Georgian FDI tumbles as inflation soars

Amid growing concern over the state of the world economy on the back of soaring oil prices, Georgia announced two pieces of bad financial news recently. Inflation is growing rapidly, and flows of foreign direct investment (FDI) fell sharply in 2010, continuing a slump that began with the war with Russia in August 2008.

Annual inflation hit 13.7 per cent in February, continuing a trend of rapidly rising prices: year-on-year inflation has climbed almost 1 per cent every month since October, and has soared since June 2010 figure of 3.7 per cent.

Most concerning for Georgian politicians is the fact that food and non-alcoholic beverages is the biggest contributor to inflation, making up almost all of the 2.8 per cent jump from January's figures. Taken alone, inflation on these products is running at 28.4 per cent. The social and political impact of such a sharp rise in food prices is – as governments around the globe are finding – potentially very serious indeed.

The administration of President Mikheil Saakashvili responded in typically populist fashion, by distributing one-off food vouchers of 30 lari (around US$17) to poor households, following a one-off electricity subsidy in February. Although these might be effective at alleviating immediate concerns, economists have warned that in the long term these could distort the economy and actually contribute to galloping inflation.

Saakashvili's long-term solution – rapid economic development – will not be made easier by news that in 2010 FDI fell 16 per cent year-on-year, to US$553 million. This is only around a quarter of the FDI high-water mark, US$2.01 billion in 2007, and was far below the government's original 2010 target of US$1 billion. The decline in FDI is officially attributed to the ongoing impact of the global recession; however, investors are also cautious due to the political climate and Russia's military build-up in the breakaway provinces of Abkhazia and South Ossetia.

Although the IMF has said recently that FDI “remains quite respectable by international standards”, the decline is a blow to Saakashvili's high-profile campaign to attract outside investment. A troubling fact for the government is that, according to Georgian media reports, remittances from migrants back to Georgia now exceed FDI flows.

Amid this sobering economic climate, even the fact that American property tycoon Donald Trump has formally announced his empire's expansion into Georgia may not be enough to start a new wave of foreign investment.

Sources: Geostat, Eurasianet, Civil Georgia, Messenger.ge

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