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© 2009 International Monetary Fund
January 2009
IMF Country Report No. 09/1
Georgia: First Review Under the Stand-By Arrangement—Staff Report; Press Release on the Executive Board Discussion; and Statement by the Executive Director for Georgia
In the context of the first review under the Stand-By Arrangement, the following documents have been released and are included in this package:
The staff report for the First Review Under the Stand-By Arrangement, prepared by a staff team of the IMF, following discussions that ended on November 5, 2008, with the officials of Georgia on economic developments and policies. Based on information available at the time of these discussions, the staff report was completed on December 1, 2008. The views expressed in the staff report are those of the staff team and do not necessarily reflect the views of the Executive Board of the IMF.
A Press Release summarizing the views of the Executive Board as expressed during its December 15, 2008 discussion of the staff report that completed the review.
A statement by the Executive Director for Georgia.
The documents listed below have or will be separately released.
Letter of Intent sent to the IMF by the authorities of Georgia*
Technical Memorandum of Understanding*
*Also included in Staff Report
The policy of publication of staff reports and other documents allows for the deletion of market-sensitive information.
Copies of this report are available to the public from
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Price: $18.00 a copy
International Monetary Fund
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INTERNATIONAL MONETARY FUND
GEORGIA
First Review Under the Stand-By Arrangement
Prepared by the Middle East and Central Asia Department
(In consultation with other Departments)
Approved by David Owen (MCD) and Dominique Desruelle (SPR)
December 1, 2008
Arrangement: An 18-month Stand-By Arrangement (SBA) for SDR 477.1 million (317 percent of quota) was approved on September 15, 2008, to help restore investor confidence in the wake of the August armed conflict with Russia. A first purchase of SDR 161.7 million ($250 million) was disbursed upon approval. All end-September performance criteria have been observed.
Policy Discussions: Discussions centered on economic management in the face of the adverse impact of the conflict on confidence—further compounded by the unfolding global financial crisis. Increased pressures in the foreign exchange market due to recent and expected losses in foreign inflows led the authorities to allow a sharp depreciation in November. They reaffirmed their commitment to greater exchange rate flexibility.
Review under the Emergency Financing Mechanism: The SBA first review also satisfies the review prescribed under the emergency financing mechanism in relation to the initial policy response and the reaction of markets to these policies.
Team: A.L. Coronel (Head), C. Dieterich, J. Koeda (all MCD), P. Lohmus (MCM), A. Sadikov (SPR), and E. Gardner (Senior Resident Representative in Lebanon).
Exchange Rate Regime: The regime was reclassified as a de facto conventional peg from managed float based on the exchange rate policy introduced during and after the conflict.
Statistics: Economic data are broadly adequate for surveillance and program monitoring. Georgia participates in the GDDS.
Contents
Executive Summary
I. Recent Political and Economic Developments
A. Political Developments
B. Economic Developments
II. Performance Under the Program
III. Outlook and Risks Linked to the Global Financial Crisis
IV. Policy Discussions
A. Exchange Rate and Monetary Management
B. Addressing Bank Vulnerabilities
C. Calibrating the Fiscal Stimulus
V. Other Issues
VI. Staff Appraisal
Box
Recent Evolution of Key Financial Indicators
Figures
1. Key Financial Indicators
2. 12-Month CPI Inflation
3. Real GDP Growth
4. Financial Sector Indicators
Text Tables
1. Bank Deposit and Lending Rates
2. Fiscal Developments, 2008
3. External Financing Assumptions, 2008–10
4. Summary Balance of Payments, 2008–09
5. Prudential Indicators of Commercial Banks, 2004–08
6. Savings and Investment Balance, 2006–09
Tables
1. Selected Macroeconomic Indicators, 2006–09
2. Annual Consolidated Government Operations
3. Quarterly Consolidated Government Operations
4. Summary Balance of Payments, 2006–12
5. Accounts of the National Bank of Georgia, 2006–09
6. Monetary Survey, 2006–09
7. External Vulnerability Indicators, 2006–12
8. Indicators of Fund Credit, 2006–17
9. External Financing Requirements and Sources, 2006–12
Attachments
I. Letter of Intent
II. Revised Technical Memorandum of Understanding
Executive Summary
The authorities’ actions to stabilize the markets in the wake of the armed conflict with Russia proved effective. The temporary exchange rate peg helped stabilize expectations, and the central bank liquidity injections helped protect the integrity of the payments and the financial systems. Financial indicators showed some improvement through end September, allowing for the observance of all performance criteria for the first review of the Stand By Arrangement (SBA).
However, a resumption of market uneasiness—probably linked to the global financial crisis—added to the post-conflict-related investment uncertainties. Increased demand for foreign exchange, reflecting the recent and expected decline in private capital inflows and the perception of exchange rate overvaluation, led to a deposit decline and significant losses in international reserves since late September. Faced with these pressures, the authorities acted decisively by allowing a large depreciation of the lari in the second week of November. Since then, the markets seem to have stabilized, but developments in the next few weeks will determine whether the exchange rate has found its new equilibrium.
The international financial turmoil and the economic slowdown in neighboring countries pose new challenges to the outlook. The recovery of private inflows will likely take longer to materialize and is subject to greater uncertainty. This delay, along with a possible reduction in remittances and a slowdown in trade activity, would reinforce downward risks to economic growth and create further pressures to the balance of payments. Moreover, curtailed access to international capital markets, the recent lari depreciation, and the spillover effects on confidence will likely generate new vulnerabilities for the banking sector. On the positive side, the expected substantial donor support will help counteract these adverse shocks by bolstering international reserves and supporting economic growth.
The authorities’ Fund supported program will continue to address these challenges to restore access to international markets. Sustaining economic growth and maintaining confidence in the currency and the financial system within the constraints of available external financing are the main program priorities. To this end, fiscal policy is set to support economic activity while addressing key social and reconstruction needs, and monetary policy will focus on achieving the inflation objective by assigning a more active role to interest rate adjustments in the context of exchange rate flexibility.
Continued monitoring of the financial sector is crucial at this time of stress. Financial assistance from IFIs is expected to help banks meet their maturing external obligations, but liquidity could suffer from market nervousness. Moreover, the exchange rate depreciation and a reversal of the real estate boom could hurt bank asset quality. Enhanced supervisory efforts are therefore needed to ensure the soundness of the financial system.
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INTERNATIONAL MONETARY FUND
GEORGIA
First Review Under the Stand-By Arrangement
Informational Annex
Prepared by the Middle East and Central Asia Department
December 1, 2008
Contents
I. Relations with the Fund
II. Relations with the World Bank
III. Relations with the EBRD
IV. Statistical Issues
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Press Release No. 08/328
FOR IMMEDIATE RELEASE
December 16, 2008
International Monetary Fund
Washington, D.C. 20431 USA
Telephone 202-623-7100
Fax 202-623-6772
