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Georgia: Staff Report for the 2013 Article IV Consultation—Informational Annex

Author(s):
International Monetary Fund. Middle East and Central Asia Dept.
Published Date:
August 2013
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Relations With the Fund

(As of May 31, 2013)

Membership Status

Date of membership: May 5, 1992.

General Resources Account

SDR MillionPercent of Quota
Quota150.30100.00
Fund Holdings of Currency513.46341.63
Reserve Tranche Position0.010.01

SDR Department

SDR MillionPercent Allocation
Net Cumulative Allocation143.96100.00
Holdings144.36100.28

Outstanding Purchases and Loans

SDR MillionPercent of Quota
Stand-By Arrangements363.16241.63
ECF Arrangements58.8039.12

Latest Financial Arrangements

TypeApproval DateExpiration DateAmount Approved

(SDR Million)
Amount Drawn

(SDR Million)
Stand-ByApr. 11, 2012Apr. 10, 2014125.000.00
SCFApr. 11, 2012Apr. 10, 2014125.000.00
Stand-BySept. 15, 2008June 14, 2011747.10577.10

Projected Payments to the Fund

(SDR million; based on existing use of resources and present holdings of SDRs)

Forthcoming
20132014201520162017
Principal188.99166.7552.239.804.20
Charges/Interest1.641.450.220.020.00
Total190.62168.2052.459.824.20

Safeguard Assessments

An update of the January 2010 safeguards assessment of the National Bank of Georgia (NBG) was completed in September 2011. The NBG continues to publish financial statements that comply with International Financial Reporting Standards, and are externally audited by an international firm in accordance with International Standards on Auditing. In response to the safeguards assessment of 2010, the authorities implemented recommendations including the appointment of an external audit firm for a multi year term beginning with financial year 2010.

Implementation of Multilateral Debt Relief Initiative (MDRI)

Not applicable.

Implementation of HIPC Initiative

Not applicable.

Exchange Arrangements

The de jure exchange rate arrangement of Georgia is floating. In line with the official policy, NBG has remained committed to improving functioning of the foreign exchange market and enhancing exchange rate flexibility since the introduction in March 2009 of multiple-price foreign exchange auctions. While the NBG intervenes in the foreign exchange market through the FX auctions, the NBG does not make any explicit or implicit commitment with respect to an exchange rate target or path. In the first half of 2012, the FX purchase auctions moderated with a cumulative volume of USD 75 million. However, since July 2012, the NBG has intensified the FX auctions both in volume and frequency and has been active on both sides of the market, with total purchases of USD 340 million and total sales of USD 65 million through April 2013. FX purchase auctions have been directed toward rebuilding foreign exchange reserves; an objective of the authorities’ economic program that is supported by the IMF SBA/SCF arrangement. With respect to intervention data, the volume sold at NBG’s FX auctions and the average exchange rates are posted on the NBG website immediately after each auction. Based on these data, most of the activity took place since December 2012, coinciding with increased appreciation pressures on the lari. Although FX interventions account for a small portion of annual foreign exchange market turnover, the size of these interventions on any given day is substantial. Since July 2012, the lari has remained stable against the U.S. dollar in a 2% band. Market supply and demand play a role in determining the exchange rate, as does official action based on the observed path of the exchange rate and the discretionary nature of the FX auctions. Therefore, as of end-April 2013, the de facto exchange rate arrangement has been reclassified to a stabilized arrangement against the U.S. dollar from floating, effective July 1, 2012.

The government uses the official exchange rate for budget and tax accounting purposes as well as for all payments between the government and enterprises and other legal entities and for foreign exchange transactions with the NBG. The official rate is defined as the average of the previous day’s market transaction rates, and may thus differ by more than two percent from the freely determined market rate, which had caused a multiple currency practice in the past. However, in March 2013, an amendment was introduced to the 2010 agreement between the NBG and Treasury Service of the Ministry of Finance on the Participation in the Real Time Gross Settlement (RTGS) System that eliminates Georgia’s multiple currency practice. The 2013 amendment insures that foreign exchange transactions between the government and the NBG are priced with the market exchange rate of the day when the foreign exchange order is submitted to NBG.

