1,763.6 2,314.6 2,920.3 
GDP by economic activity at cons tant prices (annual %age change)      
Agriculture, forestry and fishing -1.4 10.3 -7.9 12.0 -11.7 3.3 -2.1 
Mining and quarrying 29.8 -2.1 -19.9 -7.8 18.7 19.9 17.0 
Manufacturing 13.1 7.9 7.2 13.6 16.5 15.9 -2.1 
Table I.1 (cont'd) 
                                                      
 4 On 1 December 2009, the Treaty of Lisbon amending the Treaty on European Union and the Treaty 
establishing the European Community  (done at Lisbon, 13 December 2007) entered into force.  On 
29 November 2009, the WTO received a Verbal Note (WT /L/779) from the Council of the Eu ropean Union and 
the Commission of the European Communities stating that, by virtue of the Treaty of Lisbon , as of 1 December 
2009, the European Union replaces an d succeeds the European Community. WT/TPR/S/224/Rev.1 Trade Policy Review 
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    2002 2003 2004 2005 2006 2007 2008 
Electricity, gas and water -10.2 9.2 -4.0 5.1 13.4 6.8 -2.7 
Construction 43.1 46.6 35.9 14.1 8.5 14.6 -11.0 
Services 5.4 10.5 7.5 10.4 14.6 12.1 4.6 
 Trade and repair 3.9 12.1 8.2 9.4 19.7 9.6 10.4 
 Restaurant and hotels 7.6 14.2 3.5 16.6 10.5 11.4 5.0 
 Transport, storage and communication 8.7 8.4 7.1 10.9 15.7 10.9 -2.4 
 Financial intermediation 22.9 18.1 12.8 52.8 36.9 15.3 3.3 
 Real estate, renting and business act ivities -1.9 10.6 11. 8 5.4 8.6 14.7 2.2 
 Public administration and defence 1.2 -2.3 9.7 -6.3 -2.4 15.9 10.3 
 Education 1.5 1.5 1.8 13.8 12.1 9.5 13.7 
 Health and social work 6.5 1.7 4.2 7.6 15.4 10.4 5.9 
 Other 3.7 18.6 7.0 16.8 7.1 23.5 -0.1 
Share of main sector in current GDP, factor prices (%)      
Agriculture, forestry and fishing 20.6 20.6 17.9 16.7 12.8 10.7 10.3 
Mining and quarrying 0.7 0.9 0.9 0.9 1.2 1.0 0.8 
Manufacturing 13.7 13.9 13.4 13.7 12.7 12.7 12.3 
Electricity, gas and water 4.5 4.0 3.4 3.2 3.1 2.8 2.5 
Construction 5.5 6.8 8.8 9.1 7.9 7.8 6.1 
Services 56.1 54.8 56.5 57.7 63.2 66.1 69.3 
 Trade and repair 13.7 14.1 13.9 13.5 15.6 14.8 16.1 
 Restaurant and hotels 3.1 3.0 3.0 3.2 2.6 2.4 2.4 
 Transport, storage and communication 15.2 14.8 14.6 14.0 13.2 12.1 11.6 
 Financial intermediation 1.6 1.6 1.4 2.3 2.4 2.5 2.4 
 Real estate, renting and business activities 6.4 6.4 6. 3 6.0 6.5 6.5 6.6 
 Public administration and defe nce 4.2 3.8 6.4 7.3 9.7 14.9 17.3 
 Education 3.9 3.5 3.8 3.7 4.2 3.8 4.0 
 Health and social work 5.0 4.3 3.8 3.9 5.0 4.7 4.7 
 Other 2.9 3.2 3.2 3.7 3.8 4.4 4.3 
Less:  FISIM adjustmenta 1.0 1.0 0.8 1.3 0.9 1.1 1.3 
Share of sector in total employment (%)        
Agriculture, forestry and fishing 53.8 54.9 54.0 54.3 55.3 53.4 .. 
Mining and quarrying 0.3 0.2 0.2 0.3 0.2 0.3 .. 
Manufacturing 4.6 4.9 5.1 5.1 4.7 4.9 .. 
Electricity, gas and water 1.4 1.1 1.2 1.3 1.1 1.1 .. 
Construction 1.9 2.2 2.4 2.5 3.1 4.2 .. 
Services 37.9 36.6 37.2 36.4 35.7 36.3 .. 
 Trade and utilities 11.7 10.9 11.0 10.8 9.6 9.9 .. 
 Restaurant and hotels 0.8 0.9 1.1 0.9 1.0 1.1 .. 
 Transport, storage and communication 4.3 4.2 4.2 4.0 4.5 4.2 .. 
 Financial intermediation 0.4 0.5 0.7 0.8 0.8 1.0 .. 
 Real estate, renting and business activities 1.1 1.8 1. 6 1.5 1.5 2.0 .. 
 Public administration 5.9 5.0 4.9 4.7 4.5 3.8 .. 
 Education 7.1 7.5 7.5 7.5 7.6 7.3 .. 
 Health and social work 3.4 2.7 3.1 3.3 3.0 3.5 .. 
 Other 3.2 3.1 3.1 2.9 3.2 3.5 .. 
.. Not available. 
a FISIM stands for Financial Intermediation Services Indirectly Measured. 
Source:  Georgia Statistics online information.  Viewed at :  http://www.statistics.ge /main.php?pform=54&plang=1 
[May 2009]. Georgia WT/TPR/S/224/Rev.1 
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13. Labour productivity in agriculture is barely on e-tenth of that in the rest of the economy, 
generating relatively low incomes and thus poverty.  According to the latest poverty assessment of 
Georgia by the World Bank, rural areas account for 59% of the total poor and 62% of the extreme poor in the country.
5  With a widening rural-urban income ga p, agriculture's performance is critical 
for poverty reduction, which contin ues to be prevalent in rural areas left behind by the economic 
growth of recent years.  To reduce poverty in the longer term, the World Bank recommends the introduction of measures to revitalize the agriculture  sector, where livelihoods continue to rely on 
low-productivity subsistence agriculture.  
14. Industry – comprising mining, manufacturing, u tilities and construction – contributed 21.7% 
of GDP in 2008 and provided employment to 10.5% of the total employed labour force in 2007, 
making labour productivity more than twice the level in  the rest of the economy.  The most significant 
parts of the sector are the agri-processing and en ergy industries.  Construction work on two 
international pipelines contributed to significant expa nsion in the construction, industrial, and services 
sectors in the early 2000s.   
15. The services sector, particularly market-ori ented services, has undergone rather rapid 
development, in particular with regard to trad e, transport, and financial services, as well as public 
administration and defence.  It accounted for over 69% of GDP in 2008, up from 56% in 2002,  
engaging over one third the employed labour force in 2008.  Transport is a ke y sector given Georgia's 
location as the shortest transit link from A zerbaijan and Central Asia to Europe.    
(iii) The shadow economy 
16. Studies carried out over the past few years suggest  that Georgia had one of the largest shadow 
economies in the former Soviet Union;  some esti mates indicate that it was as much as 67% of GDP 
in 2000.
6  The size of informal sector production and household production for own final use is likely 
to have declined since the present G overnment came to power in late 2003.7  Reform measures and 
the targeting of several high-pro file businessmen on charges of corruption and tax evasion may have 
spurred enterprises to start paying taxes and enter th e formal economy.  The authorities maintain that 
although there are no official estimates of the curre nt size of the shadow economy it  has declined 
significantly, as witnessed for exam ple by the increase in the number of registered enterprises (from 
36,000 in 2005 to 51,000 in 2007) and the rise in the tax to GDP ratio from 18% in 2004 to 25% by 2007. 
(3) M
AIN ECONOMIC DEVELOPMENTS  
(i) Macroeconomic performance 
17. Prior to the August 2008 armed conflict with Russia, the Georgian economy was growing 
strongly, with GDP rising by nearly 10% per a nnum on average led by construction, financial 
intermediation, communications and,  more recently, manufacturing.  Underlying this was a rapidly 
improving business climate and increasing inflows of foreign direct investment, which jumped from 
8.4% of GDP in 2003 to an estimated 17.2% in 20 07.  Rising public expenditures, financed by a 
substantial increase in the tax to GDP ratio were being directed at improvements in education and 
                                                      
