4 Feb 2025 19:00

Georgia's GDP growth could slow to 2.4% in 2025 due to political polarization - Galt & Taggart investment bank

TBILISI. Feb 4 (Interfax) - Increasing political polarization in Georgia could result GDP growth this year slowing to 2.4% from 9.5% in 2024, according to the pessimistic scenario, said Lasha Kavtaradze, leading economist at Georgia's largest investment bank Galt & Taggart.

"In the pessimistic scenario, we assume that political polarization will deepen, which will weigh on investment activity, and as a result, will cause economic growth to slow. Economic growth is expected to be up to 2.4% in 2025," the business portal bm.ge quoted Kavtaradze as saying.

He said that in Georgia's economy, the investment component was one of the fundamental factors behind the exchange rate. In the pessimistic scenario, the exchange rate will fall to 3.1 lari/$1 [from 2.8 lari/$1 at present]. Given the impact devaluation has on inflation, consumer prices in this scenario might grow by up to 5.7% this year compared to 1.9% last year.

In that event, the National Bank would have to raise the refinancing rate to at least 9.5% from the current 8% per annum.

"We believe the development of the macroeconomic environment in Georgia will depend largely on political processes. It is difficult to say how political processes will unfold. We have come up with three scenarios: baseline, optimistic and pessimistic," the expert said.

If the current political uncertainty persists throughout the year, then the bank's baseline scenario is expected: economic growth would slow to 5%, and inflation would rise to 3.9% with an average exchange rate of 2.88 lari/$1.

The National Bank would not be able to lower the refinancing rate with inflation above the 3% target, and the rate would remain at the current level of 8% per annum.

"Accordingly, our own and the government's GDP growth forecasts coincide, and the budget deficit [3% of GDP] in the approved 2025 budget remains unchanged in our baseline forecast," Kavtaradze said.

"In the optimistic scenario, we hold open the possibility of a reset in relations with the West. All these scenarios have a political component, and the optimistic one assumes the EU accession process will continue, which will have a positive impact on business and consumer sentiment," he said.

In this scenario, the investment bank predicts economic growth of 7% with inflation at 3% and some strengthening of the national currency - on average to 2.78 lari/$1. The refinancing rate could fall by 0.25 percentage points.

The Georgian authorities expect GDP will grow by no less than 6% in 2025, as the budget projects. But Georgian Prime Minister Irakli Kobakhidze has said GDP could grow more than 9%. "We hope to at least repeat the same result in 2025. We want the figure to be higher this year, and the possibility of this exists," he said.

Both the IMF and the World Bank forecast a slowdown in Georgia's GDP growth to 6% in 2025. The UN expects it to grow 5.4%, the European Commission - 5.8%, the European Bank for Reconstruction and Development - 4.6%, the Asian Development Bank - 5.5% and the ratings agency Fitch - 5.3%. A consensus forecast from Georgian economists presented by the consulting company PMCG forecasts that Georgian economic growth will slow to 3.6% this year.

Economic growth stood at 7.8% in 2023 and 10.4% in 2022.