Georgia: Despite Foreign Aid, at Risk for Recession?

The Georgian government is counting on an October 22 donor conference in Brussels to provide billions of dollars to keep the country's economy afloat following its August war with Russia. While the European Union and the United States have already announced major aid packages for Georgia, some observers believe the money will not be enough to stop the country's economic slide.

The findings of a recent joint assessment report produced by the World Bank and the United Nations paint a bleak picture for the Georgian economy. According to the authors, foreign direct investment -- which, prior to the conflict had driven the country's economic growth -- will decrease by half in 2008. Georgia's gross domestic product growth rate will fall by almost 60 percent, from an anticipated 9 percent to just 3.5 percent.

The report, publicly released on October 22 -- several days after it was presented to the Georgian government -- estimates that Georgia needs 2.38 billion euros (about $3.06 billion) over the next three years to fully recover from the war, a figure that includes everything from emergency economic measures to infrastructure rebuilding. [For additional information, click here].

Officials are counting on the October 22 Donor's Convention for Georgia in Brussels to provide most of that sum.

"We clearly have issues related to the recovery of the direct civilian damage. ... This costs a lot of money, the kind of money we, on our own, cannot afford, hence the donor conference that has been called for October 22," Georgian Prime Minister Lado Gurgenidze told the International Monetary Fund's IMF Survey magazine on October 21. [For additional information, click here].

Georgian officials have had reason to be optimistic that they would receive the funds. On October 21, the European Union announced an "up to" 500 million euro (nearly $643 million) aid package for Georgia over the next two years. The assistance is in addition to the $1 billion aid pledge Washington made in September.

Tina Gogeliani, a political analyst at Tbilisi's International Center on Conflict and Negotiation, believes that Georgia's allies at the conference are ready to help counter the fact that Brussels has been only partially successful in getting Moscow to withdraw its forces following the August incursion. [For background see the Eurasia Insight archive].

"It [financial aid] is some kind of compensation," Gogeliani said. "It is a kind of balance."

On October 21, Transparency International's Georgia office released a statement that criticized the Brussels conference for being closed to donors. TI Georgia Executive Director Tamuna Karosanidze warned that "aid given behind closed doors lacks accountability."

"The lack of transparency in giving this aid makes it less likely that money will reach those most in need," Karosanidze said in the statement. "If donors want aid to support Georgia's development, they must ensure that this aid is transparent and democratically accountable."

Within Georgia, little public information has been released about how funds received at the conference will be spent or tracked. Officials have repeatedly told Georgian media outlets that more details will be available at a later date.

Some economists see a slowdown as being inevitable, despite the arrival of a large amount of aid.

Eric Livny, director of the International School of Economics at Tbilisi State University, notes that the worldwide economic crisis will likely affect several sectors of Georgia's economy -- not just foreign direct investment.

"Growth will certainly slow down, at least in the short term," Livny said in an email interview with EurasiaNet. "What was driving Georgia's growth was the rapid expansion in just a few sectors: banking, construction, services (including tourism), trade, storage, and transportation. These sectors are likely to be affected by the crisis."

Former Prime Minister and Finance Minister Zurab Noghaideli also underscored the weak construction and housing market a potential factor in a slowdown. Without the high levels of direct investment that were pushing the Georgian economy, the country is at risk for a serious recession, Noghaideli, who recently announced plans to return to politics, said in an interview with EurasiaNet.

He noted that the "turbulent environment" globally will make it nearly impossible for Georgia to receive new investments and that, in turn, will add to woes facing debt-laden construction companies. In addition to job loss, Noghaideli stressed that any massive failure in the construction industry would have a severe impact on the financial sector, thereby putting Georgia in the same position that so many Western economies have faced over the past month.

"A large part of the housing sector is part of the financial sector," he said, explaining that banks have given developers and private individuals large loans during the recent housing boom. "There is no way of stopping a housing sector problem from spreading to the financial sector," he continued. "The government needs to take steps to intervene."

Government officials like Gurgenidze, however, have downplayed the likelihood that Georgia will be caught up in the global financial crisis. During his October 21 interview with the IMF, the prime minister stated that the world has "turned a corner," and that the crisis will only affect Georgia "indirectly" as the country seeks new investment.