Article IV Consultation

The 2011 Article IV consultation was concluded on March 23, 2011.

FSAP Participation

Two FSAP missions visited Tbilisi in May 1–15, and in July 24–August 7, 2001. An FSAP update mission visited Tbilisi in February 15–28, 2006.

Technical Assistance

See Table 1 of this Annex.

Resident Representative

The seventh resident representative, Mr. Azim Sadikov, took up his post on July 9, 2012.

National Bank of Georgia Resident Advisors

Ms. Vance, MAE peripatetic banking supervision advisor to the NBG, commenced a series of visits to Tbilisi in September 1997. Mr. Nielsen, an MAE advisor, provided technical assistance to the NBG in May 1998. Mr. Viksnins was an MAE peripatetic advisor to the NBG president starting in October 1999. Mr. Fish was resident advisor on banking supervision from August 10, 1999 to January 31, 2002. Mr. Bernard Thompson provided peripatetic technical assistance in accounting and internal audit in March and August 2000. Mr. Wellwood Mason provided technical assistance on payment system issues on a peripatetic basis in 2002 and 2003. Mr. Howard C. Edmonds served from September 2004 to October 2007 as a resident advisor on banking supervision issues.

Ministry of Finance Resident Advisors

Mr. Sharma was an FAD resident advisor and assisted the authorities in the development of a Treasury beginning in May 1997. Mr. Sainsbury, an FAD advisor, assisted the Ministry of Finance from June 1998 to November 1999. Mr. Chaturvedi was FAD resident advisor in 2001 and 2002 to assist the authorities in continuing the development of the Treasury and the Treasury Single Account, in revising the legislative framework, expenditure control systems, and budgeting issues. Between 2001 and 2003, Mr. Welling was an FAD peripatetic advisor to assist the State Customs Department in preparing and introducing measures for the custom reform and modernization program. In March 2005, Mr. Zohrab started advising the authorities on treasury-related reforms, and his term ended in November 2006.

Georgia: Technical Assistance Missions, 2008–13
SubjectType of MissionTimingCounterpart
Fiscal Affairs Department (FAD)
Tax AdministrationExpert assistanceJan/Feb andMinistry of Finance
(Woodley)Apr/May 2008
Public Financial ManagementExpert assistanceApr. 6-19, 2010Ministry of Finance
Pension ReformExpert assistanceApr. 21-27, 2011Ministry of Finance
Public Financial ManagementAdvisoryMay 14-24, 2012Ministry of Finance, Partnership Fund
Tax AdministrationAdvisoryAug. 15-28, 2012Ministry of Finance, Revenue Service
Monetary and Capital Markets Department (MCM)
Lender of Last Resort FrameworkAdvisoryDec. 11-17, 2008National Bank of Georgia
Stress Testing and ForeignAdvisoryApr. 21-30, 2009Financial Supervisory Agency; National Bank of Georgia
Exchange Market
Macroeconomic Modeling forAdvisoryJune 2-10, 2010National Bank of Georgia
Monetary Policy Formulation
Macroeconomic Modeling forAdvisoryOctober 4-13, 2010National Bank of Georgia
Monetary Policy Formulation
Payment Systems OversightAdvisoryMay 3–12, 2011National Bank of Georgia
Statistics Department (STA)
Monetary and Financial StatisticsAdvisoryMar. 18-31, 2009National Bank of Georgia
Evaluation of Technical AssistanceFollow-up assistanceJul. 14-16, 2010National Statistics Office, National Bank of Georgia, Ministry of Finance
External Sector StatisticsFollow-up assistanceOct. 4–15, 2010National Bank of Georgia
ROSC Data ModuleROSCOct. 4–17, 2011National Statistics Office, National Bank of Georgia, Ministry of Finance
External Sector StatisticsFollow-up assistanceOct. 17-26, 2012National Bank of Georgia
National Accounts StatisticsFollow-up assistanceJan. 14-25, 2013National Statistics Office
Legal Department (LEG)
Payment SystemsAdvisoryMay 25–Jun. 5, 2010National Bank of Georgia
Payment SystemsFollow-up assistanceNov. 8–14, 2010National Bank of Georgia
Legislative DraftingAdvisoryFeb. 28–Mar. 7, 2011National Bank of Georgia
International tax policyAdvisoryJune 6-7, 2012Ministry of Finance

