1. www.pmcg-i.com Challenges and Opportunities of Georgia’s Economy Mr. Aleksi Aleksishvili ₋ Chairman of Policy and Management Consulting Group (PMCG) ₋ Former Minister of Finance of Georgia 2005-2007 ₋ Former Minister of Economy of Georgia 2004-2005 April, 2013

2. Country Overview, 2012  Area – 69,700 km²  Population – 4.5 mln  Capital – Tbilisi (1.2 mln)  GDP – $ 15829.7 mln (current prices)  GDP per capita – $ 3519.6 (current prices)  GDP real growth rate– 6.1%  Inflation – -2.1% (Feb, 2013)  Av. Exch. Rate USD/GEL=1.66 Turkey Syria Iraq Iran Azerbaijan Armenia Georgia Russia Kazakhstan

3. GDP Growth  GDP growth rate reached 12.3% in 2007;  Despite the global economic crises and the conflict with Russia in 2008, the country has proved to be highly resilient to political and external economic shocks;  GDP growth rate in 2012 is 6.1%  Contribution from export to GDP 2012 is 15%, which is higher compared to 2007 (12.1%);  Contribution from FDI in 2012 GDP is 5.5 %, which is significantly lower compared to 2007 (20%);  The main sectors, which contributed in GDP 2012 were Manufacturing(17.2%), Trade (16.6%), Public Administration (11.2%), Transport & Communication (10.6%), Agriculture (8.4%), Construction (7.3%), Health & Social Work (6%).

4. Foreign Direct Investments  FDI sharply increased from 2004 and over reached $2 billion in 2007, which was 19.8% of GDP;  Denmark, Netherlands and Czech Republic became the top investors by investing in 2007;  After the Russian-Georgian conflict in 2008 and global financial crises in 2008- 2009 FDI shrank;  In 2012 FDI indicator is reduced to $ 865.2 mln, which is just 5% of 2012 GDP;  Germany, Netherlands and Turkey became the top investors by investing in Georgia in 2012.

5. External Trade, 2012  The volume of export and the volume of import increased, but the growth of import volume exceeded the growth of export volume;  Georgia recorded negative trade balance in 2012 (- $5465 mln)  The trade deficit of 2012 is the highest one in the period of 2000-2012;  Top three trading partner countries by export in 2012 were Azerbaijan (26%), Armenia (11%) and USA (10%) and three major exported commodities were cars (25%), Ferro-alloys (11%) and nitrogenous fertilizers (6%);  Top three trading partners by import were Turkey (18%), Azerbaijan (8%) and Ukraine (8%) and three major imported commodities were petroleum products (12%), cars (8%) and petroleum gases (3%).

6. Public Revenue, Tax Burden and Informal Economy  Significant improvement in tax control and administration since 2004  In spite of easing the tax burden, the ratio of tax revenues to GDP increased from 12% in 2003 to 25% in 2012;  Tax Revenue - the major source of revenue, 89% of total revenue (2012)  Informal Economy has been reduced from around 65 % to 10% of GDP *Tax Effort is defined as Tax Revenue / Gross Domestic Product

7. Public and External Debt as a Percentage to GDP  The coefficients of total public debt and external debt as a % to GDP had decreasing pattern in 2000- 2007;  The coefficients of Public as well as External Debt as a % to GDP increased in the period of 2008-2009;  The coefficients of total public debt and external debt as a % to GDP have again decreasing trend since 2011 again.

8. Economic Activity Rate & Employment Statistics, 2002-2011  Unemployment rate has been increasing over time – one of the biggest challenge of the government;  The structure of employment in 2011: hired (32%), self-employed (52%), not-identified worker (1%), unemployed (15%);  Increase in unemployment due to structural reforms in Public Sector and State Owned Companies during first 2 years of reforms.

9. Financial Sector  The financial sector is dominated by banks (more than 95%);  The banking sector is one of the most dynamic sectors of the economy ;  There are 19 commercial banks in Georgia;  In 2012, 18 Georgian banks and 2 branches of foreign banks had final ownership with to foreign capital participation;  More than 50% of total banking sector capital is owned by international companies.

10. Financial Sector

12. Current Challenges & Opportunities Current Challenges…  Social Vulnerability  High Trade Deficit  Foreign Direct Investment  External Debt  Unemployment  Dollarization  Political Stability  Rule of Law and Legal System Looking Ahead  Scaling up the Economy – further Integration  Increasing competition - achieving Competitive Input Prices  Increase the level FDI  Decrease the unemployment  Further improve the business environment  Strengthening public institutions  Improve rule of law and legal system

13. Policy and Management Consulting Group E-mail: office@pmcg.ge www.pmcg-i.com Phone: +995 322 921171