Journal Issue

IMF Executive Board Concludes 2005 Article IV Consultation with Georgia

International Monetary Fund
Published Date:
May 2006
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On March 31, 2006, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Georgia.1


The breakup of the Soviet Union brought a steep fall in living standards in Georgia, among the worst for any transition country. Following a period of hyperinflation in the mid-1990s, the Georgian authorities had some success in stabilizing the political and economic situation, only to experience a temporary setback during the Russian crisis. Economic growth started to pick up in 2000, but fiscal performance was poor, resulting in insufficient spending on priority items and the build-up of domestic arrears.

Georgia’s economy has performed well over the last two years, and the fiscal turnaround has been impressive. Since the change in government in late 2003, Georgia has demonstrated strong fiscal performance and a renewed commitment to press ahead with structural reforms, including the privatization of state-owned enterprises and further legal, fiscal, and financial reforms. Prudent macroeconomic policies have resulted in robust growth rates of about 7 percent on average in 2004–05, and average CPI inflation of about 7 percent over the same period. Significantly improved fiscal revenues have allowed for many spending initiatives to be undertaken while maintaining fiscal stability. The new government has also shown its resolve to combat corruption, including by reorganizing parts of the public sector and by prosecuting corrupt high-ranking officials of the previous government. More recently, the government has focused on creating a business-friendly environment, including by reducing the administrative hurdles to economic activity.

Strong fiscal performance over the last two years enabled a significant increase in government spending. In 2005, the Georgian authorities implemented a comprehensive tax reform, simplifying and streamlining major taxes, eliminating nuisance taxes, and lowering most tax rates. Nonetheless, tax collections rose from 14.5 percent of GDP in 2003 to an estimated 19.8 percent of GDP in 2005, resulting in a cash deficit that was substantially lower than budgeted in the last two years. At the same time, the government eliminated a large part of the outstanding domestic arrears. The Georgian authorities have started a process of fiscal decentralization by devolving some fiscal responsibilities to local bodies.

Over the past two years, monetary developments have been characterized by high reserve money growth, continued remonetization of the economy, and, more recently, a credit boom. After a period of lax monetary policy in late 2004, the National Bank of Georgia (NBG) stepped up its efforts to contain the monetary expansion, in line with its target for inflation. Underexecution of the budget has also contributed to the slowdown of reserve money growth due to higher-than-expected government deposits at the central bank. Interest rates on treasury bills have continued to decrease since the political turmoil in late 2003, but no treasury bills have been issued since mid-2005 in light of the government’s limited financing needs. Available data indicate that the banking system remains strong.

In 2004, the lari appreciated by 12 percent against the U.S. dollar. This appreciation resulted in a substantial improvement of Georgia’s external debt situation. Excluding imports related to two pipelines, the current account deficit increased somewhat as a share of GDP over the past two years, reflecting stronger aid inflows and related imports. Gross international reserves have slowly increased to 2.1 months of nonpipeline imports at end-2005.

The authorities submitted a Poverty Reduction Strategy Paper (PRSP) progress report to the Executive Boards of the Fund and the World Bank in March 2005. Although the availability of data is scarce, it appears that there has been limited progress toward reducing poverty.

Executive Board Assessment

Executive Directors broadly agreed with the thrust of the staff appraisal. They commended the authorities for their impressive progress over the last two years, including in maintaining macroeconomic stability, turning around the fiscal position, and combating pervasive corruption. Directors welcomed the authorities’ efforts to push ahead with further structural reforms, which will improve public sector operations and the business environment and foster private sector development, so as to put the economy on a path to sustained growth.

Directors supported the authorities’ economic program for 2006, which—based on sound macroeconomic policies—aims at bolstering growth and keeping inflation at single-digit rates, while carrying forward the structural reform agenda. In this context, they noted the need for further progress on reducing widespread poverty.

Directors endorsed the authorities’ plans to increase public spending in priority areas, based on their assurances that fiscal sustainability will be maintained. They welcomed the introduction of a medium-term expenditure framework, which should help to improve fiscal planning and expenditure control. Directors cautioned that the authorities’ intentions to decentralize fiscal responsibilities may lead to a weakening of fiscal transparency, and stressed the need to monitor closely the Legal Entities of Public Law (LEPLs) in a transparent way, and to ensure their full accountability. Against the backdrop of continued high poverty, Directors encouraged the authorities to strengthen the social safety nets, including by introducing the targeted poverty benefit as planned.

