Georgia’s macroeconomic situation in light of Russian sanctions
On 21 June, Russia announced a ban of direct flights to/from Georgia. The ban will not only have a strong impact on the tourist industry, but will also affect the macroeconomic situation, given the importance of tourism for the Georgian economy.
The estimated impact of Russian sanctions on GDP amounts to 1 percentage point. As a result, we expect a slowdown in real GDP growth from 4.7% in 2018 to 3.6% in 2019. Expectedly, the Georgian Lari has come under pressure: since 21 June, the Lari depreciated by about 4.5% against the US dollar. As a consequence, inflation will be somewhat higher than previously expected. This will be the case, because of the “pass through” effect of a depreciated currency on consumer prices. Moreover, we expect the previously improved current account deficit (“only” 7.9% of GDP in 2018) to deteriorate by around 1 percentage point, as foreign exchange inflows from the tourist sector will be hit. The Georgian government has already reacted to thesanctions, offering economic support to vulnerable businesses. This will most likely make fiscal policy more expansionary, thus leading to a higher, but manageable, budget deficit. In total, the shock will be significant, but manageable. Both monetary and fiscal policy have been prudent in the last years, which allowed to build up buffers. In the long-run, it will be crucial for Georgia to increase its efforts to diversify its economy in order to be less vulnerable to external shocks – something GET Georgia has been advocating in the past.
