Georgia’s Cost of Living Crisis – Civil.ge

0

Author: Bachana Anasashvili, Outgoing Civil Georgia Editor. He has served in Civil.ge since September 2020.


Russia’s brutal and all-out invasion of Ukraine has dealt a severe blow to the global economy, further increasing the inflationary pressures that were already prevailing amid the major disruptions of the COVID-19 pandemic. And Georgia was no exception.

Next to a record series of high annual inflation in the second half of 2021, Georgian citizens are now tightening their belts as the country faces perhaps the toughest cost of living crisis seen in nearly two decades.

Skyrocketing consumer prices

The latest inflation data published by the National Statistics Office (Geostat) for May 2022, showed the grim state of affairs. Consumer prices increased by 13.3% in all areas, on an annual basis. Among all consumer goods and services, the largest increases were widely seen in food products.

Georgians paid 22% more for food and non-alcoholic beverages than a year earlier, with vegetable prices soaring 51.1% and the cost of bread and cereals 34.5%. Cabbage costs 297.4% more than in May 2021; cucumber – 110.3%; margarine – 67.3%; corn flour — 56.4%; buckwheat — 37.5%; wheat flour — 31.6%.

The other two main drivers of headline annual inflation were price spikes in transport – up 20%, and payments for housing and major utilities (water, electricity, gas, etc.) – up by 16.1%. Georgians paid 12.9% more for transport services, 28.2% more for rent and 11.2% more for electricity, gas and other fuels.

Inflation, spiraling out of control, has hit Georgians hard, and precisely where it hurts the most.

It is not surprising that Georgian households spend most of their disposable income on essential expenses such as food, housing and utilities, transport and health care – precisely the goods and services affected by the price spike. After all, Georgia is a country where in 2021 the unemployment rate stood at 20.6% and while 17.5% lived below the absolute poverty line; where in 2021, only 1.53 million (50.9%) of the three million people aged 15 and over participated in the labor force; where 387.1 thousand people (32%) out of 1.22 million in employment were self-employed.

In 2021*, the average Georgian household spent 890.7 GEL (77%) of its total expenditure of 1,158 GEL (400 USD) on consumption. Expenditure on food, drink and tobacco; housing payments and utilities; health care and transportation—the essentials—accounted for 72% of all consumer spending.

The case of the Russian influx

While a large influx of Russians – fleeing the economic or political consequences of invading Ukraine – into Georgia has become widely apparent, Georgians have still not been able to determine the exact scale of the influx, and to what extent the resulting increase in aggregate demand could further exacerbate the spike in consumer prices.

Several Georgian agencies report relevant migration data differently, making it impossible to paint a broader picture of the influx.

Geostatistical data shows that a total of 63.9 thousand Russian visitors arrived in Georgia in the first quarter of 2022. Meanwhile, monthly data from the State Tourism Administration counted 128,529 visits by Russian residents in February-May, and monthly Interior Ministry data reported 120,567 border crossings from Russia from February to April.

No report is available on the number of Russian nationals who actually remained behind. But Interior Minister Vakhtang Gomelauri has said earlier than of the 30,439 Russians who arrived in Georgia between February 24 and March 16, 12,638 had remained, a significant growth from 2019 – before the pandemic halted travel – when 64,008 Russians entered Georgia but only 911 remained.

The resulting pressure is there, however. Pent-up demand for housing, particularly in Tbilisi, has pushed rental prices in the capital to record highs, with asking rental prices rising 21.5% month-on-month and 83.3% year to April 2022, research by TBC Capital, Georgia’s leading investment bank, showed this.

Asking prices were also “significantly higher” than April 2021, rising 10.7%, and March 2022, rising 7.3%, the research found.

Income growth fails to beat inflation

While rising prices eat away at the purchasing power of ordinary Georgians, a relatively broader and worrying trend has emerged in previous years, particularly in the context of the pandemic-related recession – the nominal growth** of the Average monthly household disposable income is slowly lagging along or falling behind inflation.

The average monthly disposable income per household – excluding borrowing – increased from 1,028 GEL in 2020 by 9.9% to 1,130 GEL in 2021. Nominal growth narrowly exceeded the 9.6% average annual increase in prices to 2021 consumption. Previously in 2020, the 3.3% decline in income fell significantly behind the 5.2% CPI rise, and in 2017, the 1.1% growth was lower than the inflation rate of 6%.