Directors welcomed the gains from the far-reaching tax reform enacted by the authorities in 2005, while encouraging them to continue strengthening tax administration. They regretted that the authorities cleared fewer domestic arrears than foreseen under the program, but noted the authorities’ commitment to eliminate the remaining stock of outstanding verified claims by the end of 2006. Directors urged the government to resist additional spending pressures that may arise ahead of local elections in the fall.

Directors viewed the current stance of monetary policy as appropriate, and welcomed the vigorous efforts by the National Bank of Georgia (NBG) to contain inflation. At the same time, they observed that a stronger fiscal position contributes to new challenges in the conduct of macroeconomic policy, which will require enhanced coordination efforts between the fiscal and monetary authorities. They noted that the extremely small treasury bill market makes effective liquidity management more challenging. In this context, they welcomed the recent memorandum of understanding between the NBG and the ministry of finance on securitizing some of the outstanding nontradable debt held by the NBG, which will provide the central bank with much-needed monetary policy instruments. They encouraged the authorities to strengthen the autonomy of the central bank.

Directors observed that the improved economic outlook for Georgia and strong capital inflows could put some appreciation pressures on the exchange rate. They agreed that the authorities should monitor developments closely, and endorsed the authorities’ commitment to a floating regime, with foreign exchange interventions limited to smoothing temporary and extreme fluctuations.

Directors commended the authorities for their continued efforts to strengthen the financial system. They noted that strong credit growth requires robust banking supervision practices to avoid the pitfalls associated with a credit boom. In this context, Directors looked forward to discussing the ongoing Financial Sector Assessment Program (FSAP). Update in the context of the next review. Going forward, Directors welcomed the NBG’s strategy to attract international interest in the Georgian financial sector and to consolidate the banking sector and foster competition.

Directors welcomed the substantial progress achieved in fighting corruption, improving governance and transparency, and enhancing the business climate. They endorsed the authorities’ structural reform agenda, which is geared toward removing bottlenecks in infrastructure and energy, and they recommended strengthening legal institutions to further entrench the principles of good governance and foster the enforcement of creditor and property rights. Directors stressed the importance of moving ahead with the privatization agenda. They welcomed the planned liberalization of the trade regime as a bold step toward strengthening Georgia’s competitiveness.

Directors broadly agreed with the findings of the recent debt sustainability analysis, noting that the appreciation of the national currency in 2004 and the government’s repayment efforts have eased the debt burden considerably. Directors welcomed the bilateral agreements reached in the wake of the July 2004 Paris Club debt rescheduling, and urged the authorities to finalize as soon as possible the outstanding agreements with Paris Club and other bilateral creditors on comparable terms.

Directors noted that the provision of data by the authorities is adequate for surveillance and program monitoring purposes, but encouraged the authorities to further strengthen the statistical database, with technical assistance from the Fund, particularly in the compilation of national accounts, balance of payments, and fiscal statistics.

Public Information Notices (PINs) form part of the IMF’s efforts to promote transparency of the IMF’s views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.

Georgia: Selected Economic and Financial Indicators, 2002–05
2002200320042005 1/
(Percentage change relative to previous year, unless otherwise indicated)
National income and prices
GDP at constant prices5.511.15.99.3
Consumer price index, end-of-period5.
Money and credit (end-of-period)
Reserve money18.413.944.319.7
Broad money (including foreign exch. deposits)17.922.842.626.4
(In percent of GDP, unless otherwise indicated)
Public Finance
Total revenue and grants15.816.221.723.4
Tax revenue14.414.518.219.8
Total expenditure and net lending17.818.718.624.9
Fiscal balance, commitment basis-2.0-2.53.1-1.5
Fiscal balance, cash basis-1.9-1.3-0.2-2.4
External sector
Trade balance-12.9-15.0-13.8-14.1
Current account balance (excl. pipeline imports)-5.5-2.8-3.5-4.1
External debt51.746.335.827.1
Gross international reserves in months of imports 2/
Exchange rate
Exchange rate, lari/U.S. dollar, period average2.202.151.921.81
Sources: Georgian authorities; and Fund staff estimates.

Preliminary estimates for some variables.

Gross international reserves are calculated based on imports of goods and services, excluding pipeline-related import.

Sources: Georgian authorities; and Fund staff estimates.

Preliminary estimates for some variables.

Gross international reserves are calculated based on imports of goods and services, excluding pipeline-related import.

Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country’s economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country’s authorities.

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