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15 Aug, 2008 04:28

Western aid to continue to supporting Georgia’s economy

The damage caused to Georgia by the conflict with South Ossetia could reach an estimated $500 million dollars. A significant sum in comparison with Georgia’s $12 billion GDP. But Tbilisi is likely to repair the damage swiftly, thanks to massive subsidies

Georgia has been spending much more than it earned for several years. Most of its reforms were sponsored by its western allies. The bulk of this financial aid was allocated to Georgia’s armed forces.  In the last three years its military budget has rocketed from $90 million in 2004 to more than a billion last year – that’s 10 percent of the country’s GDP.

According to Andrey Suzdaltsev, of the Higher School of Economics, in order to repair the damage caused by the conflict, Georgia is likely to rely on the same source for cash.

“We’ve got very approximate figures. Total damage may be not more than $500 million. However this sum is significant for Georgia with $12 billion GDP. But the country will soon recover due to foreign support.”

In the last three years Georgia has enjoyed rapid economic growth – its GDP grew 10% annually. But the country remains an agrarian economy with tea, citrus fruit and wine among its main exports. Georgia imports almost everything else from food to heavy machinery. This reliance on imports has resulted in the countrys account deficit of 22 percent of GDP according to Igor Yurgens, Vice President of Renaissance Capital.

“They export 1 billion dollars worth of product per year, they import 3 billion.  This is the country which lives off subsidies from the west.”

International agencies Fitch and S&P cut Georgia’s credit rating from B + to B, amid concern the conflict with South Ossetia may cut inflows of foreign investment. Agencies say FDI is the main source of cash for Georgia to cover the trade deficit. Andrey Suzdaltsev says its western allies won't leave Georgia without support.

“During the conflict Georgia’ relied heavily on American support. But this did not happen. So now the coutry’s western allies will have to compensate for this. They will provide massive financial help.”

With external help and no significant damage to its infrastructure, Georgia is likely to recover within a year.