Georgia Seeks Higher EU Trade Amid Russia Slump, Minister Says

Georgia is relying on a free-trade agreement signed with the European Union last June to spur its economy and offset the fallout from Russia’s recession on the former Soviet region, Finance Minister Nodar Khaduri said.

The government has cut its forecast for growth in gross domestic product twice this year, from 5 percent, and may need to reduce it further to 2 percent after the lari lost a quarter of its value against the dollar in the past six months and Russia’s economic downturn cut remittances and trade, Khaduri said. A one-third increase this year in exports to the European Union helped to limit the impact, he said.

“Our economy is not that focused on the Russian economy,” Khaduri said in an interview in the capital, Tbilisi, on Wednesday. “The free-trade agreement gives us an opportunity to increase exports to the EU, which we are doing.”

Georgia’s economy has suffered from the conflict in Ukraine and Russia’s slide toward recession in response to the slump in oil prices last year and U.S. and EU sanctions. Declines in exports, tourism and remittances from Georgians working abroad, particularly in Russia, have cut foreign-currency earnings and prompted the lari to weaken, hurting businesses and people that have foreign-currency debts.

The EU’s share in Georgia’s trade may increase from the current 34 percent, Khaduri said, while Georgia has recently gained a foothold in China as part of diversificaton efforts.

Jobs Worries

Jobs were the top concern of 67 percent of Georgians in a survey of 4,360 people conducted by the National Democratic Institute and released Monday. Inflation was named by 43 percent and 37 percent cited poverty as their biggest worry.

The lari has declined 25 percent against the dollar in the last six months, the fourth-worst performance among more than 170 currencies tracked by Bloomberg. Currencies of other former Soviet countries make up the rest of the top five decliners as the aftershocks of the Russian ruble’s collapse late last year spread to their economies.

Georgian monetary-policy makers have been criticized by the government, which said that they failed to defend the currency. The central bank raised its benchmark interest rate to 5 percent from 4.50 percent on May 6.

The lari’s decline “reduced trust in our national currency further” and encouraged a renewed shift to dollarization, said Khaduri, who called the depreciation the key economic challenge this year.

“We need to take action, we need to stabilize the situation,” he said.

The Finance Ministry has sought to control spending, reaching a budget surplus in the last four months “to support monetary policy,” Khaduri said. The budget shortfall may narrow to 3 percent of GDP this year from 3.2 percent in 2014, he said.

The government also wants to boost state asset sales to increase foreign currency income, he said, and potentially repeat last year’s record $1.27 billion of foreign direct investment.