The World Bank Group in Georgia
Chapter 3 | Support for Private Sector Development
Highlights
The World Bank Group’s strategy for private sector development was based on sound analytics and was aligned with the main economic priorities of the country. Support has contributed to delivering higher-level outcomes.
Bank Group reform support helped create critical institutions that contributed to improvements in the business climate and provided access to markets, particularly the European Union. It is too early to judge the impact of the Bank Group’s support on attracting productivity-enhancing foreign direct investment.
The Bank Group’s engagement in financial services became increasingly selective, by complementing the work of other partners with targeted investments and advice to promote instruments previously unavailable in the market. Support helped address the key constraints of a shallow and highly dollarized financial system.
Support for tourism helped boost growth in targeted regions, whereas work in agriculture complemented a more substantive engagement of the European Union, focusing on areas of comparative advantage.
A programmatic approach consisting of advisory services and analytics, reforms, and investment lending helped lay the foundation for an innovative ecosystem.
Support for private sector development has intersecting priorities, such as improving infrastructure and human capital. This chapter is split into two major sections, evaluating (i) the support for enabling conditions intended to underpin Georgia’s path toward economic convergence and (ii) the specific sectors identified for Bank Group support based on their potential to generate exports and promote growth outside of urban areas. The sections discuss the main areas of support identified in CPS, CPF, and analytic work to address specific challenges holding back Georgia’s progress on key outcome indicators.
Enabling Conditions
The Bank Group’s engagement to resolve bottlenecks in enabling conditions for economic development was informed by sound analysis that provided a theory of change and underpinned strategy and program design. The 2013 and 2014 CEMs indicated that Georgia’s export growth largely originated from low-complexity primary sectors with little value added (World Bank 2013, 2014b). To address these challenges and strengthen export competitiveness, the 2014 CEM recommended creating conditions for firms to build productive and innovative capacity, diversify exports, and move up the value chain. To capitalize on the opportunities presented by the Deep and Comprehensive Free Trade Area, the reports recommended alignment with EU standards and export promotion. Gaps in transport, logistics, and supply chain management were identified as critical factors reducing trade competitiveness and impeding Georgia’s potential as a transit country. Policy recommendations included upgrading transport infrastructure, increasing access to diversified financial services, and strengthening the technical and innovation capacity of firms.
Business Climate
The World Bank’s support through policy lending helped establish critical institutions to support private sector development. The 2015 Private Sector Competitiveness DPO series focused on strengthening legislation, promoting innovation, and addressing market barriers for entrepreneurship and small and medium enterprise (SME) growth. The series was informed by analytic tools, such as the 2013 Georgia Competitive Industries Technical Assistance Project. It supported the establishment of the Investors Council and the Entrepreneurship Development Agency (later renamed Enterprise Georgia). The objective of enhancing competition policy was to be addressed through the strengthening of the Georgian Competition and Consumer Agency and the introduction of laws related to telecommunication infrastructure, including infrastructure sharing, as well as support for capacity building at Enterprise Georgia by IFC.
The institutions established with support of Bank Group policy lending were effective in delivering on their mandates. Enterprise Georgia, supported through the First Private Sector Competitiveness DPO in 2015, is the main institution for small enterprise support and provides funding, training, and mentorship to encourage entrepreneurial growth, contributing to a dynamic small business ecosystem.1 The Investors Council, which was set up by the European Bank for Reconstruction and Development (EBRD) and the Georgian government with the support of the Second Private Sector Competitiveness DPO in 2018, serves as an independent public-private dialogue platform with participants from the business community, international financial institutions, bilateral agencies, and the government to improve the business and investment climate.2 The Georgian Competition and Consumer Agency, strengthened as part of the 2020 Economic Management and Competitiveness DPO, examined twice the number of laws originally envisaged and contributed to the improvement of competition policy.
