Georgia Faces Persistent Inflation and Competitiveness Risks, Says IMF Report

Georgia’s economy has shown resilience amid global shocks, but faces persistent inflation, wage-productivity imbalances, and potential external vulnerabilities. The IMF urges cautious monetary policy, structural reforms, and productivity-driven growth to sustain long-term stability.

Georgia’s economic trajectory is navigating through a complex intersection of domestic structural shifts and global shocks, as captured in the latest IMF report published in March 2025. Drawing on research from the International Monetary Fund (IMF), the National Bank of Georgia (NBG), the World Bank, and the Caucasus Research Resource Center, the report provides a deep dive into the country’s macroeconomic conditions, highlighting persistent inflation, labor market imbalances, and external sector fluctuations. The findings suggest that while Georgia has demonstrated remarkable resilience, underlying vulnerabilities continue to pose risks to long-term stability.

Inflation Persistence: More Than Just a Passing Phase

The inflation narrative in Georgia has been shaped by the twin crises of the COVID-19 pandemic and the geopolitical fallout from Russia’s invasion of Ukraine. These global shocks pushed inflation upward, primarily through supply disruptions and price spikes in food and energy. Although headline inflation has recently begun to moderate, it remains above the NBG’s 3 percent target. More troubling is the stickiness of core inflation, which excludes volatile components, and remains significantly elevated.

This persistence is largely driven by higher prices in service sectors such as healthcare, real estate, and hospitality, coupled with wage increases that outstrip productivity growth. Businesses are also feeding the inflationary cycle by adjusting prices based on expectations of continued inflation. This expectation-driven behavior is weakening the effectiveness of monetary policy. Despite the NBG’s efforts to tighten monetary conditions, the report finds that the pass-through to price stabilization has been slower than anticipated. A measured monetary easing is expected over the next two years, but only if inflation expectations are successfully re-anchored and wage pressures are contained.

Wages Surge Ahead of Productivity

Georgia’s labor market has bounced back strongly, fueled by sustained economic growth and a surge in migration, particularly from Russia, since 2022. Employment levels now exceed pre-pandemic figures, but this recovery has come with significant caveats. Much of the job creation is concentrated in services and informal sectors, where productivity is comparatively low. As a result, wages are rising at a pace that is not supported by productivity gains.

Sectors such as ICT, construction, and tourism have seen particularly sharp increases in compensation. While this boosts household incomes and consumption, it also fuels inflationary pressures and undermines competitiveness. The IMF underscores that real wages have risen well above historical trends, making it increasingly difficult for Georgian exports to compete unless productivity sees a corresponding uplift. The danger is a wage-price spiral where inflation and wage expectations feed off each other.

Migration Boom: A Mixed Blessing for the Labor Market

Migration has had a transformative impact on Georgia’s labor market. The influx of Russian, Armenian, and Belarusian nationals, many of them professionals and entrepreneurs, has expanded the labor force and injected new demand into the economy. However, this surge has also introduced new challenges. A significant share of migrants operate in informal or self-employed capacities, making it difficult to assess their impact on official labor statistics and overall productivity.

While the presence of skilled migrants presents long-term opportunities for economic diversification and innovation, integration into the formal economy remains a hurdle. The IMF points out that effective absorption of migrant labor will require reforms aimed at skills certification, labor market regulation, and access to formal employment channels. Without such measures, the benefits of migration could be limited and even contribute to distortions in the labor and housing markets.

External Position Strengthens, But May Not Last

Georgia’s external account has seen a dramatic improvement in recent years. The current account deficit narrowed from over 10 percent of GDP in 2021 to just 3.5 percent in 2023. This was largely driven by a surge in tourism, remittances, and IT-related service exports. However, the IMF cautions that these improvements may not be durable. Much of the recent inflow of foreign exchange is linked to transient geopolitical factors, including Russian capital flight and a spike in tourism tied to migration trends.

Concurrently, the Georgian lari has appreciated by more than 35 percent since early 2022. Although exports have remained stable for now, IMF models suggest the currency may be overvalued by 5 to 10 percent. A prolonged overvaluation risks eroding Georgia’s trade competitiveness, especially if inflation and wage growth remain unchecked. The report argues that maintaining external balance in the coming years will require productivity-enhancing reforms and tighter control over domestic cost structures.

Policy Choices Ahead: Balancing Stability and Reform

In response to these intertwined challenges, the IMF calls for a coordinated policy framework. On the monetary front, the NBG should remain vigilant, maintaining a tightening bias until inflation expectations realign with targets. Premature easing could reignite price pressures and further unanchor expectations. Fiscal policy must also play a stabilizing role, avoiding pro-cyclical spending while supporting long-term investments in infrastructure, education, and innovation.

Structural reforms are indispensable for unlocking Georgia’s growth potential. These include strengthening labor market data collection, improving vocational training, facilitating formalization of migrant labor, and fostering high-productivity sectors such as advanced manufacturing and digital services. Encouraging sustainable foreign direct investment will also be crucial, especially as current inflows tied to temporary geopolitical shifts begin to recede.

Ultimately, Georgia stands at a pivotal moment. The post-pandemic and post-invasion tailwinds that boosted the economy may not endure. To sustain momentum, the country must rebalance from consumption-led growth to productivity-driven expansion. Doing so will require not just prudent macroeconomic management but bold structural reforms to build a more competitive and inclusive economy.