TOPIC OF THE WEEK: Why is Georgia growing so much faster than Armenia?
When the IMF upped its 2025 GDP forecast for Georgia (to 7.2%) in June upon conducting its regular Article IV Mission in Tbilisi, many were caught by surprise. After all, wasn't Georgia about to experience the aftershocks of the contested parliamentary and presidential elections in 2024 as religiously claimed by the opposition and some foreign governments? What made the IMF forecast even more intriguing was that it was even stronger than the 6.0 percent projection of the government itself.
While the reasons for that outperformance are interesting in themselves, it would be even more instructive to compare Georgia and Armenia in terms of their economic growth over the last several years up to 2025. There are two key considerations here. First, both countries delivered an impressive 20 percent real GDP growth over the course of just two years, 2022 and 2023. Moreover, that growth spurt was quite similar in that only three industries accounted for most of it, with trade, IT, and construction contributing 67% to GDP growth in Armenia and 72% to GDP growth in Georgia. Second, things have changed significantly since then, with GDP growth in Georgia continuing to power on, while that in Armenia is losing luster.
Hence, I investigate the underlying reasons for that growth bifurcation by looking at individual industries over 2024/early 2025 and conclude that Georgia's advantage lies in its ability to (broadly) preserve the momentum from the stellar 2022-2023 years and its conscientious effort to increase public spending in line with the political cycle. While IT, construction and trade accounted for about 7% of the average annual real GDP growth rates of 10% in Armenia and Georgia in 2022 and 2023, they added only 2.8% and 2.7% to GDP growth in Armenia (including because of the end of the diamond trade) in 2024 and 1Q25 vs 4.6% and 4.7% in the case of Georgia. Moreover, the 2024 elections (parliamentary and presidential) elections in Georgia were associated with elevated levels of fiscal spending, which created an environment in which public services (healthcare, education, public administration) added 2.8% and 1.5% to growth in 2024 and 1Q25. In sharp contrast, these industries actually subtracted from growth in Armenia in 2024 (-1%).
The good news for Armenia is that 2025 seems to have partially reversed that trend, with public services already adding 0.8% to 1Q25 growth. This suggests that as the political cycle gears up in the runup to the 2026 parliamentary elections, growth in Armenia might receive a boost from fiscal spending as its pace of economic expansion catches up with that of Georgia.
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