5 World Bank (2009b), p. 52. 
6 Based on Schneider and Enste (2002).  The figure is quoted in OECD (2009). 
7 Informal sector production is defined in the OECD paper as low-level production with the intent of 
generating employment and income to the persons concerned.  This is quite different from underground 
production, i.e. activities that are de liberately concealed from pub lic authorities to avoid ta xes, social security 
payments or certain legal/administrative standards. WT/TPR/S/224/Rev.1 Trade Policy Review 
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health services and in targeted social assistance for the poor as we ll as infrastructure (Table I.2). 
Economic policies were guided overall by reliance on the private sector for growth in a liberalized 
trade, investment, and business environment. 
Table I.2 
Selected macroeconom ic indicators, 2002-08 
  2002 2003 2004 2005 2006 2007 2008 
National accounts (Percentage change)  
Real GDP (at 2003 prices)  5.5     11.1       5.9       9.6       9.4       12.3     2.1 
          XGS/GDP (%) (at current market price) 29.2 31.8 31.6  33.7    32.9     31.2   28.7 
          MGS/GDP (%) (at current market price)       42.4      46.4     48.2      51.6      57.0       58.0   57.7 
Unemployment rate (%)      12.6      11.5      12.6      13.8      13.6       13.3  16.5 
Prices and interest rates (Per cent)  
Inflation (CPI, %age change, period average)      5.6        4.8       5.7      8.2      9.2        9.2  10.0 
Inflation (CPI, %age change, end period)     5.4      7.0     7.6      6.2      8.8      11.0    5.5 
Deposit ratea  9.82   9.28  7.24   7.55 11.44   9.52    10.39 
  (10.23)  (9.19)  (7.66)  (5.94)  (6.60)   (7.28)   (9.01) 
Lending ratea  31.83  32.27  31.23   21.63  18.75   20.41   21.24 
  (29.27)  (27.62)  (27.06)  (24.18)  (22.50)   (18.64)  (20.43) 
Money credit (end period) (Percentage change)  
Reserve money (M1) 19.7   14.3   46.9   16.2   26.3    40.1    -7.8 
Broad moneyb   17.9   22.8    42.4    26.5    39.7      49.7    6.9 
Credit to private sector     21.4    23.5    29.1     78.3    56.7      79.1  31.7 
Exchange rate        
Lari/US$ (annual average)   2.19   2.15    1.92    1.81    1.78     1.67   1.49 
Real effective exchange rate (%age change)    -6.4       -6.8      6.8      6.3    5.9       3.8      16.4 
Nominal effective exchange rate (%age change ) -3.3         -4.9      6.4     3.7     1.9      0.1  13.4 
 (Per cent of GDP, unless otherwise indicated)  
Consolidated Government operations        
Revenue and grants  ..   15.7    23.1    24.3     27.9     29.3   30.7 
       Tax revenue  ..    11.7    15.6    17.1    19.2     21.6   24.9 
Current expenditure  ..    14.7    18.7    20.9    21.6     25.8   28.4 
Operational balance  ..     1.0      4.4     3.5      6.3      3.5    2.3 
       Capital spending and net le nding  ..  ..     2.0     5.1      9.3       8.2   8.7 
Total balance  ..  ..      2.4         -1.6         -3.0   -4.7     -6.4 
Government total debt (end-period)  ..   53.8     43.8    35.1     28.0       23.1    27.0 
   Domestic debt  ..    18.3    16.0     13.2     11.0        8.8      7.7 
Saving and investment         
Gross national savings      19.8     23.2     22.5     22.8     14.9      14.6    8.5 
Gross domestic investment   28.5     31.3    31.9     33.5     30.9     32.1    27.0 
Savings-investment gap  -8.7   -8.1   -9.4  -10.7  -16.0   -17.5   -18.5 
External sector        
Current account balance   -6.3  -9.6  -6.9  -11.1  -15.1   -19.8   -22.8 
Net merchandise trade   -14.4  -16.0  -17.9   -18.9   -26.0   -28.5   -30.0 
   Merchandise exports 17.8  20.8   21.3   23.0   21.5    20.5   19.0 
   Merchandise imports   32.1  36.8   39.2  41.9   47.5   49.0   48.9 
Services balance   1.3 1.5   1.4    1.3    2.0      1.6    0.2 
Capital account  0.5  0.5   0.8     0.9   2.2   1.3   0.8 
Table I.2 (cont'd) Georgia WT/TPR/S/224/Rev.1 
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  2002 2003 2004 2005 2006 2007 2008 
Financial account   6.4   8.8  9.4 11.5   19.4    22.5   23.4 
    Foreign direct investment in Georgia   4.7   8.4   9.6  7.1   15.1   17.2   12.2 
Balance-of-payments    0.9   -0.5    3.5    1.7   5.7    3.7    1.0 
Merchandise exports (%age change)  21.6   37.7  31.5  34.8   13.2    25.3   16.3 
Merchandise imports (%age change)    4.5   34.4   36.7   33.8   37.2     35.2   25.6 
Service exports (%age change)    30.0    12.1    21.1    28.9    23.8    23.6   15.2 
Service imports (%age change)   53.4     9.2   22.3  30.2   15.1    28.3   32.7 
Foreign exchange reservesc (US$ million, end-
period)  199.3    191.3   375.4   477.6  929.9  1,346.3  1,467.8 
    In months of imports of goods and services   1.6     1.2      1.8      1.7      2.5      2.7   .. 
External debt (US$ million)   1,858.8   2,042.1   2,138.0   2,095.0   2,328.0  3,136.0  4,581.0 
Debt service ratiod  ..  ..        41.7        32.7        30.0      30.7       35.6 
.. Not available. 
a Data in brackets refers to inte rest rates in foreign currencies. 
b Broad money consists of cash outside banks (except reserves in  vaults of commercial banks) and total national currency deposi ts 
with commercial banks, including fo reign currency denominated deposits. 
c Excluding gold, Special Drawing Rights, and Reserve Position in the IMF. d Debt service in per cent of exports of goods and services. 
Source: Georgia Statistics online information.  Viewed at:  http://www.statistics.ge/main .php?plang=1 [June 2009];  
IMF (2009), International Financial Statistics , June;  National Bank of Georgia on line information.  Viewed at:  
http://www.nbg.gov.ge/index.php?m= 306 [June 2006];  and data provided by the authorities. 
18. However, the recent growth has largely been  jobless in net terms, as high quality private-
sector jobs created have just about compensated fo r job cuts resulting from public sector reforms.  The 
total number of active persons in the labour force has been declining, from 2.1 million in 2002 to 
1.9 million in 2008.  Over the same period, the unemployment rate rose from 12.6% in 2002 to 16.5% 
in 2008, with significant lay-offs reported recently in  the construction, financial and retail sectors.  
Poverty remains widespread at  an estimated 22.1% in 2008 compared with 21.3% in 20078, an 
increase probably due to the conf lict and the economic downturn. 
19. The August 2008 armed conflict with Russia took a significant toll on the country, with about 
127,500 people displaced, much physical capital dest royed, important trade routes disrupted, and the 
Government's authority in large segments of its te rritory undermined as 20% of Georgian territory 
was occupied by Russia.9  The armed conflict resulted in sever e shocks to macroeconomic stability 
and a sharp deterioration in investor and consumer confidence.  GDP growth declined sharply in the 
second half of 2008, resulting in real growth of 2.1% for the year as a whole, down from over 12% in 2007.  In the first quarter of 2009, the economy contracted by 5.9%.  The on-going global economic crisis continues to cast a shadow over Georgia's growth prospects with lower commodity prices (in 
particular for fertilizers and metals), a drop in dema nd for Georgian exports and  a significant decline 
in private capital inflows, which have been the main driver of growth,  all negatively affecting the 
economy.  
                                                     
