Growth has been accelerating since 2000, and Georgia's economic performance is slowly improving; GDP growth peaked at 8.6% in 2003, as construction of the Baku-Tbilisi-Ceyhan pipeline began. Inflation is low and stable; it was 4.8% in 2003. Despite several years of slow growth following the 1998 Russian financial crisis, Georgia led the former Soviet Union in developing the legal infrastructure necessary for an attractive investment climate. However, corruption still persists and confidence in the judiciary has not risen significantly. Further reform of the judiciary and anticipated tax reform in late 2004 were expected to help the investment climate. Georgia maintains no currency controls, allows foreign investment in all but a few sectors deemed strategically important, and has implemented an impressive privatization program, including land privatization. Georgia was the second country of the former Soviet Union to join the World Trade Organization, which should provide additional opportunities for development.

Economic activity in Georgia remains below potential. The low level of increase in trade and GDP are due to fundamental economic problems that have eroded investor confidence in Georgia. The poor fiscal situation, pervasive corruption, and arbitrary implementation of laws and regulations have inhibited economic growth in the country. Georgia's electricity sector is in critical condition, although new government policies and increased collections following the Rose Revolution may be the starting point to reform the energy sector. Even so, extensive capital investment is needed in order to keep the system functioning. Shortages of electricity have resulted in public unrest almost annually in the past. In 1998, Georgia began to privatize its energy distribution system and hoped to privatize its energy generation system by 2000, an objective that remains unrealized.

Privatization is a potential source to generate the capital needed to rehabilitate the economic sector, and the new Minister of Economy has plans to move aggressively in this regard. Due to a lack of investment, Georgia's transportation and communication infrastructure remains in very poor condition.

Corruption in Georgia, both official and otherwise, has been a significant and persistent obstacle not only to domestic and foreign investment, but also to economic development. Its pervasive nature and high visibility have stunted economic growth and seriously undermined the credibility of the government and its reforms. However, the new Georgian government in 2004 committed to tackle corruption at the highest levels, as visibly displayed by arresting and prosecuting several former government officials. They also established an anti-money laundering bureau within the Procuracy, a vetted unit that addresses corruption investigations and prosecutions. In July 2000, the government created an Anti-Corruption Commission that made its report in the fall of 2000. Based on this report, an Anti-Corruption Coordinating Council (ACCC) was created in summer 2001 to implement recommendations of the Anti-Corruption Commission. Its recommendations include several measures that, if implemented, would improve the investment climate. However, few, if any, of the recommendations have been acted upon. In 2004, the ACCC was eliminated, and the National Security Council is now responsible for the government anti-corruption strategy. It is too early to tell whether this strategy and its implementation will result in reduced corruption in Georgia. In the past year, major reductions in corruption increased public faith in the police force. In July 2004, the Ministry of Internal Affairs (MIA) reduced the police force to 3,000 from 13,000, paying much higher salaries to members of the newly rescaled patrol and demanding higher standards of behavior.

Following the Rose Revolution, the new Georgian government took the opportunity to establish a new IMF program and reschedule its debt through the Paris Club. In June 2004, Georgia agreed with the IMF to a new 3-year Poverty Reduction and Growth Facility (PRGF) program. Two previous IMF programs went off track in 1999 and 2003 due to Georgia's failure to meet budgetary targets. While Georgia has yet to complete an IMF program successfully, through November 2004 Georgia had met or exceeded all the quantitative targets of the new IMF program, especially the crucial revenue collection target. Georgia also reached a debt rescheduling agreement with the Paris Club in July 2004. Contingent upon the existence of an IMF program, the Paris Club agreement reschedules debt falling due in 2004-2006 and reduces Georgia's debt service payments over this period from $169.2 million to $46.4 million. Georgia had previously received debt rescheduling from the Paris Club in 2001, but the agreement was suspended when Georgia fell off track with the IMF.

Foreign direct investment (FDI) declined to $61.8 million in 2001, compared to $83.65 million in 1999. Key sectors of economic activity in Georgia include energy, agriculture, trade, tourism, and transport, as well as significant projects in the food processing and telecommunications industries. The United States is the largest foreign investor in Georgia, annually contributing between 20%-34% of overall FDI in recent years. The completion of the Baku-Tbilisi-Ceyhan oil pipeline, expected by the end of 2005, and the Shah Deniz gas pipeline, which began in 2004, will offer opportunities for investors in the energy sector as well as related infrastructure. Additional privatization is planned in the energy sector, although the government has indicated its willingness to wait until this is under a more sound financial footing.

Georgian agricultural production is beginning to recover following the devastation caused by the civil war and sectoral restructuring necessary following the breakup of the Soviet Union. Livestock production is beginning to rebound, and domestic grain production is increasing. Both will require sustained political will and infrastructure improvements to ensure appropriate distribution and return to farmers. Tea, hazelnut, and citrus production have suffered greatly as a result of the conflict in Abkhazia, an especially fertile area. Supported by European Union assistance, Georgia has taken steps to control the quality of and appropriately market its natural spring water. Georgian viniculture, well developed during Soviet times, is internationally acclaimed and has absorbed some new technologies and financing since 1994.

To encourage and support the reform process, the United States and other donors focus heavily on technical and institution-building programs, both to the government and to private companies. Provision of legal and technical advisers to various government ministries is paired with training opportunities for parliamentarians, law enforcement officials, and economic advisers, complemented by extensive educational exchanges programs. The United States and other donors have increasingly imposed conditions on assistance in order to encourage improved performance on key issues and in key sectors, including energy. In May 2004, Georgia was selected as one of 16 Millennium Challenge Account (MCA) countries. While the United States terminated two assistance programs in fall 2003 due to lack of progress and commitment for reform on the part of the Georgian government, after the Rose Revolution in November 2003, we have re-engaged with the government to help them develop and implement comprehensive reform policies. Georgia continues to depend on humanitarian aid, which targets the most-needy groups.