Relations With the World Bank

(As of June 13, 2013)

TitleProductTentative Timing of

Mission
Expected

Delivery of

Report
BankOperations
DPO-2 to support reforms to sustain growth, promote job creation, strengthen social safety nets, and deepen public financial management reforms.February–June 2013Second half of 2013
Statistics Capacity Building Trust Fund grant to support preparation work for national population census.Periodic 2012–13Ongoing, closing in 2013
Institutional Development Fund grant for strengthening capital budgeting in Tbilisi municipalityPeriodic 2012–13Ongoing, closing in 2013
Analytical Work
Sources of Growth StudyQuarterlyJuly 2013
Programmatic PER; PER-1 follow-up and PER-2QuarterlyDecember 2012 March 2014
Programmatic Poverty AssessmentPeriodicPeriodic
PEFA 2012 Repeat AssessmentPeriodicSeptember 2013
Missions and Technical Assistance
Fund
1st and 2nd reviews under the SBA/SCF blendNov. 28–Dec. 12, 2012February 27, 2013
3rd review under the SBA/SCF blendFall 2013December 2013
TA: Improving national account and external sector statisticsFY 2014FY 2014
TA: Strengthening tax administrationFY 2014FY 2014
4th review under the SBA/SCF blend1st quarter of 2014April 2014
Joint Bank-FundJoint Debt Sustainability AnalysisOngoing collaborationJune/July 2013

Relations With the European Bank for Reconstruction and Development (EBRD)

(As of June 2013)

Since 1994, the EBRD has been active in supporting Georgia’s transformation toward a market economy. The bank’s current country strategy for Georgia, approved in February 2010, outlines the following main strategic directions:

  • Supporting stabilization and restructuring of the financial sector, strengthening risk and portfolio management practices and increasing the share of local currency operations;

  • Helping rehabilitate and modernize the country’s road, energy and municipal infrastructure to strengthen energy security and promote energy efficiency, help Georgia benefit from its potential as a transit country, and improve efficiency and long-term financial sustainability of its municipal services;

  • Provide financing to the enterprise sector with the view of supporting innovation, competition and export potential, in particular in manufacturing and agribusiness.

As of end-May 2013, the bank signed 155 investments in Georgia with the cumulative commitment totaling €1.8 billion. Its outstanding portfolio stood at €604 million. Almost one half of the portfolio is in the financial sector, followed by the energy and infrastructure sectors with one fifth each and corporate sector accounting for 13 percent. The ratio of private sector projects in the portfolio currently stands at around 80 percent. The bank gives preference to non-sovereign operations. Where sovereign guarantees are required, donor co-funding on a grant basis is sought.

Banks overall investment in 2012 reached €97 million with 13 projects. It was active in continuing to support the agribusiness sector directly and through provision of credit lines to local partner banks. The Georgian Agriculture Financing Facility (GAFF), a €40 million framework launched in 2011, made credit lines available to local commercial banks, nonbank microfinance institutions and leasing companies for on-lending to farmers and other agricultural entities. Additional credit lines were extended to Bank of Georgia, VTB Bank Georgia, Bank Republic and TBC Bank, most of them were provided in lari. The bank has also supported the enterprise sector by investing €18.2 million across various industries.

