Managing Expenditure Pressures for Sustainability and Growth
in the path of public debt. Generating rapid growth in Georgia will also require engineering a shift in the growth model toward one financed more out of domestic savings and driven more by the tradable sectors. National savings at 14 percent of GDP in 2011 remains too low to sustain the investment necessary for rapid growth. With exports at 36.6 percent of GDP in 2011, the tradable sectors have played a much smaller role in driving growth in Georgia than in regional and global comparators. Fiscal consolidation is important in addressing the growth challenge to prevent further erosion of national savings and contain further real exchange rate appreciation pressures. Given the low appetite for higher tax rates and the high productivity of collections, fiscal consolidation will need to rely on further expenditure consolidation. In the event of an upside growth scenario induced by higher FDI and other capital flows, saving part of the additional revenues realized can prevent a return to the large macroeconomic imbalances of the pre-crisis period. Figure 1.1. GDP Growth, Exports, and Imports GDP growth, in percent
exports, imports, in percent of GDP
14
70
Figure 1.2. CA Deficit, Investment, FDI, Savings in percent of GDP
35
12
60
10
50
8
40
6
30
20
4
20
15
2
10
0
0
-2
-10
30 25
10
-20
-4 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 GDP growth
Imports (rhs)
Exports (rhs)
Source: Georgian authorities and WB staff estimates.
2011
5 0 2001 CA deficit
2002
2003
2004
Investment
2005
2006
2007
FDI Inflows
Source: Georgian authorities and WB staff estimates.
2008
2009
2010
2011
National savings
Pre-crisis Developments, 2004–07 Georgia experienced strong growth from 2004 through mid-2008 facilitated by far-reaching reforms and large foreign direct investment (FDI) inflows. Following the Rose Revolution at end-2003, reforms were undertaken to strengthen public finances, improve the business environment, upgrade infrastructure services, liberalize trade, and improve social services. As a result of the reforms and a favorable global environment, economic growth averaged 9.3 percent per year during 2004–07. A key driver of this growth was substantial inflows of FDI, which increased from $331 million (8.3 percent of GDP) in 2003 to $1.67 billion (16.4 percent of GDP) in 2007. Growth during 2004–07 was associated with a significant widening of the current account deficit. Exports remained around 31–34 percent of GDP during 2004–07, suggesting that growth during this period was not associated with a substantial expansion of the export and tradable sectors. On the other hand, the large capital inflows, along with rapid credit growth, fueled an expansion of imports. Aggregate demand was driven in large part by the growth of consumption, particularly rapidly growing government consumption. Consequently, the external current account deficit widened from 7 percent of GDP in 2004 to 21.8 percent by 2008, raising concerns about sustainability. The real exchange rate appreciated by about 40 percent between 2004 to mid2008, thus impacting the competitiveness of tradables. Gross national savings fell from 25 percent of GDP in
|
3
Chapter 1. Macroeconomic Context and Expenditure Composition