Conditions for Economic Integration
Bank Group support for Georgia’s market access focused on streamlining customs procedures and export-enabling interventions, but the line of sight to results was not always clearly articulated. The Competitiveness and Growth DPO series (2013–14) supported the implementation of reforms to strengthen trade policy and trade facilitation with a focus on alignment with the EU standards (World Bank 2017b). However, indicators lacked a clearly articulated line of sight to outcomes. A prior action under the Private Sector Competitiveness DPO series (2015–18) supported adoption of the EU accreditation standards based on the findings of the 2014 CEM. The resulting certification of Georgian entities significantly exceeded targets. The 2020 Economic Management and Competitiveness DPO focused primarily on aligning laws related to product and factor markets with international standards, including the EU Association Agreement.3
Bank Group support for trade has contributed to improvements in integration, particularly with the EU. Policy support resulted in a 69.5 percent increase in the adoption of European and international standards, exceeding the target by 54 percent. Georgian exports increased from 39.9 percent of GDP in 2014 to 54.8 percent in 2019; the COVID-19 shock caused a drop in exports in 2020, but they had rebounded to 52.9 percent by 2022 (World Bank 2024c; figure 3.1). Exports to the EU remained relatively flat during the first half of the evaluation period but increased at an annual rate of 14.2 percent starting in 2018. This suggests that Georgia, in line with World Bank support, is increasingly able to benefit from trade integration, particularly with the EU (European Commission 2024).
Figure 3.1. Georgia Exports as Share of GDP
Figure 3.1. Georgia Exports as Share of GDP
Source: World Bank 2024c.
Efforts to improve economic integration through attracting FDI have yielded operational results, although it is too early to judge the effect on composition of FDI. The 2020 Economic Management and Competitiveness DPO supported the adoption of a strategy and action plan to attract FDI. This led to Enterprise Georgia setting up the investment promotion agency, Invest in Georgia, which is tasked with outreach to strategic foreign investors, serves as a one-stop shop for international investors, and offers support throughout the investment process. Invest in Georgia, supported by IFC, developed an investment promotion strategy and action plan to attract export-oriented FDI requirements. The agency delivered initial results despite COVID-19–related disruptions, attracting initial interest from 30 investors in the first year of the plan’s implementation, but no deal had closed. In parallel, the government of Georgia submitted to parliament a draft Law of Georgia on Investment Funds to bring the relevant legal framework closer to the EU directives.
Financial Sector
Analytics performed during the evaluation period identified a shallow financial sector and a high level of dollarization as constraints for private sector growth and macroeconomic stability. The 2014 Financial Sector Assessment Program review identified significant gaps in access to financial services and structural vulnerabilities related to the high levels of dollarization and concentration (IMF 2014). The 2013 and 2014 CEMs and the SCD identified a shallow and insufficiently diversified financial sector as an obstacle to credit, particularly for SMEs. Limited domestic savings increased reliance on capital inflows and constrained financial deepening and diversification. The Bank Group recommended a series of reforms to improve product development and market practices, regulation and supervision of the nonbank financial sector, functioning of capital markets, financial infrastructure, risk mitigation, and financial stability. The 2021 Financial Sector Assessment Program identified a priority of reducing risks stemming from the high dollarization of the financial system and acknowledged steps taken by the Bank Group to address these risks (IMF 2021). The 2022 CEM identified digital financial access, improvement of credit information systems, and promotion of asset-based financing through legal frameworks and factoring platforms as priorities (World Bank 2022a).
During the evaluation period, the availability of development partner funding for financial sector development increased, prompting a shift in the World Bank’s engagement mode. In the years leading up to the evaluation period, EBRD was the most prominent partner. The CPS envisaged a more pronounced role for the World Bank in increasing access to finance for micro, small, and medium enterprises (MSMEs). During the evaluation period, the Asian Development Bank (ADB), the European Investment Bank (EIB), and EBRD significantly increased their engagement in MSME finance. The reasons included the availability of finance with elements of concessionality and more attractive pricing structures, especially for local currency. The Bank Group reacted with an increased focus on diversifying sources of finance in the CPF, including a broad program of ASA. Throughout the evaluation period, the Bank Group was the fourth-largest partner in the sector with 9.9 percent of commitments (figure 3.2).
