Transparency International: Fear of isolation due to sanctions affected deposits, lari exchange rate, and Georgia’s National Bank reserves
Fear of sanctions affects Georgian economy
According to a study published by the Georgian branch of Transparency International, concerns over domestic political instability and potential isolation due to sanctions have already impacted bank deposits, the lari exchange rate, and the National Bank’s foreign currency reserves.
The organization warns that disruptions to the country’s external balance could lead to a significant depreciation of the lari, which in turn would drive up inflation, interest rates, and debt servicing costs. Transparency International notes that Georgia’s economic outlook will largely depend on the scale and nature of the anticipated sanctions.
Key findings of Transparency International Georgia report
● According to preliminary data from Geostat, economic growth in 2024 stood at 9.5%. While this is a strong figure, growth rates have slowed: the average monthly increase from January to October was 9.6%, but it dropped to 7.5% in November and 6.7% in December. The slowdown does not indicate an economic crisis but reflects reduced activity in certain sectors.;
● In the first three quarters of 2024 (data for the fourth quarter is not yet available), foreign direct investment (FDI) inflows into Georgia fell by 40%. Investments declined 55% in the third quarter, though the steepest drop was in the first quarter (70%). Therefore, the decline cannot be solely attributed to the law on “foreign influence transparency.” However, its adoption, along with domestic political instability and sanctions, is expected to impact future investment flows;
● Overall, fears of political instability and isolation due to sanctions have already significantly affected bank deposits, the lari exchange rate, and the National Bank’s foreign currency reserves. Activity in certain economic sectors, such as restaurants and hospitality, has declined, though the economy as a whole has not contracted.
What’s next for Georgian economy?
● A study titled Economic Climate in Georgia, published by Policy and Management Consulting Group in January, indicates that economists have a negative outlook on the current economic situation and expect it to deteriorate over the next six months;
● Expectations play a crucial role in the economy—when negative sentiment leads to reduced investments, businesses and households adopt a wait-and-see approach, delaying decisions and lowering economic activity.;
● The future trajectory of Georgia’s economy will primarily depend on the scale and nature of expected sanctions. The main risk stems from Georgia’s economic structure: a high trade deficit, budget shortfalls, and dependence on foreign investment and loans make the country particularly vulnerable to potential sanctions;
● A worsening external balance would lead to significant depreciation of the lari, which in turn would drive up inflation, interest rates, and debt servicing costs.
2024 showed that even discussions about possible Western sanctions worsened expectations in Georgia and led to the depreciation of the lari. The adoption of the “foreign influence transparency” law by Georgian Dream devalued the lari by 6%, despite the National Bank selling 220 million dollars in April–May.
The exchange rate came under pressure again in September–October 2024, when the United States included two high-ranking Interior Ministry officials in the Magnitsky List and banned dozens of government officials from entering the U.S.
In addition, Western countries stopped providing new grants to the Georgian government. The situation was further exacerbated by the parliamentary elections. In September–October, the National Bank sold 700 million dollars to maintain the lari at 2.72.
After Prime Minister Irakli Kobakhidze announced the suspension of European integration on November 28, the political crisis and instability in the country intensified, and sanctions were expanded. However, unlike during the pre-election period, the National Bank allowed the lari to depreciate to 2.88 and purchased 29 million dollars in December. Information on currency interventions conducted in January will be published later, the report stated.
Fear of sanctions affects Georgian economy
