1. The following information has become available since the issuance of the staff report. It does not change the thrust of the staff appraisal.

2. Twelve-month inflation in November was 4.1 percent. Reflecting continued foreign exchange intervention by the NBG, year-on-year growth in reserve money as of early December was around 36 percent. Gross official foreign reserves now stand at around US$380 million, compared with the revised end-year forecast of about US$320 million mentioned in the staff report. The NBG expects the end-year indicative target for reserve money (an increase of 25 percent) to be exceeded by about 5 percentage points. The monetary officials regard the persistent overshooting of reserve money targets since the program’s inception as stemming from continued remonetization. They stress, however, that they are closely monitoring price performance and are prepared to tighten the monetary stance if inflationary pressures emerge. In recent weeks, the lari has further strengthened against the dollar, bringing the cumulative nominal gain since end-2003 to 15.4 percent. The real effective appreciation during that period amounted to 9.8 percent.

3. Fiscal performance has remained very strong, with tax receipts increasing by 43 percent year-on-year in November. The authorities plan to submit shortly a further supplementary 2004 budget to parliament, featuring a slight upward revision in the tax revenue target for the year and higher spending appropriations, including for additional arrears clearance beyond the amounts envisaged in the program.

4. The final vote on the tax reform bill is scheduled for December 21 and the new tax code will come into effect January 1, 2005. The main difference from the original bill described in the staff report is a delay in reducing the VAT rate from 20 percent to 18 percent, from January to July 2005, with a positive yield of 0.4 percent of GDP. The authorities said that other modifications from the original bill, including on the tax base and the rates of excise and property taxes, do not entail tangible deviations from their original revenue forecast. The authorities have indicated that they plan to submit a revised tax write off bill to parliament soon after passage of the tax reform.

5. On December 10, the government sent to parliament a revised 2005 budget bill superseding the draft submitted last October. Compared to the headline numbers described in the staff report, the main innovations are summarized in Table 1. The overall cash deficit would now be capped at 2.2 percent of GDP (compared with the indicative limit of 1.9 percent set out in the authorities’ MEFP). Nevertheless, domestic deficit financing (excluding privatization) would remain limited to 0.4 percent of GDP as discussed with the recent mission, thereby underpinning macroeconomic stability.

6. Regarding structural reforms, on December 1, the Prime Minister ordered the creation of an inter-ministerial working group on trade liberalization, chaired by the Minister of Finance and including representatives from the Ministries of Finance and Economic Development. The implementation decree is expected to be issued shortly. The authorities sent to parliament in November several modifications to the anti-money laundering legislation. Passage of these amendments (a structural benchmark for September 2004) is now expected by March 2005.

7. The safeguards assessment of the NBG was completed on December 10. Staff found that the bank has made progress in addressing vulnerabilities identified during the 2002 assessment, and that adequate safeguards are in place in the core areas. The NBG was receptive to staff recommendations to strengthen internal audit and control procedures and indicated that it is already working to address these issues.

8. The authorities will shortly finalize a status report on the implementation of Georgia’s PRSP, which they discussed with donors and domestic stakeholders. They plan to submit the document to Fund and World Bank staff in the next few weeks.

9. Georgia expects to conclude shortly the bilateral rescheduling agreements pursuant to the June 2005 Paris Club rescheduling of maturities coming due during the program period. The authorities have also contacted other official creditors to seek a rescheduling on comparable terms.

10. Results for Georgia from the recently-issued Global Corruption Barometer 2004, a survey of 64 countries conducted by the NGO Transparency International, are encouraging.¹ The responses rank Georgia among the top three countries in terms of the outlook for reducing corruption over the next three years.

Table 1.

Georgia: Revised 2005 Budget Bill

Source: Georgian authorities

Table 1.

Georgia: Revised 2005 Budget Bill

			Staff Report		Revised Bill
			million lari	% of GDP	million lari	% of GDP
Total revenue and grants			2,207	20.4	2,284	21.1
	Tax revenue		1,946	18.0	1,987	18.4
	Nontax revenue		146	1.4	162	1.5
	External grants		116	1.1	135	1.2
Total expenditure and net lending			2,242	20.7	2,383	22.0
	Of which:
		Current expenditure	1,935	17.9	1,992	18.4
		Capital expenditure	244	2.3	313	2.9
Overall balance (commitments basis)			-35	-0.3	-99	-0.9
Net change in expenditure arrears			-170	-1.6	-142	-1.3
Overall balance (cash basis)			-204	-1.9	-241	-2.2
Total financing			204	1.9	241	2.2
	Privatization		115	1.1	100	0.9
	Domestic financing		47	0.4	47	0.4
	External financing		43	0.4	94	0.9
		Of which: Disbursements	216	2.0	268	2.5
Memorandum item:
Nominal GDP (millions of laris)			10,809		10,809

Source: Georgian authorities

View Table

Table 1.

Georgia: Revised 2005 Budget Bill

			Staff Report		Revised Bill
			million lari	% of GDP	million lari	% of GDP
Total revenue and grants			2,207	20.4	2,284	21.1
	Tax revenue		1,946	18.0	1,987	18.4
	Nontax revenue		146	1.4	162	1.5
	External grants		116	1.1	135	1.2
Total expenditure and net lending			2,242	20.7	2,383	22.0
	Of which:
		Current expenditure	1,935	17.9	1,992	18.4
		Capital expenditure	244	2.3	313	2.9
Overall balance (commitments basis)			-35	-0.3	-99	-0.9
Net change in expenditure arrears			-170	-1.6	-142	-1.3
Overall balance (cash basis)			-204	-1.9	-241	-2.2
Total financing			204	1.9	241	2.2
	Privatization		115	1.1	100	0.9
	Domestic financing		47	0.4	47	0.4
	External financing		43	0.4	94	0.9
		Of which: Disbursements	216	2.0	268	2.5
Memorandum item:
Nominal GDP (millions of laris)			10,809		10,809

Source: Georgian authorities