Figure 3.2. Average Annual Financing Provided to Financial Sector Projects by Major Development Partners
Figure 3.2. Average Annual Financing Provided to Financial Sector Projects by Major Development Partners
Source: OECD 2024b.
Note: ADB = Asian Development Bank; CPF = Country Partnership Framework; CPS = Country Partnership Strategy; EBRD = European Bank for Reconstruction and Development; EIB = European Investment Bank; EU = European Union; OPEC = Organization of the Petroleum Exporting Countries.
In the context of increased involvement of other development partners, the Bank Group pursued a more selective approach to increasing access to financial services. IFC made a series of investments in financial institutions to support access to finance for MSMEs, expand the housing finance market, and help Georgian firms access international capital markets. MIGA continued supporting the financial sector by providing capital optimization guarantees to ProCredit. Enterprise Georgia and Georgia’s Innovation and Technology Agency (GITA) provided loans, matching grants, and technical assistance to SMEs to promote entrepreneurship and stimulate alternative forms of innovation financing. Policy support helped promote private equity, venture capital, or collective investment funds by improving the regulatory framework. The World Bank’s COVID-19 response provided grants, interest rate subsidies, and credit guarantees to affected MSMEs. The World Bank and IFC supported the modernization of the payment system and improved environmental, social, and governance standards.
The Bank Group helped foster financial sector deepening and diversification and availability of local currency finance. The Private Sector Competitiveness DPO series helped establish the conditions for financial sector deepening and diversification. The Bank Group, in collaboration with other partners, provided technical assistance and support for capital market reforms, insurance market development, payment systems, and financial infrastructure. In line with the CPF priorities, advisory support also aimed to enhance financial sector stability and safety nets, including through deposit insurance. IFC supported the issuance of an innovative local currency bond in 2017 and provided technical assistance through its DigiLab Finance and Green Banking Academy programs.
The Bank Group projects effectively contributed to increasing access to finance through diverse initiatives, resulting in significant improvements in MSME access to credit. Enterprise Georgia and GITA facilitated more than $800 million in finance for SME development, innovation, and exports, while IFC helped partnering financial institutions increase the volume of outstanding loans to MSMEs by 50 percent, surpassing the target. At times, IFC supported up to two-thirds of the financial system by asset size (World Bank 2018d). MIGA helped reduce a ProCredit’s mandatory reserves, freeing up capital to boost domestic credit for SMEs and climate finance in Georgia. The Georgia Relief and Recovery for MSMEs Project has so far disbursed more than $43 million in grants and loans to SMEs affected by COVID-19 and provided technical assistance to help MSME pandemic preparedness and digitalization. Access to finance improved drastically between 2014 and 2020 and fell slightly during COVID-19 and afterward. Over the evaluation period, the financial sector experienced rapid growth, with the private sector credit-to-GDP ratio increasing from 49.2 percent in 2014 to 83.3 percent in 2020 before decreasing because of the COVID-19 crisis (figure 3.3). Nonperforming loans have steadily decreased since 2014, from 3 percent to about 1.5 percent in 2022 (World Bank 2024a). The share of SME loans of all business lending increased from 33.3 percent in 2014 to 43.0 percent in 2022. The dollarization of the Georgian financial system decreased during the evaluation period, driven by loans to households and microentrepreneurs (figure 3.4).
Figure 3.3. Domestic Credit Provided by the Financial Sector and Share of Small and Medium Enterprise Loans in Total Business Loans
Figure 3.3. Domestic Credit Provided by the Financial Sector and Share of Small and Medium Enterprise Loans in Total Business Loans
Sources: Organisation for Economic Co-operation and Development iLibrary; World Bank Open Data.
Note: SME = small and medium enterprise.
Figure 3.4. Dollarization of Loans in Georgia
Figure 3.4. Dollarization of Loans in Georgia
Source: National Bank of Georgia 2024.