With the Bank’s assistance, Georgia has become an electricity exporting country. The Bank played a critical role in strengthening access to the international market through financing of the Black Sea Transmission line, which is expected to be operational by end-2013. The Bank has been actively pursuing viable small, medium and large renewable energy projects. The Bank has financed Paravani, the first Independent Power Producer (IPP) in the hydroelectricity sector. In 2011, the Bank extended USD 52 million debt financing and invested USD 5 million as equity in the company while USD 23 million has been syndicated as a B-loan and IFC co-invested as a lender. The project is expected to deliver energy to Turkey for nine months per year.

Georgia is part of the EBRD’s ‘Early Transition Countries’ (ETC) initiative. Launched in April 2004, the initiative aims to increase investments in the bank’s then seven poorest countries. The initiative builds on international efforts to address poverty in these countries. Through this initiative, the EBRD focuses its efforts on private sector business development and selected public sector interventions. It aims to stimulate market activity by using a streamlined approach to financing, focusing on smaller projects, mobilizing more investment, and encouraging ongoing economic reform. The bank accepts higher risk in the projects it finances in the ETCs, while respecting the principles of sound banking. Since the launch of the ETC initiative, the bank’s annual business volume in Georgia has increased five-fold.

The bank’s country strategy for the period of 2013-15 is currently under preparation and expected to be approved in July 2013. It is expected to focus the bank on fostering private investments, completing the restructuring and modernization of the energy sector, supporting Georgia’s transformation into a regional economic hub, and promoting broad-based growth.

Going forward, the EBRD will also:

  • Continue to support the authorities’ goal of developing local capital market and reducing dollarization by providing synthetic local currency loans and offering technical cooperation and policy advice, particularly in the legal and regulatory area and on debt and equity capital market infrastructure. The bank is actively engaged in promoting local currency lending and de-dollarization of the Georgian banking system in cooperation with other IFIs. Georgia was one of the first countries to undergo a joint EBRD-IMF-World Bank assessment of the economic policy, regulatory and legal frameworks for development of the local currency capital markets, and sign a framework agreement with the authorities on policy reforms required to support de-dollarization.

  • Actively pursue viable renewable energy projects, while promoting energy efficiency across the country and leading policy dialogue on improving the regulatory framework for energy efficiency and renewable energy.

  • Invest in the development of the agribusiness sector and modernization of the food distribution sector supported by intensive policy dialogue.

  • Support policy and regulatory developments in Georgia by providing further legal transition assistance, including improvements to the laws on secured transactions and insolvency, reform of concession laws, improved corporate governance, and judiciary reforms.

  • Maintain dialogue with the government to ensure fair and transparent implementation of tax policies and audits as well as the independence of the judiciary in dealings with businesses.

Statistical Issues

Data provision has some shortcomings but is broadly adequate for surveillance. There is some room for improving the compilation and dissemination of price, national accounts, and external sector statistics. Insufficient price and economic activity indicators to assess underlying inflation and output trends partly hamper the development of an effective inflation targeting framework. To support the authorities’ effort to improve the compilation of macroeconomic statistics, the Fund has provided a significant amount of technical assistance (TA) (Annex I, Table1.) The data module of the Report on the Observance of Standards and Codes (ROSC), prepared in October 2011, indicated that since the previous 2002 ROSC, the authorities have made significant institutional and methodological improvements in macroeconomic statistics. Georgia graduated to the IMF’s Special Data Dissemination Standard (SDDS) on May 17, 2010, after participating in GDDS since 2006.

A. Real Sector Statistics

National accounts statistics follow the concepts and definitions of the System of National Accounts 1993. Annual and quarterly GDP estimates are compiled by both the production and expenditure approaches. Preliminary national accounts estimates are available after 85 days and final estimates after 13 months. The 2011 data ROSC mission found serious source data deficiencies owing to: absence of an economic census; under-reporting in the business survey and household budget survey; shortcomings in the business register; and incomplete coverage of some activities (trade, other community, social and personal activities). Also, a better method could be used to benchmark quarterly national accounts (QNA) data to annual estimates. Volume measures of GDP by the expenditure approach are not compiled. During the national accounts TA mission in January 2013, actions on several issues were either initiated or partly implemented (benchmarking of QNA in current and constant prices, new methodology for estimating volume of taxes on products, compilation of unit values for imports). Although the authorities have made good progress in addressing some of these issues, there was scope for improving the constant price estimates and advancing the development of the system of supply and use tables.

