Supporting Georgia’s Policy Reforms for Competitiveness and Inclusive Growth
Challenge
Georgia’s economy experienced a sharp economic downturn in 2008-09, due to the global economic crisis, the conflict with Russia, and the subsequent closing of the Russian market to Georgia’s exports. These events undermined progress on poverty reduction and had severe consequences for growth, as they led to a sharp deterioration in investor and consumer confidence; a decline in foreign direct investment (FDI), exports, and remittances; and a reduction in domestic lending.
The external shocks intensified existing structural vulnerabilities that were affecting the country’s ability to grow, create jobs, and improve living standards, especially for the poorest. Although a counter-cyclical fiscal stimulus ushered in an economic recovery after 2010, limited progress has been achieved in facilitating sustained and inclusive growth.
In addition, a deepening euro zone crisis and an uncertain global economic environment posed risks for fiscal consolidation and macroeconomic stability. Georgia needed financial support to meet post-conflict and vulnerability needs and to strengthen competitiveness for post-crisis recovery and growth.
Approach
DPOs-provided budget support through International Development Association (IDA) credits and International Bank for Reconstruction and Development (IBRD) loans, to accompany the Government’s efforts to strengthen competitiveness and inclusive growth. These DPOs had built on the previous policy lending operations, which helped mitigate the impact of the 2009 economic downturn and prepare Georgia for post-crisis growth in the medium term.
Addressing Georgia’s post-crisis development needs required the implementation of a comprehensive reform program that simultaneously: (i) improved market access, the business environment, and education quality to support competitiveness, promote exports, and attract strategic investments; (ii) enhanced the effectiveness of public financial management to promote fiscal discipline, thus contributing to macroeconomic stability; and (iii) improved the quality and accessibility of health care services and the efficiency of social assistance programs to promote human capital development and increase assistance to the poor.
Results
The DPOs supported structural reforms that helped to improve competitiveness, public financial management, and the effectiveness of social spending. The main results included:
- Progress in meeting requirements for entering the Deep and Comprehensive Free Trade Agreement (DCFTA) with the EU:
- Georgia adopted more than 3,000 EU and international standards for domestic products by end-2015, a 69.5 percent increase since 2011.
- More than 3.5 million animal vaccinations had been administered by end-2015, a fourfold increase since 2012.
- Enhanced efficiency of the customs administration, facilitated by a newly introduced automated selectivity module of the risk-based customs control system for transit traffic at border crossings. The system detected 981 customs violations in November 2015, a nearly 500 percent increase compared to November 2011.
- Improved efficiency, reliability, and transparency in electricity connections in the country, evidenced by several commonly used reliability indicators. For example, customers served by JSC TELASI, one of Georgia’s largest electric power utility companies, experienced 20 percent fewer service interruptions in 2015 relative to 2013. In addition, the “Getting Electricity” subcomponent of the Doing Business index registered 70 points in 2016, 8 points higher than a year before, showing improved efficiency, reliability, and transparency in electricity connections in Georgia.
- Improvements in the quality of education through:
- teacher training in formative assessment techniques to improve student learning; 42 percent of teachers received training by end-2014, a 9 percentage points increase since 2011.
- an improvement in student learning, as recorded by the Program for International Student Assessment (PISA) and Trends in International Mathematics and Science Study (TIMSS) in 2015. Student performance improved noticeably in all subjects between 2009 and 2015, with the highest gain in science.
- Contribution to improvements in public financial management, evidenced by the strengthened quality and timeliness of annual financial statements recorded by the Public Expenditure and Financial Accountability (PEFA) indicator (PI-25), whose rating for Georgia improved from a D+ in 2008 to a C+ in 2012.
- Improved safety and quality of health care standards in hospitals, evidenced by 88 percent of hospitals submitting detailed reports to the State Regulation Agency for Medical Activities in compliance with upgraded standards in 2014 compared to none in 2011.
- Introduction of the Universal Health Care System in 2013, which expanded state-funded health care access to 3.7 million people from only 1.6 million people in 2012.
- Improved efficiency of social assistance, evidenced by the reduced time taken to issue a state pension after assessing eligibility: three days in 2014 relative to 10 days in 2011.