 
8 Estimates provided by the Ministry of Economic  Development, according to  which the subsistence 
minimum was GEL 127.9 per month in 2008, a 52% increase compared with 2004 when poverty was an estimated 24.6%.   
9 According to a recent UN/World Ba nk report, about 106,000 of the displaced persons have returned 
to the Shida Kartli region in the Gori Valley and have received assistance in the rehabilitation of damaged and destroyed houses.  See UN and World Bank (2009), p. 8. WT/TPR/S/224/Rev.1 Trade Policy Review 
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20. Georgia has run a large current account deficit,  which reflects high gross domestic investment 
(equal to 27% of GDP in 2008) in relation to na tional savings (8.5% of GDP in the same year).10  The 
deficit has been expanding progressively both in ab solute value terms and as a percentage of GDP 
since 2004 when it was 6.9%;  in 2006 the overall deficit expanded to 15.1% of GDP, and widened 
further to 22.8% in 2008.  While narrowing, the cu rrent account deficit remained high at 17.6% of 
GDP for the first quarter of 2009.  The marked deterioration in 2006-07 was attributable to a sharp widening of the trade deficit, mainly the result of the Russian trade embargo, which undermined 
Georgian exports.  Overall, current account deve lopments have been dominated by rapid import 
growth, due to growing domestic demand, FDI-related imports, and rising energy prices.  The current 
account deficit has been covered by the surpluses in  the capital and financial accounts, mainly due to 
large FDI inflows, which increased significantly  between 2003 and mid-2008.  The surplus on the 
capital and financial account helped to improve th e official reserves position, which was at around 
US$1.5 billion (about 3 months of import cove r) at end 2008, a significant improvement over 2003 
when it was as low as 1.2 months of import cover.  
21. According to the IMF, the external current account deficit narrowed substantially during the 
second half of 2008 (by around 4% of GDP) led by large official inflows from September.
11  T h e   
deficit is narrowing faster than expected, led by  declining imports; declining import demand, and 
improved confidence, which have reduced pressur es on the exchange rate.  The trade balance 
remained broadly unchanged relative to the first ha lf of the year as a severe drop in metal prices and 
exports was broadly offset by lower FDI-related imports and petroleum prices.  Private capital 
inflows, which have been financing the current account deficit, dropped from US$1.7 billion during 
the first half of the year to an estimated US$450 million during the second half.   
22. Improving productivity and thus the external competitiveness of the private sector is of 
particular importance in generating sustained growth  and improving the current account balance.  The 
key to raising productivity and competitiveness is co ntinued efforts to improve infrastructure and the 
business environment.  However, rapid economic growth during the period (driven primarily by 
construction, telecommunications, finance, and other services) has not been associated with rapid 
growth of exports relative to the overall economy:   merchandise exports as a share of GDP remained 
relatively low and stable at about 20%. 
(ii) Monetary and exchange rate policies 
23. The IMF characterizes the exchange rate regime as "managed floating" with no predetermined 
path for the exchange rate.  The authorities believe  a managed floating exchan ge rate regime remains 
appropriate for Georgia, with the National Ba nk of Georgia (NBG) acting to limit nominal 
appreciation.  The August conflict led to pressure on  the currency and a loss of international reserves 
but gross reserves were US$1.5 billion by the end of June 2009, re-estab lishing the level observed 
before the August conflict.  The currency was devalued by about 16% in November 2008 and 
currency auctions were introduced in March 2009 to al low the market to determine appropriate levels. 
Exchange rates have been relatively stable in 2009, aided by the reduction in demand for foreign 
exchange due to slowing import demand.  
24. Inflation was maintained in single digits through most of the review period but crept into 
double digits late in 2007 largely due to rising energy and food prices, as well as large capital inflows.  
                                                      