On price statistics, the scope of the consumer price index (CPI) is limited to only urban areas while the treatment of owner-occupied housing is conceptually imprecise. The structure of producer price index (PPI) relies on turnover rather than output concept while product based PPIs are not compiled. The export and import price indices are not compiled. Despite important progress achieved in the development of agricultural price indices, inadequate funding was causing delays in implementation. The accuracy of the CPI and PPI weights, with respect to actual household consumption and market turnover, suffers from the same HBS and business register shortcomings as the national accounts. The imputation methods for both CPI and PPI, while recently improved, need to be enhanced to ensure coherent long-term treatment of seasonal goods.

B. Monetary and Financial Statistics

The NBG compiles monetary data broadly in line with the recommendations of the Monetary and Financial Statistics Manual 2000. Data are compiled based on STA’s Standardized Report Forms and reported to STA on a regular and timely basis for publication in the International Financial Statistics (IFS).

C. Government Finance Statistics

The Ministry of Finance is well advanced on a program of reform to their central and local government budget and accounting systems to fully adopt the Government Finance Statistics Manual 2001 (GFSM 2001) methodology and the International Public Sector Accounting Standards (IPSASs), including the staged introduction of accrual recording into transactions data, and an expansion in the range of items recorded in the balance sheet. The reform includes the implementation of accrual accounting by 2020. The authorities’ commitment to the accounting reform strategy is set out in Decree 101 issued by the Minister of Finance on February 10, 2006. This decree approves the general strategy, but implementation of some of the individual steps in the transition plan will require amendments to the law of Georgia on the budget system (Budget System Law). Since 2008, the budget classification follows the GFSM 2001. However, there are deficiencies in the sectorization of Legal Entities of Public Law (LEPLs) and securities are not recorded at market value. The authorities report annual and monthly government finance statistics (GFS) compiled on a cash basis in the GFSM 2001 framework for publication in the GFS Yearbook and IFS, respectively.

D. External Sector Statistics

The NBG began to take the responsibility in the compilation of balance of payments statistics in January 2007. It received extensive technical assistance from STA, including the STA Resident Statistics Advisor who, stationed in Baku, undertook six peripatetic TA missions to Georgia during April 2007–October 2008.

Balance of payments data are compiled broadly in accordance with the definitions set out in the fifth edition of the Balance of Payments Manual (BPM5) and elements of the sixth edition (BPM6). The scope of the balance of payments statistics includes transactions of institutional units resident in Georgia with the rest of the world. However, data do not cover the territories of Abkhazian Autonomous Republic and Tskhinvali Region, a part of Georgian territory not controlled by the central authorities. Source data used for compiling the balance of payments are generally adequate and timely. However, the accuracy of the data received from the enterprises survey should be improved. Moreover, foreign direct investment (FDI) data are subject to significant revisions and the classification of some inflows as FDI (rather than other capital flows) has been the subject of prolonged debates between the statistical office and the NBG. Some data sources for balance of payments need strengthening, notably the International Transactions Reporting System (ITRS) and the private nonfinancial external debt compilation program. For the balance of payments, statistical techniques are adequate, except for the estimation of import and export of cars which should be further improved.

