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Summary: A small Western Asian country, Georgia has an outward-looking economic model, mainly based on services such as trade and tourism. The Georgian economy is thus highly vulnerable to external shocks and was hard hit by the Covid-19 crisis, with a recession of 6.8% in 2020, the worst since 1994. In light of these characteristics and the country’s economic ties with Russia and Ukraine, most observers expected the Georgian economy to be adversely affected by the conflict between these two countries. However, these anticipated negative effects have not materialized and economic growth remained buoyant in 2022 (+10.1%, after the rebound of +10.5% in 2021). This was in particular due to a recovery in tourism and an explosion in migratory and financial flows from Russia. These factors have also contributed to a reduction in the fiscal and current account deficits (-2.6% of GDP and -4.0% of GDP, respectively) and an appreciation of the lari. In 2023, growth is expected to have remained above its potential (6.2% according to the International Monetary Fund – IMF) and the fiscal and current account deficits would appear to have been contained. But the war in Ukraine has served as a reminder of the risk of a Russian invasion of Georgia in response to its distance from Russia’s sphere of influence. In this respect, the government is pursuing a balanced policy between the aspirations of a large segment of the population, with more than 80% in favor of European Union (EU) membership, and gestures of appeasement towards Moscow. This situation does not only affect the social climate, it also casts doubt over the outcome of the EU accession process. Indeed, Georgia submitted an application for EU membership in February 2022 and finally obtained the status of official candidate in late 2023. The government’s ambiguous position also has an impact on the economic situation, as reflected in the suspension of the IMF program following the adoption of the amendments to the Central Bank’s organic law (National Bank of Georgia – NBG). Despite two decades of sustained growth, there has only been a marginal improvement in the standard of living of Georgians and there are persistent socioeconomic challenges, in particular unemployment, poverty and inequalities. Furthermore, in view of the aging of the population and the lack of major reforms, potential growth is expected to decline by about 5% in the medium term, and 3% in the long term. In this context, it is essential to accelerate the economic catch-up and this will require the implementation of reforms in the sectors of education and connectivity. Thematic area: Macroeconomics Geographical area: Georgia