Innovation
Throughout the evaluation period, analytic work pointed to low levels of innovation and lack of adoption of information technology as major obstacles to the emergence of more productive firms. In 2014, the country was ranked 74th in the Global Innovation Index. Bank Group analytics, such as the CEMs and the SCD, linked low levels of innovation and use of technology to skills gaps, with innovation focusing on increasing domestic sales rather than improving production or increasing export sophistication. Firm investments in ICT primarily enabled basic services during the early stages of the innovation ecosystem, offering limited incentives for research institutions to focus on commercialization. Georgia’s ICT performance lagged in critical dimensions, including mobile network coverage and internet bandwidth. The adoption of ICT by businesses was ranked low, affecting competitiveness.
The Bank Group supported the government’s innovation agenda with a program that helped create an institutional framework and transferred relevant experience from similar countries to Georgia. The CPS proposed a multifaceted approach involving an institutional mechanism, advisory services, policy dialogue, and investment lending. The Private Sector Competitiveness DPO series helped establish GITA in 2013 as an institutional mechanism to address supply-side failures and demand-side constraints in research and innovation. The series further supported the establishment of the Research and Innovation Council and prepared the ground for the GENIE project and the adoption of the Law of Georgia on Innovations. The 2020 Technology Transfer Pilot Program, in collaboration with the EU, had the objective of testing the potential for the commercialization of science research in Georgia. Additional advisory activity on ICT for employment (2014–15) explored options to connect job seekers to employment opportunities and facilitate skills development in preparation for a potential project in collaboration with the EU that did not materialize.
The Bank Group’s support for GITA and GENIE has helped lay foundations for an innovative ecosystem. GITA serves as a vehicle for promoting innovation and supporting technology start-ups with training, financial assistance, and commercialization. The 2016 GENIE project implemented by GITA aimed to improve the innovation infrastructure. GENIE was designed as a high-risk project and was restructured several times to incorporate lessons based on close monitoring and supervision. Components of innovation centers and internet access were scaled down to expand innovation financing. The project financed about 138 start-ups and catalyzed $105.21 million in private financing, $30 million of which was through direct investment (World Bank 2024d).
The 2020 Technology Transfer Pilot Program built on GENIE focused on linking MSMEs to research institutions to commercialize knowledge. The project was funded by a $1.1 million EU grant to assist in the commercialization of science research, aiming to pilot at least one transaction. By 2022, four deal negotiations had been initiated, but no transactions were closed. Interviews performed for the Country Program Evaluation established that the pilot connected firms to research institutions and universities that were unaware of their potential for commercialization. Activities coincided with an increase in Georgia’s position in the Global Innovation Index, from 74 at the start of the evaluation period to 65 in 2023. Georgia produces fewer innovation outputs relative to its level of innovation investments but scores high on institutions—the area in which World Bank support was focused (WIPO 2023).
Support for Priority Sectors
Based on findings from the SCD, the CPF selected tourism and agriculture as priority sectors with potential to generate export income and decrease spatial inequality. Sectoral mini deep dives undertaken as part of the SCD found that although Georgia had among the highest global growth rates of tourism between 2009 and 2016, the sector’s potential was not fully used. Economic contributions to agriculture also remained below Georgia’s potential, lagging that of peer countries. Although employment in agriculture remained high at 52 percent, contributions to GDP dropped to 10 percent in 2016. Land fragmentation, underinvestment, and outdated practices curbed productivity and presented an obstacle to inclusion in global value chains.
Tourism
The World Bank supported the Georgian National Tourism Administration with analytic support for the 2015–25 national tourism strategy. The strategy’s priorities were to capitalize on the country’s natural and cultural heritage, promote investments, increase sustainability, and improve services and marketing to target higher-spending markets. To support spatial transformation and balanced regional development, the Bank Group recommended attracting investments in secondary cities and rural areas with high potential for tourism development. The national strategy envisaged increasing international tourism revenue from $1.8 billion to $5.5 billion per year by increasing the average stay from 4.3 days to 5.3 days. The strategy also aimed to attract FDI into tourism (increasing from $559 million to $910 million per year) and raise the sector’s contribution to GDP from 6 percent to 6.7 percent.