10 Whether Georgia's large current account deficit is sustainable raises the question of the potential risk 
of the widening of the savings-investment gap, ste mming from the expected slowdo wn in FDI from its recent 
high levels. A slowdown will require an adjustment in the savings-investment gap, either through a 
retrenchment in investment or through higher private savings to finance growing domestic private investment.  
11 IMF (2009a), p. 6. Georgia WT/TPR/S/224/Rev.1 
 Page 9 
 
 
Inflation slowed considerably in 2008 as gl obal commodity prices receded and domestic demand 
contracted given the NBG's focus on tightening mone tary policy to contain inflation pressures in the 
first half of 2008.  End-period inflation was 5.5%  for 2008 and, according to the authorities, 12-month 
inflation was only 2.3% as of end-June 2009.  In the second half of 2008, the NBG changed focus and 
deployed monetary instruments as part of the macr oeconomic stimulus package.  To provide needed 
liquidity, reserve requirements were lifted although th e desired response from the banks – in terms of 
supplying credit to the private sector at afford able rates – has been disappointing temporarily.12  
(iii) Fiscal policy 
25. From 2004 to mid 2008, the key improvements in  tax revenue – a simplified and more 
transparent tax policy, a reduction in the numbe r of taxes, efficient and corruption-free tax 
administration, expanding economic activity, and th e increase in taxes collected on imports, reflecting 
strong import growth – pushed revenue  collection to new heights and helped to create the fiscal space 
for growth-oriented public spending.  During this pe riod, trade taxes, comprising customs and excise 
duties and VAT, increased as a share of total tax revenues from 32% to 38% although customs duties 
declined markedly in line with r ecent tariff liberalization, accounting for only 3% of total trade taxes 
in 2008 compared with 16% in 2004.  At the beginning of 2008, the authorities established a 
sovereign wealth fund to save resources generated by the revenue performance.  
26. The August conflict and the economic downturn led to revenue shortfalls compared with pre-
crisis targets, in particular with respect to VAT revenues.  Central to the authorities' fiscal response 
have been expenditure measures underwritten by significant donor inflows to support job-creating 
investment projects and the broadening of the social safety net. Although the fiscal deficit is expected 
to increase to around 9% in 2009, c overed in large part by increased do nor support, the Government is 
committed to reducing it to be tween 2% and 3% by 2013.13  
27. The major macroeconomic challenge in 2009 is to restore private capital inflows to support 
growth.  The Government estimates that FDI infl ows will be of the order of US$900 million, 40% 
lower than in 2008, which significantly reduces an im portant source of growth for the economy.  The 
significant financial support made available to Georgia by the international community will be 
directed to capital expenditures necessitated by the conflict14, as well as spending to establish a 
foundation for sustained economic growth over the medium-term.15  These resources will help to 
support growth in 2009 but cannot be a full substitute for private-sector investment.  To enhance 
                                                      
12 The central bank raised the policy rate to 12% in April 2008, cut it in September, and by the end of 
the year it was at 8%. 
13 IMF (2009). 
14 The international community – through an October 2008 Donors' conference led by the World Bank 
and the European Commission – responded to the crisis by providing pledges of financial support totalling 
US$4.5 billion over 2008-10 in order to:  provide financial assistance in light of the sudden decline in capital 
inflows;  help Georgia with its external financing needs to maintain its macroeconomic stability;  and assist with 
the  rebuilding of its damaged infrastructure and help Georgia cope with the downturn of the economy and the 
substantial social needs of its (new and past) displaced population.  With donor money flowing in, the 
authorities have the room to expand fiscal policies further to counteract the adverse impact from the shocks on economic activity.  The 2009 fiscal deficit is expected to increase to 6.8% of GDP, up from 6% in 2008.  The 
authorities have committed to allocate donor assistance in a fully transparent and efficient manner. 
15 According to the authorities, in 2009 fiscal policies will support the economic recovery with a 
stimulus package that includes a moderate increase in total spending, a reduction in the rate of the profit tax, and 
a shift from import-intensive defence spending to labou r-intensive construction projects.  Particular emphasis 
will be given to capital projects to improve medium-term competitiveness as the basis for future growth.  These projects will be financed mainly from the pledges of the international community. WT/TPR/S/224/Rev.1 Trade Policy Review 
Page 10 
 
