10.36172/EKONOMISTI.2021.XVII.02.Jalagonia.Papaskua.Makalatia

EXPANDED SUMMARY

The COVID-19 epidemic has proved to be on the one hand a challenge and on the other hand, the beginning of new opportunities for the modern world. The pandemic, caused by the epidemic, together with the loss of human lives, has affected all public governance areas, shaken up the economic foundation of the society and has brought to the fore the problem of economic security, and most sharply revealed all weaknesses and gaps that the global integration processes have had. As a result, the prevailing political and socio-economic crisis has shown that the existing relationship between governance and the executive, including economic relations, must be fundamentally changed. Shock syndrome following Coronavirus cannot be avoided individually, but only through joint, focused, and coordinated efforts of the states. Georgia, as part of the world economic space, must actively participate in this process.

This article provides an assessment of the economic situation in Georgia before and during the pandemic.

Keywords: economic crisis, coronavirus pandemic, globalization, economic security, the economic policy of the state.

        The global spread of coronavirus has made human health (life) and economics equally essential. Tangible and intangible assets must provide a solution to all the problems caused by the pandemic. Based on this premise the economy cannot stop - rejection of minimal economic activity will be even more damaging to the stability of the country. The functioning of the respective areas of basic goods and fundamental services is essential for human survival; whereas shutting down of other industries whose activities are not directly related to human health or life (luxury-goods production, heavy industry, services of hotels, movie theaters, or other entertainment venues, etc.) serve the purposes, interests, and employment of people, and therefore, ultimately means lower incomes and thus deteriorating health situation. However, it should be noted that sectors that have had to cease economic activity remain at the expense of those which, despite the pandemic, still continue to operate. Consequently, there is an objective need to redistribute resources, which falls within the competence of the state, and in this respect, its role is increasing.

The economic policy of the state must take into account the wise choice of reasonable priorities and it is unacceptable to give preference to sectors that may generate revenue but can make the country’s economy vulnerable to unpredictable factors. Today, Georgias economy is facing this particular problem but in the past as well, the economic policy that has been developed over the years has not served to strengthen the economic independence of the country. The dynamics of the value component clearly testify to this. Economic development is known to be characterized by several aggregate indicators, but the first among them is economic growth. It is obvious that economic growth and, therefore, a high standard of living are ensured by industries that generate high value. Compared to agriculture, the products of high added value are developed in the industrial sector. However, in the event of force majeure, priorities are changing in favor of agriculture.

Unfortunately, the “Socio-Economic Development Strategy 2020” developed in 2014 has not been used in practice. In the absence of an economic development strategy, the implementation of short-term economic policies may not be constructive. Obviously, a long-term socio-economic development plan (strategy) is needed for the post-pandemic period.

Before the Covid-19 pandemic, three main areas of focus were identified for the development of Georgias economy:

1. Attracting foreign direct investment;

2. Promoting small and medium-sized businesses;

3. Development of tourism.

In recent years, economic growth in Georgia has been about 4 to 5% on average, which is very low for a developing country.

Under the conditions of the pandemic, the economy has fully affected (in 2020 - 6.2%), but above all tourism (and its related industries) has been in a particularly difficult situation. Georgia's aggregate consumption on the one hand depends to a large extent on income from tourism and migrant workers, and on the other hand, on the imports of foreign goods. During a pandemic, the movement of people from one country to another was delayed however imports and exports of goods did not stop. Consequently, in the event of a certain force majeure situation in the future, if, in addition to tourism, the international cargo turnover on a global scale is stopped, Georgia will face serious problems in terms of economic security. Russia's ban on buckwheat exports is a symptomatic indication of this.

The deficit in foreign exchange inflows resulting from the pandemic is being covered by external debt incurred by the state in the current period. Before the pandemic debt-to-GDP ratio was 43% while in 2020 it was 60.7%. Such a dramatic increase is truly regrettable. However, Georgia is not the only exception - developed countries have also had to incur a debt, but for them, this debt is certainly a relatively smaller burden than for developing countries.

In times of crisis, developed countries often have recourse to effective state interventions in the economy. In this respect, the US has been obviously active, implementing simultaneously expansionary monetary and fiscal policies, in the face of a pandemic.

The U.S. government is trying to stimulate the economy by significantly increasing the money supply, pursuing cheap monetary policies, increasing public debt, and public procurement. While monetary and fiscal policies differ qualitatively in developed and developing countries, it is clear that in times of economic crisis, if a developed country pursues active expansionary monetary and fiscal policies, the developing country needs to increase its interventions in this regard.

  The money supply in the economy has gradually increased over the years, which is a natural phenomenon as the economy is growing. However, in this case, it should be noted that the sharp increase of the money supply in the U.S. during the pandemic compared to previous years does not lead to an increase in the level of inflation to the extent (annual inflation in March 2021 of 2.6%, and in April of 4.2%) that it can be observed in a developing country in terms of such money supply. The reason for this is that the market is more saturated with capital in a developed country than in a developing country. As a result, due to excess money supply, the rate of inflation in a developing country is rising significantly. Nevertheless, monetary policy can also involve a sharp expansionary policy and, by allowing a certain level of inflation, create the illusion of high economic growth. Different types of economic policies are the choice of each country and there is no universal approach for any country in this regard.

Georgia has implemented inflation targeting regime, which means achieving an inflation target over the medium term (the gap between the actual and target inflation is not expected to be significant). The National Bank of Georgia is actively using the change in the monetary policy rate to curb inflation. At the end of 2019, the refinancing rate was 9%, after having decreased slightly since the beginning of the pandemic and recorded at 8% over most periods, whereas it is currently 9.5%. The change in the monetary policy rate directly affects aggregate demand, after which the rate of inflation is regulated. In the event of a pandemic, it is the problem of reduction in aggregate demand, and hence tightening of monetary policy further limits the demand. Therefore, in this respect, the policy of curbing inflation is completely useless. On the contrary, in that context, the National Bank not only reduces but rather contributes to triggering inflation, as the implementation of costly monetary policy increases the costs of production.

Since Georgia needs foreign currency (e.g. dollars) to import goods, in the current period, the state is obliged to borrow in foreign currency. Thus, under the conditions of the pandemic, in comparison with the monetary policy, it is of paramount importance to pursue the right budgetary policy to stimulate the Georgian economy.