Georgia Resilient Agriculture, Irrigation, and Land Project

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A. Country Context1. Georgia is an upper-middle-income country with an annual gross domestic product (GDP) per capita of US$5,023 in 2021 and a population of about 3.7 million. The country’s economy grew at an average annual rate of nearly 5 percent between 2005 and 2021 despite numerous upheavals, including: the global financial crisis of 2007–08, conflict with the Russian Federation in 2008, the drop in commodity prices since 2014, the 2020 COVID-19 pandemic, and the Russian Federation’s invasion of Ukraine in 2022. In 2021, the economy rebounded strongly (10.4 percent growth), driven by the recovery of consumption and exports. Like other economies in the South Caucasus and Central Asia, Georgia benefited from large inflows of money transfers and people in the aftermath of the war in Ukraine and the subsequent sanctions on Russia. In 2022, economic growth averaged 10.1 percent. 2. Georgia implemented important economic reforms that facilitated a decrease in the national poverty rate from 37.4 percent in 2007 to 17.5 percent in 2021. The reforms led to improved income and living conditions for the country’s bottom 40 percent. However, more than half of the population remain in poverty according to the upper middle-income line (US$6.86 per person per day in 2017 Purchasing Power Parity). Although inequality declined after 2010, with a Gini Index of 36.4 in 2021, Georgia has one of the highest levels of income inequality in the Europe and Central Asia (ECA) region. The incidence of poverty and inequality is higher in rural areas than in urban areas. However, poverty dropped by over six percent in rural areas, and by two percent in urban Georgia. 3. As a result of the war in Ukraine, global food and fertilizer prices have increased with negative impacts on agricultural exports. Domestic food price inflation in Georgia was 15.8 percent in August 2022. In 2021, agriculture contributed 27 percent of total exports, and agriculture export values increased during the past decade. However, from January to November 2022, exports of fruits, nuts, and vegetables amounted to approximately US$166 million, 17 percent below the same period in 2021. At the same time, domestic demand for fruit and vegetables increased, thus providing market opportunities for local produce. Physical access to Russian markets also has been constrained, affected by the financial sanctions. Despite these constraints, Russia remains the largest export destination for fruits, nuts, and vegetables, followed by Italy and Germany. Nonetheless, the war highlights the importance of agriculture competitiveness to increase export diversification.4. Climate change is a critical risk to Georgia’s development and stability, particularly for the agriculture sector. Current trends, such as increasing temperatures, eroding soils, intensifying droughts, floods, and an increased occurrence of hail, are expected to reduce yields in major agricultural regions, including the eastern regions, where irrigation is prevalent. The availability of water resources is highly seasonal in Georgia. Rivers fed by glaciers and snow, such as the Khrami-Debed and Alazani, are projected to see reduced flows between 30 percent and 55 percent by the end of the 21st century, posing a threat to an important source of water supply. Precipitation is also projected to decrease during the farming season (June–August) and increase in autumn, spring, and winter. Up to 30 consecutive dry days are expected by mid-century, increasing agricultural water scarcity, and reducing crop productivity during the summer months. Droughts are expected to exert further pressure on water availability. The annual risk exposure of the population to climate change is estimated to be between 1.5 and 6.6 percent of Georgia’s national GDP (that is, between US$238 million and US$1.04 billion annually). B. Sectoral and Institutional ContextSectoral Context5. Constraints and opportunities in Georgia’s agriculture, water, and land sectors are interlinked. Land and water are finite resources upon which agricultural production and productivity depend. While agriculture in Georgia is primarily rainfed, irrigation and drainage (I&D) investments are vital to guard against hydrological variability, and critical for high-value agriculture production. The eastern part of the country requires irrigation to buffer climatic extremes, while the western part is confronted with drainage problems. In most parts of the country, however, I&D infrastructure has deteriorated due to lack of maintenance and reduced financial resources allocated to I&D management. Pressure on fragmented land resources is also growing, making improvements in agricultural land management in Georgia critical for increasing productivity. Due to these interlinked challenges in the agriculture, water, and land sectors, interventions to address them must be implemented in the three sectors concurrently.6. The agriculture sector accounted for 41 percent of all jobs in 2017 and continues to be important in the poorer and more rural parts of the country, which are most vulnerable to climate risks. Approximately 41 percent of the total population live in rural areas, and the majority of those living in those areas rely partly on agriculture for their livelihoods. Subsistence agriculture makes up 73 percent of employment in rural areas. Almost 80 percent of rural farmers operate less than 1 hectare (ha) of agricultural land. Most smallholdings produce crops primarily for subsistence purposes and lack direct commercial potential. Productivity is low and stagnant for most crop and livestock products, both in absol ute terms and relative to comparator countries. Present and future climate change pose further risks to production and livelihoods for these marginal groups. Past droughts (a severe event occurred in 2000) caused wheat yields to drop by more than half. 7. According to the most recent agricultural census conducted in 2014, the share of commercial farms producing higher-value crops for export remains low. Forward and backward links with input suppliers and the agro-processing sector are weak, although their improvement would have a positive impact on agriculture modernization, value chain development, and competitiveness. Despite the apparent limitations of smallholder farms, a small but increasing number of medium-size and larger commercially oriented producers and agri-business enterprises are driving the development of domestic market and export-oriented value chains (World Bank 2022). From 2010 to 2020, the value of exports of agricultural food products, especially high-value commodities such as wine, hazelnuts, fruits, and vegetables, more than doubled, while imports remained stable. As new export markets are being explored, private investment in processing capacity has started to increase, and various canned, dried, and frozen products are being exported to the EU, the United States (US), and other markets. 8. Following independence in 1991, Georgia experienced a turbulent transition period resulting in the deterioration of a large part of its irrigation infrastructure. This caused a sharp decline in the irrigated area. From 2012 to 2020, the public irrigable area steadily increased to about 130,000 ha, of which about 6,500 ha is served by pumping systems. In addition, some of Georgia's dams are aging and in need of repair or rehabilitation. Thus, in recent years, GoG took steps to improve dam safety in the country. The Ministry of Environment Protection and Agriculture (MEPA) established regulations and guidelines for the design, construction, and maintenance of dams. GOG also produced an upcoming draft law “on the safety of hydraulic structures and launched several projects to upgrade existing dams and build new, safer ones.9. In 2020, there was a total of 123 irrigation schemes in use and the actual irrigated area was about 65,000 ha, according to the Georgian Amelioration Limited Lia