 
Georgia's appeal to investors, the authorities cons ider that maintaining macroeconomic stability and 
intensifying economic reforms are essen tial elements in moving forward.  
28. Although Georgia is likely to require signi ficant external financing during 2008-11, its 
external debt is expected to remain sustainable in  the medium term.  As a result of appropriate debt 
management and effective macroec onomic policies, Georgia had a low level of indebtedness prior to 
the economic downturn, with external public debt declining from 44.9% in 2003 to 22% in 2006, and a record low of 17.6% in 2007.  Following the armed conflict, external public debt rose in 2008 but remained manageable at 21.7% of GDP.  
(iv) Structural reforms and private-sector development   
29. Since 2004, Georgia has implemented a policy of  wide-ranging economic reform to foster 
economic growth through private-sector investment.  Georgia eliminated barriers to private-sector activity by deregulating the economy, privatizing most state assets, simplifying and reducing the number of taxes leading to a higher tax to GDP ratio, liberalizing the trade regime, investing in infrastructure, and significantly reducing bureaucra tic barriers.  This has helped to increase 
transparency and thus accountability and th ereby reduce discretion and corruption. 
(a) Improving the business environment 
30. The Government has remained committed to its medium-term reform agenda, continuing 
improvement of the business environment through re ducing tax rates on income and simplifying tax 
administration, significantly improving customs services, and rationalizing the licensing system.  The latter was a key area in transforming the business environment.  Consequently, the cost of doing 
business has fallen appreciably and inward FDI has su rged.  Arbitrary tax enforcement, inadequate 
legal protection, discretionary application of la ws and regulations, and pe rvasive corruption were 
among the main reasons why foreign inv estors previously shunned Georgia. 
31. Georgia is ranked 11
th out of 183 economies in the World Bank's Doing Business index for 
201016, and has been among the top ten reforming countries for the last four years.  When Georgia 
began major reforms in 2005, it was ranked behind ma ny of the countries in the region, such as 
Armenia, Russia, Kazakhstan, Turkey;  it has moved up 101 positions since then (Table I.3).  
According to the World Bank's index, reforms in Geor gia have made it easier to start a business, have 
cut the number of activities that require licences from 950 to 150, eased the cost of separating redundant workers, and cut the time and cost to regist er property.  However, attention is still needed 
in some areas, such as further simplifying tax collection and enhancing investor protection.  
32. Despite a number of successful reforms, weaknesses remain:  the most recent World 
Economic Forum Global Competitiveness Index
17 ranks Georgia 90th out of 134 countries.  The report 
highlights Georgia's reduced regulatory burden and labour market efficiency as sources of competitive advantage but also lists a large number of sources of competitive disadvantage, including:  lack of 
higher education and training, financ ing constraints particularly for small enterprises, limited financial 
market sophistication, small market size, and defi ciencies regarding availability of technology, poor 
business sophistication, and very limited innovation and R&D capacity.
18  
                                                      
16 World Bank (2009a).  The report covers June 2008 to May 2009.  
17 World Economic Forum (2008). 
18 Rapid economic growth requires inter alia  public policies that foster education and training as well 
as a research and innovation policy directly relevant to a country's sustainable economic policy objectives.  See Gylfason and Hochreiter (2008);  and Ivianiashvili-Orbeliani (2009). Georgia WT/TPR/S/224/Rev.1 
 Page 11 
 
 
Table I.3 
Ease of doing business, 2005 and 2010 
Ease of ... Doing business 2010 rank Doing business 2005 ranka Change in rank 
Doing business 11 112 +101 
Starting a business 5 59 +54 
Dealing with licences/permits 7 152 +145 
Employing workers 9 71 +62 
Registering property 2 18 +16 
Getting credit 30 96 +66 
Protecting investors 41 133 +92 
Paying taxes 64 160 +96 
Trading across borders 30 149 +119 
Enforcing contracts 41 56 +15 
Closing a business 95 98 +3 
a Out of 181 economies. 
Source:  World Bank (2009), Doing Business in Georgia 2010.  Viewed at:  http://www.doingbusiness.org/economy 
 rankings/. 
(b) Tax and customs reforms 
33. The Government has adopted a new tax regime  that has (i) simplified the Tax Code and 
substantially reduced the tax bur den on firms and individuals by reducing the number of taxes, 
(ii) abolished exemptions and broadened the ta x base, (iii) lowered some rates to facilitate 
compliance, and (iv) distributed the tax burden more  equitably. Georgia opted for a flat-rate personal 
income tax in 2004  to reduce tax evasion and to increase the incentive for economic activity in the 
formal sector (Table I.4).  The profit tax is also levied at a flat rate and was brought down from 20% to 15% in 2008;  and the VAT single rate was reduced  from 20% to 18% in 2006.  As a result of these 
reforms, tax revenues increased from 18% of GDP in 2004 to 22% in 200 6 and 25% in 2007.  
Institutional reforms in tax administration and strict er enforcement of tax laws have also helped.  
Non-tax revenues grew by 52% in 2006, mainly due to higher collections from license and permit 
fees, state duties, fines, and penalties. 
Table I.4 
Main taxes and tax rates, 2005-08 
(Per cent) 
Type of taxes Before 2005 2005-07 2008 
Income tax 12-20 12 25 
(unified with social tax in 2008 with stepwise 
reduction to 15% by 2011) 
Social tax 27-33 20 Abolished 
(merged with personal income tax) 
Corporate (profit) tax 20 20 15 
Value-added tax 20 18 18 
Customs duty 0-30 0, 5, 12 0, 5, 12 
Source: Asian Development Bank (2007), Country Economic Report:  Georgia , Appendix 3, p. 24, June.  Viewed at:  
http://www.adb.org/Document s/CERs/GEO/CER-GEO-2007.pdf. 
34. The Government adopted a new Customs C ode in 2006, which simplified customs 
requirements and reorganized the Customs Depart ment.  A law on customs tariffs abolished the 
import tariff on most items (the laws later move d to the tax code); on other items the simple 
unweighted import tariff fell from 7.4% in 2004 to 1. 4% in 2007.  As a result of these and related WT/TPR/S/224/Rev.1 Trade Policy Review 
Page 12 
 
