Reduction of Georgia’s current account deficit: a new trend?
Traditionally, Georgia has a high current account deficit, which averaged 13% of GDP between 2007 and 2016. This has caused some concern, as it makes the country vulnerable to external shocks. However, in the last two years, Georgia’s current account deficit has been declining, standing at “only” 7.7% of GDP in 2018.
This positive development has come mostly on the back of an increase in exports of services, which is the result of a booming tourism sector. Moreover, remittances have been strong, reaching record levels of about USD 1.6 bn in 2018. In contrast, Georgia’s trade deficit has even increased in 2018, amounting to roughly USD 5.8 bn. This has been the case even though exports have grown relatively stronger than imports. Currently, the country’s current account deficit is financed mostly through FDI. However, this could change as many investment projects are about to be finalised. At the same time, Georgia is tapping new domestic financing sources in the form of the recently created pension fund. This should bump up national saving rates, and thus decrease the current account deficit. Importantly, this also illustrates the often overlooked macroeconomic relevance of the pension reform. As a result, we expect that the current account deficit further declines, but that some of the financing could shift from FDI to external debt. Therefore, it is important that Georgia attracts new FDI. Moreover, Georgia should step up its efforts to promote the export sector in order to reduce its large trade deficit.
