The increase in real wages puts upward pressure on prices of domestically produced goods, and the central bank moderately increases the policy rate, according to IMF report.
The increase in the interest rate is consistent with the initial appreciation of the lari. The appreciation of the lari, as well as the import component of demand (also from higher government and private investment), temporarily deteriorates the current account—which worsens by a maximum of 1.5 percent of GDP. However, as higher productivity allows for lower prices, the real effective exchange rate depreciates, and the current account returns to its baseline level, IMF said.
“Georgia’s economic reforms have led to robust growth, but the benefits have not been broadly shared. Georgia’s growth has resulted in meager employment gains, and unemployment, underemployment, poverty, and income inequalities remain high”.
Poverty incidence and inequality, which are mostly concentrated in rural areas, also remain relatively high compared to regional comparators. Most of Georgia’s labor resources are locked in low productivity jobs, while a large share of youth with higher education is unemployed.
Business surveys indicate that labor skills have increasingly become an obstacle to growth. Comprehensive education reform—including improvements to early childhood, general, and higher education; enhanced vocational training; and upgrades to sector management—that is well integrated into the government’s reform agenda would help produce a better-skilled workforce and support more robust and inclusive growth.
“More supportive labor market policies, including improved labor matching services and more flexible employment opportunities, would enhance job creation”, IMF said.
While Georgians are highly educated, they do not have the relevant skills demanded by businesses.
The World Bank’s 2015 STEP survey highlights important differences between labor demand and supply. In particular, businesses demand mostly low and middle technically skilled workers while the majority of job seekers are university graduates. This may reflect a lack of information about labor market demands or social pressures to pursue higher education, irrespective of relevance of the field of study. The survey also shows that employers have had difficulties filling job vacancies due to a lack of required skills.