Statement by IMF Staff Representative February 28, 2007

This paper discusses key findings of the Fifth Review Under the Poverty Reduction and Growth Facility for Georgia. Despite economic sanctions imposed by Russia in 2006, Georgia’s economic growth continues to be strong, and inflation has declined. Growth is expected to reach 9 percent in 2006 and to slow only moderately to 7–8 percent in 2007. Inflation was back into single digits by end-2006. The 2007 budget is an appropriate compromise between the country’s pressing spending needs and the goal of macroeconomic stability.

Abstract

This paper discusses key findings of the Fifth Review Under the Poverty Reduction and Growth Facility for Georgia. Despite economic sanctions imposed by Russia in 2006, Georgia’s economic growth continues to be strong, and inflation has declined. Growth is expected to reach 9 percent in 2006 and to slow only moderately to 7–8 percent in 2007. Inflation was back into single digits by end-2006. The 2007 budget is an appropriate compromise between the country’s pressing spending needs and the goal of macroeconomic stability.

1. The following information has become available since the issuance of the staff report. These developments do not change the thrust of the staff appraisal.

2. After falling into single digits at end-2006, 12-month CPI inflation increased to 10.4 percent in January 2007 (reflects 2.7 percent monthly inflation), due to increases in administered prices of water and health services, and continued price pressures in the food market.

3. Reserve money growth accelerated to 25 percent as of end-January, reflecting a slowdown in the placement of NBG certificates. As credit growth also slowed, excess liquidity increased sharply. Despite large official foreign exchange purchases during February, reserve money has been declining in recent weeks due to higher NBG certificate placements and a relatively tight fiscal stance.

4. The authorities regard the rise in the CPI in January as disappointing, but are not surprised given the higher tariffs for water and health services. Preliminary indications are that price pressures have subsided in February. The authorities remain confident that they will meet the end-March monetary targets. They are mindful of the build-up in excess liquidity that has the potential for a sudden credit expansion, but are prepared to counter that development, if necessary. Continued revenue over-performance (revenues in January reached 46 percent of the Q1 target) in February and March should also reduce inflationary pressures.