 
reforms, Georgia has a more open trade regime.  The reforms have reduced economic distortions and 
the scope for corruption, and customs and border processing time for businesses. 
(c) Privatization 
35. The Government of Georgia has privatized most of the largest formerly state-owned 
enterprises.19  Georgia intends to continue its policy of privatizing state-owned assets, including 
privatizing at least two thirds of the shares of the Georgian State Electricity Company;  at least 24% 
of Poti Sea Port;  Georgian Post;  about 100,000 hectares of agricultural land;  several regional airports;  and numerous other state-owned enterprises.   Privatization has played a role in attracting 
FDI, as the Government sold a wide variety of assets. 
(4) D
EVELOPMENTS IN TRADE AND INVESTMENT  
(i) Merchandise trade   
36. The merchandise trade deficit nearly doubled during the review period, from 16% of GDP in 
2003 to 30% by 2008.20  This development has been largely conditioned by rapid import growth, due 
to growing domestic demand, FDI-related impor ts, and rising energy and commodity prices. 
According to the authorities, balance-of-payments data  for the first half of 2009 show that exports and 
imports of goods declined by 35% and 38% respectiv ely (compared with the first 6 months of 2008), 
which reflects a fall in commodity prices as well as reduced domestic demand. 
(a) Composition of trade 
37. Overall there has been a shift in export co mposition away from foodstuffs and agricultural 
products towards resource-based exports and, to some extent, high-technology products.  However, 
although there has been some diversification, Geor gia's export structure remains quite concentrated 
with the top five export categories – base metals, prepared foodstuffs, mineral products, chemical 
products, machinery and equipment, and cement – accounting for over 70% of export revenues.  
Metals including ferrous metals, copper, gold, an d other minerals account for 20% of exports 
(Chart I.1 and Table AI.1).  Exports of ferrous metals were buoyant in 2007, making up an increasing 
share of total exports, attributable to an increase in  domestic production as well as rising steel prices.  
Overall, merchandise exports performed well in th e first three-quarters of 2008 before weakening 
because of the global downturn.  Export revenues for copper and other metals, among the country's 
top exports, were affected by the retreat in global demand and prices. 
38. Exports of cement rose sharply in 2007 a nd 2008, because of higher cement prices and the 
rehabilitation of Georgia's main cement-producing fac ilities.  Car exports have risen in recent years, 
but these comprise re-exports to neighbouring countri es;  Azerbaijan absorbs much of the used cars 
imported into Georgia (mainly from Germany).  Ge orgia remains largely dependent on exports of 
low-value-added goods, leaving it vulnerable to ex ternal shocks.  The Russian embargo has had an 
impact on overall export revenue, a lthough efforts to reorient domestic output to other markets have 
proved partially successful. 
                                                      
19 See Ministry of Economic Development online information for a list of entities to be privatized.  
Viewed at:  http://www.privatization.ge. 
20 The widening trade deficit has been partially offset by growing surpluses in other current account 
balances, including the non-factor se rvices account, which has been boost ed by revenues from oil pipeline 
services since the BTC pipeline has been running near full capacity. Georgia WT/TPR/S/224/Rev.1 
 Page 13 
 
 
Chart I.1
Product composition of merchandise trade, 2002 and 2008
2002 2008
(a)    Exports (f.o.b.)
Other manufactures
4.9
Manufactures
33.2
Total:   US$346.3 million Total:  US$1,497.5 million
(b)    Imports (c.i.f.)
Chemicals
13.4
Iron & steel
2.6Transport equipment
8.2
Manufactures
56.6Electrical 
machines  
8.6Non-electrical 
machinery
8.5Non-electrical 
machinery
6.6
Other
0.6Electrical
machines
11.3Ores & 
other minerals
19.2
Other 
semi-manuf.   
9.5Transport 
equipment
11.4
Chemicals
9.1Manufactures
63.6
Total:   US$793.3 million Total:   US$6,055.7 millionPer cent
Manufactures
51.7
Ores & 
other minerals
20.0Fuels
3.0Transport equipment
16.4
Other 
manufactures
10.8
Other
0.4Mining
23.2Golda
6.7Other semi-manuf.  
6.3Transport equipment
10.9
Agriculture
18.3Fuels
5.5
Source :  UNSD, Comtrade database (SITC Rev.3).Other
  manufactures
8.0
Mining
20.0Other manuf.
4.3
Iron & steel
19.5Iron & steel 
4.9
Other semi-manufactures
  7.2Mining
26.5
Agriculture
32.0
Agriculture
15.9
Agriculture
21.4Mining
21.7
Iron & steel
4.8Other mining  1.9
Other mining 
0.2Chemicals
7.0 Chemicals  
10.5
Golda
8.3
Fuels
18.0Fuels
20.8Other mining
2.0Other mining 
0.8
a       Non-monetary gold (excluding gold ores and concentrates).Other
0.2
 WT/TPR/S/224/Rev.1 Trade Policy Review 
Page 14 
 
 
39. Georgia's largest import category is hydrocarbons (m ainly oil and gas).  It continues to import 
electricity, but a large government programme is in place to revive and expand the considerable 
potential for hydroelectric power generation.21  Georgia is a net exporter of electricity to Azerbaijan, 
Turkey, and Russia. Other major imports are motor cars, electronic and computer equipment, 
pharmaceuticals, and wheat (Table AI.2). 
(b) Direction of trade 
40. Georgia's trade with the CIS countries declined during the review period,  with exports falling 
from nearly 49% in 2002 to 36% in 2008. Trade with  Russia fell back sharply following the trade and 
transit embargo it imposed in 2006;  until that poi nt it had been Georgia's main trading partner 
(Chart I.2).  While this contributed to a sharp slow down in export growth, in particular in exports of 
alcoholic beverages, traditionally destined for Ru ssia, other factors, including significant private 
capital inflows, cushioned the impact of the slowdow n, allowing the Georgian economy to continue to 
grow.   
41. The EC27 is Georgia's main trade partner, accounting for roughly one fifth of exports and 
over one quarter of imports during th e review period (Tables AI.3 and AI.4).  Georgian exports were 
dominated by mineral fuels (around 40% of total e xports) and agricultural products (almost 30%).  
Turkey has consolidated its position as Georgia's le ading single trade partner, accounting for nearly 
18% of exports and 15% of imports in 2008, following the decline of trade with Russia.  Turkey absorbs the bulk of Georgia's exports of scrap meta ls.  The United States became a leading destination 
for Georgian exports in 2007, buying up much of the output of ferrous alloys. 
42. In terms of imports, Turkey supplies mainly  consumer goods and domestic appliances.  
Azerbaijan has become an important trading partner,  providing a market for almost all of Georgia's 
cement production and is Georgia's main supplier of oil and gas.  Ukraine supplies an assortment of 
goods, mainly consumer goods and metal products .  Whereas Georgia was a net supplier of 
agricultural products in the FSU, it has become a net importer of agricultu ral and related products, 
which account for 15% of total imports. 
(ii) Services trade 
43. Services trade was roughly in balance during th e review period, with exports and imports 
each amounting to about US$1.2 billion in 2008 (Cha rt I.3 and Table AI.5).  Exports of travel, 
transportation, and other services remained quite co nstant in terms of trade shares over the review 
period, although in the transport sector Georgia has benefited from an increase in hydrocarbons 
transiting its territory, as oil and gas pipelines have become fully operational. On the import side, the 
share of travel has halved while the shares of tr ansportation and financial and business services have 
increased. 
                                                     
