On July 10, 2013, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Georgia. 1
Last October’s general elections saw the peaceful and democratic transfer of power to a new government, for the first time in Georgia’s recent history. These elections also marked the start of a period of cohabitation between the new government, led by Prime Minister Ivanishvili, and President Saakashvili, who will leave office after the October 2013 presidential election. Georgia’s economic performance continues to be strong, despite a recent slowdown. Real GDP growth averaged 6½ percent in 2011–12, about 1½ percentage points more than projected at the 2011 Article IV consultation. Inflation has declined steadily, reflecting lower food prices, lagged effects of exchange rate appreciation, and cuts in administered energy prices. The exchange rate has faced appreciation pressures, but has been kept stable against the U.S. dollar. However, the economy has slowed down markedly since mid-2012 and unemployment remains high at 15 percent, with half of the labor force in small-scale agriculture.
Georgia’s current account deficit and external indebtedness remain high. Despite tourism receipts increasing to 9 percent of GDP and remittances to 4½ percent of GDP, the current account deficit has persisted at around 11½ percent of GDP from 2010 to 2012, one of the highest in the region. Georgia’s trade deficit rose to more than 25 percent of GDP, owing to increased imports of machinery, transport equipment, and manufactures. Georgia’s high current account deficits reflect low national savings relative to the investment needed to support high growth. The current account deficits have been financed by capital inflows. While initially these inflows were mainly foreign direct investments, in recent years their composition has shifted towards less stable sources of financing, including Eurobond issuance and increases in nonresident deposits (now 15 percent of total deposits). These inflows have contributed to keeping net external liabilities close to 100 percent of GDP.
Fiscal consolidation has continued, with the fiscal deficit declining from 6.6 percent of GDP in 2010 to 3.0 percent in 2012, reflecting higher tax revenues and lower current expenditures. The 2013 budget law aims at reducing the deficit to 2.8 percent of GDP in 2013, with greater emphasis on social expenditure, while maintaining critical capital spending. Although the economic slowdown meant revenues were lower than projected in the first quarter of 2013, the government’s overall balance was higher than expected due to procedural delays in government spending.
In response to the sharp decline in inflation and more recently to the economic slowdown, the National Bank of Georgia (NBG) has loosened its monetary stance. It cut its policy rate from 8 percent in mid-2011 to 4 percent in June 2013. While, at least until recently, commercial bank lari deposit rates have fallen more or less in line, lending rates have decreased less, suggesting some room for strengthening monetary policy transmission. The NBG has increased its foreign currency purchases, already buying US$335 million so far this year, which has helped resist appreciation pressures and the risk of further deflation. Despite looser monetary policy, private credit growth has declined from around 20 percent to 12–15 percent since October 2012.
Despite the slowdown, growth could still reach 4 percent in 2013, rising to around 6 percent in 2014 and beyond, while inflation would gradually realign with NBG’s medium-term target (5 percent for 2015), provided the authorities take strong policy action.
Executive Board Assessment
Executive Directors noted that heightened domestic uncertainty, government underspending, and a difficult external environment have contributed to a marked economic slowdown. Against this background, Directors encouraged Georgia’s policymakers to recalibrate policies to revive economic activity, accelerate job creation, and promote lasting and equitable growth.
Directors generally concurred that supportive fiscal and monetary policies are needed in the near term. They encouraged the government to address the causes of recent budget underspending and to allow a higher budget deficit if revenues are undercut by the slowdown. Most Directors agreed that further monetary easing is necessary at present and that it should be supported by measures to strengthen policy transmission.
Directors noted that the financial system appears sound, with comfortable levels of capital and liquidity in banks. They supported steps underway to discourage foreign-currency lending and deposits, including those held by nonresidents, which pose risks to the system and undermine the effectiveness of monetary policy. Directors welcomed the authorities’ intention to participate again in the Financial Stability Assessment Program.
Directors considered that improved communication of economic policies would help reduce business uncertainty and stimulate private investment. In particular, they welcomed the greater transparency of the inflation targeting framework and encouraged the government to clarify the role and governance of the investment funds it intends to establish. Directors also noted that greater coordination between the government and the central bank, while preserving central bank independence, would improve the overall policy response.
Directors agreed that a critical medium-term priority is to bolster external stability by reducing the current account deficit in relation to GDP. This will require continued fiscal consolidation, higher private saving, exchange rate adjustment, and structural reforms to improve competitiveness.
Welcoming the authorities’ focus on inclusive growth, Directors supported their efforts to strengthen and appropriately target social programs. They endorsed the authorities’ plans to lift potential growth by addressing skill mismatches, promoting trade and competition, and boosting property rights and the rule of law. Directors also encouraged the government to upgrade the regulatory framework for the energy sector and safeguard the independence of the regulator.
|Real GDP growth (in percent, at market prices)||6.3||7.2||6.1||4.0||6.6|
|Nominal GDP (in billions of U.S. dollars)||11.6||14.4||15.8||16.3||17.3|
|GDP per capita (in thousands of U.S. dollars)||2.6||3.2||3.5||3.6||3.9|
|Unemployment rate (in percent)||16.3||15.1||15.0||…||…|
|Consolidated government operations||(in percent of GDP)|
|o.w. Tax revenue||23.5||25.2||25.4||25.7||25.5|
|Of which: foreign-currency denominated||33.6||28.8||27.6||26.8||26.3|
|Money and credit|
|Credit to the private sector (annual percentage|
|change, end of period)||18.8||24.3||12.8||14.3||22.6|
|Broad money (incl. fx deposits, annual percentage|
|change, end of period)||23.9||20.3||11.4||15.5||18.5|
|Deposit dollarization (in percent)||68.6||63.3||66.0||65.5||62.3|
|Policy rate (in percent, end-of-period)||7.5||6.8||5.3||…||…|
|Deposit interest rate (in percent, annual average)||7.9||9.4||8.6||…||…|
|Lending interest rate (in percent, annual average)||19.5||18.7||19.0||…||…|
|Imports of goods and nonfactor services (percentage|
|change, in U.S. dollars)||26.6||29.6||14.8||9.0||6.6|
|Exports of goods and nonfactor services (percentage|
|change, in U.S. dollars)||16.5||30.5||14.3||2.3||3.2|
|Gross international reserves (in billions of US$)||2.3||2.8||2.9||2.8||2.7|
|In months of next year’s imports of goods and services||3.4||3.7||3.7||3.4||3.2|
|Current account balance (in billions of US$)||−1.2||−1.8||−1.8||−1.5||−1.3|
|In percent of GDP||−10.2||−12.7||−11.5||−9.1||−7.7|
|Foreign direct investment (inflows, in percent of GDP)||7.0||7.3||5.5||5.8||6.0|
|Gross external debt (in percent of GDP)||84.1||77.8||81.4||81.8||79.0|
|Gross external debt, excl. intercompany loans|
|(in percent of GDP)||62.9||58.9||63.4||63.5||60.9|
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. An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm.