Azerbaijan is capitalising on high levels of oil and gas revenues, as a result of elevated prices and increased export revenues, but also on the strong performance of its non-energy sector.
Meanwhile, Armenia and Georgia are benefiting from an inflow of Russian businesses and information and communication technology (ICT) professionals, boosting the service sectors of these small economies.
However, the robust growth recorded for the region in 2022 will taper off in 2023, highlighting concerns about its medium-term sustainability. The report warns that current growth in the Caucasus is mainly driven by temporary factors that could easily be reversed.
For Azerbaijan, the uncertainty stems from energy prices but also from inflation. For Georgia, however, the risks are driven by uncertainty and the significant probability of external shocks. In the case of Armenia, these are further amplified by the country’s close ties to an increasingly isolated Russian economy.
The economy of Azerbaijan is forecast to grow by 4.5 per cent this year, softening to 2.5 per cent next year. In 2022, Georgia’s economy is projected to post growth of 8 per cent, with a slowdown to 5 per cent next year. Similarly, the expected growth of 8 per cent in Armenia’s economy this year is likely to decelerate to 4 per cent in 2023.
During the first half of 2022, inflation in the Caucasus gained momentum due to a new wave of price rises for energy and food. The central banks of all three countries responded by raising their policy rates.
Inflation has now fallen to an average of 10 per cent, which is still high but significantly lower than the average of 16.5 per cent across the EBRD regions as a whole.
In Azerbaijan, the strong performance of the non-energy sector led to 6.2 per cent growth during the first seven months of 2022. The rising prices of hydrocarbons almost doubled export revenue, leading to large current-account and budget surpluses.
High energy prices are expected to support the country’s economic growth in the near term. The May forecast of GDP growth of 4.5 per cent for 2022 and moderation to 2.5 per cent in 2023 remains unchanged.
In Georgia, robust growth of 10.3 per cent is supported by a pickup in tourism, which has almost reached pre-pandemic levels, and by an increase in money transfers (boosted by the temporary inflow of Russian businesses and technology-sector professionals).
These trends have helped to cover Georgia’s trade deficit and supported the appreciation of the lari, leading to an increase in foreign reserves. The growth is expected to continue, albeit at a slower pace of 8 per cent in 2022, which remains significantly higher than the 3 per cent growth previously predicted.
For next year, the report expects this trend to moderate further to 5 per cent, in line with the previous forecast.
In Armenia, the solid recovery seen in 2021 carried strong growth momentum into 2022, with economic growth reaching 13.1 per cent in the period from January to July. As in Georgia, the arrival of many people and firms from Russia led to an increase of 113 per cent in foreign inflows and boosted demand for services.
This has helped Armenia to finance its widening trade deficit. Foreign reserves have also increased by 20 per cent and the exchange rate by 18 per cent. The report forecasts robust growth of 8 per cent in 2022, up from a previous estimate of 4.5 per cent. The slowdown is expected to be less gentle, with a drop to 4 per cent likely in 2023. However, the latest growth estimate for 2023 remains above the earlier projection of 2.5 per cent.
Overall, the EBRD predicts growth of 2.3 per cent in output across its regions in 2022. While this is an upward revision of 1.2 percentage points relative to its May forecast, the Bank warns of subdued growth in 2023, revising projected growth figures down by 1.7 percentage points to 3 per cent.
Projections are subject to further downside risks, should the war on Ukraine escalate.
