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TBILISI, June 1 (Reuters) - Massive street protests against Georgia's President Mikheil Saakashvili will turn Georgia's economic growth into contraction in 2009, Prime Minister Nika Gilauri said on Monday.
The Caucasus state had been enjoying high growth rates in recent years, mainly due to its fast expanding banking sector, but the global crisis and the five-day war with Russia have brought growth to a halt despite $4.5 billion in foreign aid. Gilauri said the Georgian economy will contract by 1.0-1.5 percent in 2009, according to new estimates, which have been agreed with the International Monetary Fund (IMF). The IMF had earlier forecast growth of 1.0 percent in 2009.
The European Bank for Reconstruction and Development (EBRD) last month forecast that Georgia's economy would contract by 1.0 percent this year.
"The first quarter was normal but then everything was spoiled in April and May due to the street protests ... Due to the political crisis in the country we have basically lost the first half of the year," Gilauri said.
The stand-off between Saakashvili and the opposition is fuelling fears of unrest in the country of 4.5 million people on Russia's southern border where Moscow and the West are competing for influence over oil and gas transit routes.
Critics accuse Saakashvili of monopolising power since the 2003 "Rose Revolution" that swept him to the presidency. The 41-year-old has come under renewed pressure since last August's war with Russia.
Economic woes may aggravate the situation for Saakashvili's cabinet, keen to find new sources of funding. Gilauri said the government will issue treasury bills worth 200-250 million lari ($121-152 million) this summer on the domestic market.
He said the proceeds of this issue will be used to finance infrastructure projects although the maturity will likely be only three to six months. Georgia has one outstanding Eurobond issue maturing in 2013.
Gilauri said earlier Georgia expected $1.3 billion in overseas investment this year, which along with donor funding will cushion its economy during the current financial crisis and political gridlock.
"The GDP contraction will take place due to weak economic activity, not due to a fall in foreign direct investment. The FDI may also fall compared to our forecast but not very significantly," Gilauri said.
Asked about Gilauri's comments on the economic impact of the street protests, Stuart Culverhouse, chief economist at frontier markets brokerage Exotix in London, said: "Given the move out of risk assets, I do not think Georgia would have been excluded from that.
"Local difficulties would add to that perception of risk. We have seen recession in most eastern European countries, it's not unusual." (Reporting by Niko Mchedlishvili and Carolyn Cohn, writing by Gleb Bryanski, editing by Stephen Nisbet)