The Bank Group partnered with the government of Georgia on regional development initiatives to enhance tourism-related infrastructure and preserve cultural heritage sites across various regions. Between 2012 and 2021, the World Bank supported the government in implementing three regional development projects that focused on increasing tourism-related employment and spending in four regions. IFC complemented this support by investing strategically in tourism and agritourism. The projects facilitated more than GEL 100 million in private investments and helped triple average time of stay while increasing visitor numbers, leading to improved job opportunities and local growth (World Bank 2018d). The National Statistics Office of Georgia reports an increase in regional tourism after 2015 in both targeted regions where implementation was completed (figure 3.5). Overall, average annual growth of tourism in the four regions was 8.5 percent, exceeding the national annualized increase of 4.8 percent.
Figure 3.5. Monthly Average Number of Visitors by Region with Completed Projects
Figure 3.5. Monthly Average Number of Visitors by Region with Completed Projects
Source: National Statistics Office of Georgia, Statistics, https://www.geostat.ge/en.
Note: No data were collected in 2020 and 2021 because of COVID-19.
Agriculture
Agriculture has traditionally played an important social and economic role in Georgia. Although contributions to GDP have been relatively modest, the sector was the largest employer at the start of the evaluation period. Most food products were predominantly grown by small-scale, subsistence-oriented family holdings, with surplus production frequently sold on local markets. The farm structure was highly fragmented, with low labor productivity, an average farm size of 1.4 hectares, and 77 percent of farms operating on land holdings of less than 1 hectare (OECD 2020). Lack of land titling hindered consolidation to larger, more efficient units. Some sectors, such as hazelnuts and wine, were able to improve operations, leading to growing exports.
The Bank Group used a selective approach in addressing agriculture, complementing the substantive engagement of the EU. The EU took the lead role in agriculture with the European Neighbourhood Programme for Agriculture and Rural Development, which accounted for 41.5 percent of funding in the sector, starting in 2014. The program supported local capacity building, strengthening farmers’ cooperation skills and access to resources, and diversified social and economic opportunities in rural areas. The CPS primarily focused on irrigation and support for land reform, whereas the CPF (on the basis of the findings of the SCD) added a strong objective to support agricultural modernization and market access.
The Bank Group support contributed to improvements in land registration, irrigation, and exports. The Irrigation and Land Market Development Project and its additional financing supported the government in improving land registration, surpassing targets for registering titles. Investments in irrigation and drainage improvement were less successful and reached a reduced target of 174,040 hectares. Registered land titles increased sixfold from 50,600 in 2020 to 174,000 in 2023 (World Bank 2024e). The World Bank provided additional resources through technical assistance for smallholders in agrifood value chains (in 2014) and an agribusiness development analysis (in 2015). IFC helped harmonize Georgia’s food safety legislation with EU requirements, helped producers comply with standards, and contributed to opening new markets. IFC also implemented an advisory project helping honey producers improve the standards and access the European market.
World Bank Group Coordination
The Bank Group coordinated its analytics and strategic approach to seek complementarities among the World Bank, IFC, and MIGA. Alignment among the programs was based on diagnostics, such as the 2013 and 2014 CEMs and the SCD, which identified respective areas of focus. With respect to the second-generation business climate reform and economic integration, IFC advisory services complemented the World Bank support for reform. IFC investment and advisory services and MIGA guarantees complemented World Bank programs and projects in the financial sector, where both institutions worked separately but coordinated with one another. The World Bank worked through the DPO on FDI promotion, and IFC supported Enterprise Georgia with strategic assistance. The World Bank’s work in agriculture focused on irrigation and land registration, the latter of which is crucial for the consolidation of land holdings that would allow more efficient, export-oriented agriculture. There is some evidence that this agenda is progressing, as one of IFC’s clients was able to improve efficiency through scale after initially relying on a model that bought crops from smallholder farmers. In the tourism sector, World Bank support of the regional development projects was complemented by IFC investments in hospitality.
