Georgia is reported to have an “overall score well above the world and regional averages.” Such a pleasant economic condition, as well as its strategic location at the crossroads of Europe and Asia, Western-oriented economic policies, and low corporate tax rates, make Georgia an accessible and relatively safe investment destination for investors and business people.
Although the pandemic and post-pandemic decline affected Georgia as well as the rest of the world, Georgia seeks to build upon the reputation of being a secure and business-friendly place to invest. Managing macroeconomic stability, encouraging job creation and high foreign direct investment inflows are essential for carrying on the momentum of post-pandemic growth. This article focuses on Georgia’s economic condition in 2023 and beyond to identify the country’s viability as a competitive destination for global capital.
Resilient Macro Outlook Amid Uncertainties
In the scope of the past decade, Georgia showed significant progress, growing fast and continuously. The World Bank’s report, although acknowledges the potential difficulties Georgia might face, predicts the country’s economy’s further development and rapid growth.
Inflation in Georgia
In the past decade, the inflation rate in Georgia was relatively stable, ranging from 3% to 6%. The drastic increase in the inflation rate was evident in 2020-2022. In 2020, the inflation was 5.2%, raising to 11.9% by the end of 2022. Such a dramatic increase can be associated with the pandemic and post-pandemic crisis, explicitly caused by “increased access to financial resources and the encouragement of aggregate demand,” among other factors.
However, in 2023, the inflation rate in Georgia decreased by more than double. In 2023, the inflation is 2.47%, with the expectancy of a slight increase in the next several years, targeting the 3% stable inflation as it is considered the optimal inflation rate for Georgia.
Unemployment in Georgia
Regarding the unemployment rate in Georgia, it has gradually declined in the past decade, reaching its historic minimum in 2023. In the first half of the year, the unemployment rate constituted 18%. Though, in the second half, it declined even more and now stands at 16.7%.
The main source of employment growth in Georgia is the private sector. Hence, Georgia places the primary focus on creating the environment for the development of businesses through liberal legislation and encouraging investments.
Georgia has built its economic policy around principles of a free market economy, protecting property rights, and free competition. It created an environment of a transparent governance that allows the private sectors, foreign and domestic, to operate effectively.
The businesses have also been granted preferential incentives like those available in special economic zones, including simplified and liberal taxation system.
Georgian tax system:
- The corporate income tax (CIT) rate is a flat 15% applied to annual profits distributed by companies. This is relatively low compared to other countries.
- Goods and services are subject to a value-added tax (VAT) at a standard rate of 18%, which is in line with international standards.
- Dividends received from Georgian companies are taxed at 5%.
- Individual income tax applies at a flat rate of 20% to resident individuals earning income in Georgia. This includes income from employment, which employers are responsible for withholding.
- For self-employed individuals and small businesses, taxation is simplified through lump-sum payments that can be a percentage of turnover instead of accounting-based taxes.
- Special economic zones provide favorable tax treatment, like VAT and import duty exemptions, to encourage business in designated regions.
- Bilateral treaties signed by Georgia help avoid double taxation for international businesses operating across borders.
GDP Growth Rate in Georgia
In 2023, Georgia’s GDP continued its expansion, growing by 7.5%, though the rise was slightly less than in the previous quarter, which constituted 7.7%. Some sectors faced slower growth in 2023, while others, such as construction, education, and professional services, saw faster growth. In general, the GDP growth averaged by 7.6%, which is a relatively strong rate in the current economic headwinds.
The slight reduction in the GDP growth rate evident in the second quarter of 2023 might indicate Georgia moving from the high-paced post-pandemic development to the steadier long-term growth trend. In the current condition and if the expected growth will remain around 6-8%, Georgia’s economy outperforms regional economies vastly.
FDI Inflow in Georgia
Georgia relies heavily on foreign investments, allowing foreign investors to develop their businesses and settle in Georgia. The FDI inflow evidently reflects this trend. In the second quarter of 2023, the FDI inflow rose by 30%, exceeding 505 MLN USD. The total FDI inflow in the first 6 months of 2023 was over 1 BLN USD. This index is 10% higher than the previous year, and compared to the pre-pandemic 2019, it is 88% higher.
With its desire to attract more investments, Georgia committed to guaranteeing the rights and protection of foreign direct investments. Georgia has developed a transparent and predictable legal framework that ensures the security of the FDI. Some critical protections include fair compensation in case of expropriation, free transfer of profits, and repatriation of capital.
If the investor chooses, disputes between foreign investors and the state can be resolved through international arbitration instead of local courts. This dispute-resolution mechanism assures that any disagreements will be addressed through a neutral third party. Hence, the government has prioritized developing a highly business-friendly environment where investors feel confident putting their money into various industries, knowing their investments have strong legal protections.
Foundations of Stability
The continuous expansion of Georgia’s economy is conditioned by the fundamentals that provide the environment for the country’s stable development.
As the data presented in this article shows, Georgia places a specific focus on the economy of the country, trying to make the environment stable and pleasant for growth and development. According to the 2023 Index of Economic Freedom, Georgia has been ranked as the 35th freest economy in the world, with a score of 68.7 out of 100 for its level of economic freedom. Among the 44 European countries analyzed, Georgia placed 21st, with an overall rating above the world and regional averages.
Georgia is categorized as having a “moderately free” economy. The country promoted regulatory reforms to enhance efficiency and maintain open-market policies and low taxation. The economy has shown resilience even in the face of challenges. However, the subsequent reforms are required to comprehensively strengthen economic freedom conditions.
The Law on Economic Freedom
One of the fundamentals for stability is the Law on Economic Freedom. The Law on Economic Freedom aims to guarantee economic rights and freedoms under the Georgian Constitution, considering them as human rights that can only be limited as defined by law. It establishes the principles of reduced government, responsible macroeconomic policy, and low taxes.
The introduction of new taxes or increases in tax rates must be approved through a referendum initiated by the government. The law also sets maximum limits for macroeconomic indicators like the budget expenditures to GDP ratio, budget deficit to GDP ratio, and government debt to GDP ratio. If the approved budget exceeds these ratios, the government must present a plan to return to the limits within 2 years to the Parliament. Additionally, all budget revenues must be directed to finance expenditures based on the principle of budget universality. The law also guarantees free movement of capital with exceptions only as permitted by Georgian legislation or international treaties.
In 2023, Georgia keeps its track on expanding and strengthening its economy, attracting foreign investment, and providing the conditions for businesses to develop. Georgia’s liberal taxation system and business-friendly legislation make it a perfect business environment and subsequently bring a positive outcome for the country’s economy.