 
21 To this end, the Government sold several hydropower plants in 2007 to EnergoPro (Czech Republic), 
which pledged to invest heavily in the rehabilitation of the plants. Georgia WT/TPR/S/224/Rev.1 
 Page 15 
 
 
Chart I.2
Direction of merchandise trade, 2002 and 2008
2002 2008
(a)    Exports (f.o.b.)
CIS
48.7
Total:   US$346.3 million Total:  US$1,497.5 million
(b)    Imports (c.i.f.)
Other 
6.9
EC27
31.3Other CIS
3.9
United States
8.7
EC27
27.4China  4.9
   Turkey
15.1United States
4.0
Total:   US$793.3 million Total:   US$6,055.7 millionPer cent
CIS
36.2Middle East  1.8Russian Federation 
17.7
Middle East 
6.2Other 
CIS
5.1
Middle East  2.1United States
3.9Ukraine 
3.7
United States
6.8Other  4.7
Source :  UNSD, Comtrade database (SITC Rev.3).Ukraine
10.8Armenia
8.3
EC27
22.3Turkey
15.5Middle East   2.0
Switzerland
7.0
CIS
33.0 CIS
36.9Ukraine
7.4Other  5.0Other Asia  4.4  Ukraine
9.0
EC27
18.4Other  2.5Asia  1.9Other CIS
2.5
Canada
8.8Turkey
17.6Asia  1.8
Turkey
11.3 Asia   2.9Azerbaijan
10.0Azerbaijan
10.1Azerbaijan
8.5Other CIS  3.3Russian
 Federation
1.9
Russian 
Federation
7.0Russian Federation
15.4Armenia
5.8Azerbaijan
13.7Turkmenistan
10.6
 WT/TPR/S/224/Rev.1 Trade Policy Review 
Page 16 
 
 
2002 2008
(a)    Exports
Financial & business
6.5
Travel
30.8
Total:   US$408.4 million Total:  US$1,260.4 million
(b)    Imports
Business travel
21.8Government
11.0
Travel
41.0Financial & business
11.3Communication
2.9
Personal travel
4.5
Other
2.9Communication
1.1Air transport
5.0
Business travel
11.9Financial & business
21.0
Travel
16.4
Total:   US$363.4 million Total:   US$1,237.7 millionPer cent
Travel
35.4
Air transport
6.6Communication
4.3
Government
6.7
Other
4.0Transportation
48.7Government
8.2Personal travel
15.0Communication
1.9
Sea transport
6.7
Pipeline transport & electricity 
transmission
11.5
Transportation
51.9Financial & business
4.9 Business travel
20.4Business travel
18.1
Personal travel
19.2Transportation
49.2Sea transport
9.3
Sea transport
14.7Sea transport
6.7 Transportation
29.9
Other transport
24.4Other transport
23.4Other  transport
14.1Personal travel
12.7
Government
9.3
Air transport
12.8Air transport
13.2
Other transport
10.0Other
0.9
Source :   National Bank of Georgia online information.  Viewed at:  http://www.nbg.gov.ge/index.php?m=
                  306&lng=eng#external [8 June 2009].Chart I.3
Trade in services, 2002 and 2008
Pipeline transport & electricity 
transmission
21.3
 Georgia WT/TPR/S/224/Rev.1 
 Page 17 
 