The data looks more pessimistic relative to the price increases of individual CPI components. Namely, nominal disposable income growth has lagged behind the food and soft drink price spikes in 2019, 2020 and 2021.

At the same time, disposable income growth has been consistently below healthcare price inflation since 2015, excluding 2018 and 2019. In 2021, transport price inflation also exceeded nominal income growth.

“Unfortunately, the incomes of the majority of the Georgian population often cannot catch up [rises] in spending,” said Giorgi Kepuladze, founder and chairman of the board of directors of Society and Banks, a nonprofit organization that closely monitors the Georgian economy. Civil Georgia.

Kepuladze argued that it is characteristic of “poor countries that every year the disposable income of consumers and citizens decreases because their major expenditures are on food, utilities, and medicine.”

He pointed out that the prices of essentials – such as food and oil – were skyrocketing globally, an inflation that Georgia subsequently imports, because “a large part, about 70%, of our basket of consumption consists of imported products”.

Given the surge in prices in the first five months of 2022, it would be even more difficult to maintain a positive outlook.

While the uncertainties accompanying Russia’s protracted conflict in Ukraine could render any forecast largely unreliable, it would be safe to assume that Georgians’ disposable income growth will not catch up with rising prices in the coming months. This would also be true in theory, as incomes – especially their key element, wages – tend to be more rigid than the prices of food, drink and housing, which are easily subject to fluctuations.

Whatever the future income trend, this cost-of-living crisis further highlights a larger problem which is the decline in real income growth and general well-being of Georgians.

The average monthly disposable income (excluding borrowing) of December 2016 of 944 GEL, adjusted for inflation in December 2021, amounts to 1,277 GEL, which is 13% higher than the monthly average of 1,130 GEL recorded in 2021.

This means an 11.5% real decline in the average disposable income per household over a five-year period in Georgia. The decline comes as real GDP growth from 2016 to 2021 was 18.7%.

Where have the country’s economic gains gone? Apparently not in the pockets of ordinary, ordinary people. The experts pointed to, among other things, a “mismatch between the drivers of GDP growth and the drivers of employment”, which could be one of the reasons for the lack of progress in income growth.

A 2021 IMF staff report on Georgia pointed out that the main drivers of growth in 2011-2019 were financial, insurance and real estate activities – which “created almost no jobs between 2017 and 2019 “. This could be the main reason why the real growth of the economy has not translated into tangible progress in the growth of disposable incomes, as more jobs could support higher participation, fiercer competition for workers and therefore higher wages. But there is also a catch, as the IMF has also pointed out that there is a mismatch between the skills demanded by the labor market and the skills of Georgian workers.

The issue is linked to a wider range of structural challenges, which are low productivity, the need to create high-quality growth, and low measures of human capital, including education, as reported by the World Bank. The international financial institution also argued that Georgia’s trade openness and reliance on tourism revenue have made the country even more vulnerable to external and global shocks, which have been numerous lately.

And now?

Amid global turmoil, attempts by Georgia’s central bank to keep inflation at bay have been largely unsuccessful. While the National Bank of Georgia has steadily increased the policy rate, the May 2022 inflation rate of 13.3% was well above the 3% target. But central bankers are right when they argue that most of the causes of the price spikes are not monetary policy.

Addressing the root causes of Georgia’s cost-of-living crisis would likely require significant state efforts towards inclusive and sustainable growth, increasing women’s participation in the labor market and providing better education, among others.

But Georgian politics, marred by a series of controversies and tumultuous developments in recent years, have rarely put the country’s economic woes under the microscope. While the public has repeatedly made it clear in opinion polls that the economy remains their main concerntheir pleas have apparently fallen on deaf ears with political elites on all sides.

During this time, Georgia has not seen a significant grassroots protest movement that would largely focus on the social and economic hardships of people across the country.


*Geostat publishes household income and expenditure data annually, with 2022 figures expected after the first quarter of 2023.

** Geostat does not publish data on real disposable income growth.

Share.

About Author

Comments are closed.