Georgia: Table of Common Indicators Required for Surveillance(As of June 6, 2013)
Date of

latest

observation
Date

received
Frequencyof

Data7
Frequency of

Reporting7
Frequency of

Publication7
Memo Items:
Data Quality—Methodological soundness8Data Quality—Accuracy and reliability9
Exchange RatesApr. 20135/10/13DDD
International Reserve Assets and Reserve Liabilities of the Monetary Authorities1Apr. 20135/7/13DDM
Reserve/Base MoneyApr. 20135/21/13DDMO, O, LO, OLO,O,O,O,O
Broad MoneyApr. 20135/21/13DDM
Central Bank Balance SheetApr. 20135/21/13DDM
Consolidated Balance Sheet of the Banking SystemApr. 20135/21/13MMM
Interest Rates2Apr. 20135/21/13DDD
Consumer Price IndexApr. 20135/16/13MMMO,LO,O,OLO,O,LO,O,O
Revenue, Expenditure, Balance and Composition of Financing3—General Government4Mar. 20135/10/201 3MMMO,O,LO,LOO,O,O,O,O
Revenue, Expenditure, Balance and Composition of Financing3—Central GovernmentMar. 20135/10/201 3MMM
Stocks of Central Government and Central Government-Guaranteed Debt5Dec. 201102/15/12QQQ
External Current Account BalanceQ1 20127/12/12QQQO,O,O,OLO, O, LO ,O, LO
Exports and Imports of Goods and ServicesQ1 20127/12/12QQQ
GDP/GNPQ4 20114/19/12QQQO,LO,LO,LOLNO, O, LO, O, LO
Gross External DebtDec. 201102/15/12QQQ
International Investment Position6Q1 20128/10/12AAA

Any reserve assets that are pledged or otherwise encumbered should be specified separately. Also, data should comprise short-term liabilities linked to a foreign currency but settled by other means as well as the notional values of financial derivatives to pay and to receive foreign currency, including those linked to a foreign currency but settled by other means.

Both market-based and officially-determined, including discount rates, money market rates, rates on treasury bills, notes and bonds.

Foreign, domestic bank, and domestic nonbank financing.

The general government consists of the central government (budgetary funds, extra budgetary funds, and social security funds) and state and local governments.

Including currency and maturity composition.

Includes external gross financial asset and liability positions vis-à-vis nonresidents.

Daily (D), Weekly (W), Monthly (M), Quarterly (Q), Annually (A), Irregular (I); Not Available (NA).

Reflects the assessment provided in the data ROSC (published on March 19, 2012, and based on the findings of the mission that took place from October 4–17, 2011) for the dataset corresponding to the variable in each row. The assessment indicates whether international standards concerning concepts and definitions, scope, classification/sectorization, and basis for recording are fully observed (O), largely observed (LO), largely not observed (LNO), or not observed (NO).

Same as footnote 8, except referring to international standards concerning (respectively) source data, assessment of source data, statistical techniques, assessment and validation of intermediate data and statistical outputs, and revision studies.

Any reserve assets that are pledged or otherwise encumbered should be specified separately. Also, data should comprise short-term liabilities linked to a foreign currency but settled by other means as well as the notional values of financial derivatives to pay and to receive foreign currency, including those linked to a foreign currency but settled by other means.

Both market-based and officially-determined, including discount rates, money market rates, rates on treasury bills, notes and bonds.

Foreign, domestic bank, and domestic nonbank financing.

The general government consists of the central government (budgetary funds, extra budgetary funds, and social security funds) and state and local governments.

Including currency and maturity composition.

Includes external gross financial asset and liability positions vis-à-vis nonresidents.

Daily (D), Weekly (W), Monthly (M), Quarterly (Q), Annually (A), Irregular (I); Not Available (NA).

Reflects the assessment provided in the data ROSC (published on March 19, 2012, and based on the findings of the mission that took place from October 4–17, 2011) for the dataset corresponding to the variable in each row. The assessment indicates whether international standards concerning concepts and definitions, scope, classification/sectorization, and basis for recording are fully observed (O), largely observed (LO), largely not observed (LNO), or not observed (NO).

Same as footnote 8, except referring to international standards concerning (respectively) source data, assessment of source data, statistical techniques, assessment and validation of intermediate data and statistical outputs, and revision studies.

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