CAPITAL: Tbilisi

MONETARY UNIT: Lari

REFINING CAPACITY: 108,836 b/cd

OIL PRODUCTION: 2,000 b/d

OIL RESERVES: 35 million bbl

GAS RESERVES: 300 bcf

The political situation in Georgia seemed in 1999 to have stabilized after years of civil strife. President Eduard A. Shevardnadze commanded support from home and had a high profile abroad. Georgia had friendly relations with all of its neighbors-rare in a region torn with conflict.

Georgia had been able to institute a series of economic reforms and position itself as a regional trading hub.

However, stability in Georgia was a relatively new phenomenon, and several underlying problems remained in 1999. Following its independence in 1991, Georgia suffered from a civil war in 1992 following the overthrow of Zviad Gamsakhurdia, its first democratically elected president. In addition, Georgia was divided by separatist struggles in Abkhazia (northwest Georgia) and South Ossetia (north-central Georgia).

South Ossetia wanted to join with North Ossetia, part of Russia, and Russia backed both separatist struggles. About 250,000 people were displaced by the civil wars in Georgia.

Economy and government

The separatist wars affected trade with Russia, which was once Georgia`s main trading partner.

Two land connections to Russia pass through the separatist regions, and the main rail connection to Russia passes through Abkhazia. A third connection through the breakaway Russian region of Chechnya was also problematic. The civil war and separatist struggles devastated an economy which was once one of the strongest in the FSU. By 1995, Georgia`s gross domestic product had fallen to 20% of 1990 levels.

Toward the end of the decade, however, this decline appeared to have leveled off. After suffering declines of 20-40%/year during 1991-94, Georgia`s economy showed modest growth during 1995 and was estimated to have grown by 11% in 1996. Continued economic growth of 5-7% was expected over the next 5 years.

These growth rates do not reflect the underground economy; the World Bank estimated that unofficial economic activity accounted for over half of Georgia`s overall economy.

The inflation rate, which had reached more than 7,000%/year by 1994, was brought under control in the latter half of the decade with help from the International Monetary Fund.

Georgia`s currency, the lari, introduced in September 1995 to replace the coupon, remained stable with the backing of an IMF stabilization fund. Consumer prices rose by 13.5% in 1996 and were expected to rise by 8-12%/year over the following 5 years.

Other energy

Weakness of the power sector was one of the biggest obstacles to economic growth in Georgia. Long power outages were a daily occurrence in much of the country in the 1990s, and parts of Georgia did not have any electricity at all. The situation worsened in 1997, as water levels in hydropower reservoirs hit low marks.

Hydroelectric power accounted for more than 80% of electric power generation in 1995, and hydropower`s share rose steadily as thermal capacity lay idle with the end of fuel subsidies following the collapse of the Soviet Union.

Equipment and maintenance problems also plagued generation capability, leaving only 700 Mw of the installed capacity of 4.4 million Mw in service. Nonpayment for power hindered the ability of the system to operate.