 
(iii) Trends in foreign direct investment (FDI) 
44. During the review period, FDI responded to an improving business climate and aggressive 
privatization;  it more than doubled between 2003 and 2007, from 8.4% of GDP to 17.2%.  FDI 
inflows rose strongly in 2003-04 mainly due to the construction of the Baku-Tbilisi (BTC) oil pipeline 
and the South Caucasus gas pipeline (SCP).  Since  the completion of the BTC pipeline in 2004, the 
inflows have been largely non-pipeline related, fro m privatization in the network industries, real 
estate, basic industries, and mining and minerals pro cessing (Table I.5).  After declining in 2005,  FDI 
increased in 2006 to nearly US$1.2 billion and to US$1.7 billion in 2007, as investment in manufacturing, banking and tourism compensated for lower pipeline-related investment.  As a result 
of the August conflict, net foreign direct investme nt inflows fell in 2008 to around US$1.5 billion and  
the authorities forecast around US$900 million for 2009.   In 2007, the EC27 accounted for over 56% 
of FDI inflows and in 2008 the EC, UAE, and Turkey accounted for nearly 60%. 
Table I.5 
Inflows of foreign direct investment, 2002-08 
(US$ million and per cent) 
  2002 2003 2004 2005 2006 2007 2008 
Total inflows (US$ million) 160.2 334.6 492.3 452.8 1,170.1 1,750.2 1,564.0 
     % of GDP 4.7 8.4 9.6 7.1 15.1  17.2   12.2 
 (Per cent of total)  
Inflows by origin        
EC27 34.9 28.2 39.2 54.2 34.2 56.2 30.5 
   United Kingdom 10.5 11.1 17.6 29.6 15.7 7.2 9.5 
   Netherlands 0.0 0.0 0.0 0.1 1.6 14.9 8.7 
   Austria 0.0 5.3 4.6 3.3 0.9 0.6 3.3 
   Germany 2.5 1.2 1.0 1.1 1.7 2.8 2.6 
United Arab Emirates 0.0 0.1 0.0 0.1 0.0 6.5 19.6 
United States 49.1 21.2 16.3 3.3 15.3 4.2 10.7 
Turkey 5.3 5.1 6.8 4.8 10.9 4.7 10.5 
British Virgin Islands 0.0 1.8 1.4 1.1 4.9 9.3 10.0 
Switzerland 0.0 0.0 0.0 0.0 0.0 0.5 5.8 
Kazakhstan 0.0 0.0 0.0 0.0 12.8 4.4 4.2 
Belize 0.0 0.0 0.0 0.2 0.0 0.5 2.4 
India 0.0 0.0 0.0 0.0 0.0 0.0 1.7 
Russia 4.7 12.5 8.8 8.6 2.9 4.4 1.7 
Azerbaijan 0.0 0.0 0.0 0.0 0.0 2.1 1.5 
Japan 0.0 2.5 2.4 3.7 2.9 1.7 0.7 
Bahamas 0.0 8.7 13.8 14.9 6.5 0.0 0.0 
Other  6.0 19.8 11.3 9.1 9.5 7.5 2.1 
Inflows by sector        
Agriculture  ..  ..  ..  ..  ..  0.8 0.5 
Industry  ..  ..  ..  ..  ..  19.8 13.3 
Energy sector  ..  ..  ..  ..  ..  18.0 18.9 
Construction  ..  ..  ..  ..  ..  8.5 3.6 
Transports and communications  ..  ..  ..  ..  ..  20.7 27.0 
Real estate  ..  ..  ..  ..  ..  1.5 17.8 
Other services  ..  ..  ..  ..  ..  19.0 18.1 
Banking system  ..  ..  ..  ..  ..  6.8 0.5 
Not stateda  ..  ..  ..  ..  ..  4.9 0.3 
.. Not available. 
a As a result of the privatization process,  real estate bought by non-resident natura l and legal persons is not defined yet. 
Source:  Data provided by the authorities;  and Georgia Statistics online in formation.  Viewed at:  http://www.statistics.ge/ 
main.php?plang=1 [June 2009].   WT/TPR/S/224/Rev.1 Trade Policy Review 
Page 18 
 
 
45. The majority of foreign (and local) investme nt has flowed into domestic infrastructure 
(transport, telecoms, energy, real estate) and domestic-oriented services (financial services, retail, construction, etc.).  As investment has flowed into  infrastructure, construction, and retail, domestic 
demand for construction materials, food, and consumer goods has boomed , but domestic production 
of these inputs has not kept pace.  As there has been relatively limited investment in export-oriented 
agri-business and manufacturing, imports have soared , while exports have grown much more slowly. 
One of the aims of Georgia's investment policy is to persuade investors to set up production facilities 
in Georgia, either to serve the local  market or to export.  This is a challenge as investors need to be 
convinced not only that Georgia is a good place to  do business, but also that production in Georgia 
will be more competitive than producing elsewhere and then exporting the product to Georgia or to 
other countries. 
(5) O
UTLOOK  
46. The economy was badly shaken in 2008 as damage to infrastructure and disruption to activity 
in several sectors, including construction, trade, and tourism, severely dampened growth following the 
armed conflict with Russia.  The on-going global economic crisis continues to threaten Georgia's 
growth prospects with lower commodity prices (in particular for fertilizers and metals), a drop in 
demand for Georgian exports, and a significant decline in private capital inflows, which have been the 
main driver of growth, all negatively affecting the economy.  The Georgian authorities forecast a 
contraction in real GDP for 2009 of around 4% ta king into account the declines in private capital 
inflows, exports, and remittances.  
47. According to the authorities, the current account deficit is likely to narrow in 2009 to around 
16% of GDP (from the record high level of almost  23% in 2008).  Exports and imports of goods and 
services are projected to decline by 20% and 27% respectively, reflecting flat import volumes and lower world oil prices, which will bring down th e oil import bill;  in addition, exchange rate 
depreciation is likely to discourage growth in cons umer imports.  On the other hand, the slowdown in 
trading partners is seen as keeping exports subdued in 2009, neutralizing the potential boost from a 
lower exchange rate.  In particular, lower worl d demand for key commodity exports, such as copper 
and other metals, will dampen export earnings.  FDI in flows, hitherto the main source of financing for 
the current account deficit and a principal driver of economic growth, are projected to be in the region 
of US$900 million for 2009, 40% lower than in 2008 , depriving the economy of a significant source 
of growth.  Flows of workers' remittances have al so decreased as Russia (where the majority of 
Georgian working abroad are based) experiences a recession.  
48. Provided that a measure of regional stability can  be re-established, the Georgian economy 
should experience higher growth rates from 2010 based  on an expected recovery in exports and a 
significant recovery in FDI.  Based on a moderate recovery of activity, the IMF forecasts real GDP 
growth at 2% in 2010 with the level of potential growth in the medium term remaining uncertain.
22 
Inflation is expected to remain moderate at 3-5% in the medium term, down significantly from 11% at 
the end of 2007.  The large amount of external aid granted to Georgia after the armed conflict could 
stimulate higher rates of consumption and investme nt, bringing about higher GDP growth.  However, 
there are downside risks.  Should a protracted period of political uncertainty (extending to the conduct of economic policy) ensue, foreign investors may shun Georgia for a longer period. 
                                                     
 
22 IMF (2009c), p. 11. Georgia WT/TPR/S/224/Rev.1 
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49. Structural reforms will be key both to further st rengthening Georgia's resilience to shocks and 
to sustaining growth.  When there is a recovery in external demand, structural reforms should help in 
attracting investment into export activities, impr oving productivity, thereby helping to create an 
enabling environment for export diversification.