External Collaboration
The Bank Group has worked closely with other development partners, coordinating strategies and using external trust fund resources. On structural reforms, the Bank Group cooperated with the EU on trade facilitation and private sector development to support the implementation of the Deep and Comprehensive Free Trade Area. In the context of the regional development projects, the World Bank worked closely with the Swedish International Development Cooperation Agency, the EU, the German Agency for International Cooperation, and the United States Agency for International Development. The World Bank helped design partial credit guarantees with trust fund resources from the EU. In partnership with the Swedish International Development Cooperation Agency and close collaboration with the Ministry of Environmental Protection and Agriculture of Georgia and the National Food Agency, IFC engaged with the public and private sectors to foster financial inclusion, boost agricultural exports, and enhance market access.
Findings
The Bank Group’s support for private sector development was aligned with main constraints and was based on sound analytics. The combination of CEMs and policy notes at the start of the evaluation period contributed to the alignment of the priorities of the incoming government and the Bank Group strategy. In addition to the internal analysis, reforms were informed by the documents produced by other development partners, such as Transition Report 2013: Stuck in Transition? (EBRD 2013), which further contributed to a coordinated approach. Approaches in specific areas drew on a variety of analytic and advisory products, in line with the priorities expressed in strategy documents.
The Bank Group’s support for Georgia’s alignment with the EU presented an important anchor for economic convergence. During the evaluation period, Georgia’s income level increased from 37 percent of the World Bank’s high-income threshold in 2014 to 48 percent in 2022. The 2024 World Development Report finds that increased EU alignment and adoption of EU standards presents a unique anchor for economic convergence for accession countries (World Bank 2024g). The move from focusing on improving the business climate to developing an open economy with innovation and competition retraces the experience of other EU accession countries that have successfully achieved economic convergence.
The Bank Group contributed to improvements in the business climate, economic integration, and innovation. Policy lending helped establish several relevant institutions that are contributing to the implementation of reforms, competition policy, investment promotion, and MSME development. Bank Group interventions helped create the conditions for greater trade integration, particularly for capitalizing on closer economic integration with the EU. In addition to broadly achieving their intended operational results, relevant interventions were highlighted in key informant interviews and are consistent with the improved high-level indicators they were intended to influence.
The Bank Group adjusted well to an environment in which other development partners frequently offer funding with higher concessionally, by shifting its engagement to other areas for additional value. The strategy for the financial sector at the start of the period was sound. However, as institutions such as ADB and EIB increased their engagement in an already narrow financial system, IFC reacted by focusing on more innovative areas, such as capital market development, through the introduction of local currency bonds, and providing advisory services, including through the support for environmental, social, and governance standards, instead of trying to crowd out other development partners.
Support for agribusiness and tourism contributed to economic integration and exports. The Bank Group’s work in agribusiness complemented the larger EU program well, focusing on land titling and irrigation as areas with significant World Bank expertise. Land titling addresses a crucial constraint to consolidation of the sector that impedes agricultural production at the scale required to export to the EU. Support for tourism contributed to a stronger growth in areas that benefited from Bank Group projects.
- Between 2015 and 2022, Enterprise Georgia provided small grants for 8,200 projects, interest rate subsidies for 1,500 projects, and collateral guarantees for 722 projects, supporting the creation of 65,000 jobs.
- The council was highlighted by various interlocutors from the private sector and the development partners as an influential advisory body, which met regularly and raised issues in Georgia’s business environment for resolution by the government. Its prominent position, in proximity to the prime minister, was identified in interviews as a crucial factor in ensuring the body’s effectiveness.
- Advisory projects on trade, green freight facilitation logistics delivered in 2016, and a 2017 customs valuation assessment further supported the objective of economic integration. IFC’s Georgia Investment Climate Project (2014–17) and Georgia Trade, Investment, and Agricompetitiveness Project (2018–23) helped upgrade the customs automation system, streamline customs valuation, and apply harmonized systems for trade.