This paper discusses key findings of the Third Review under the Stand-By Arrangement for Georgia. With monetary policy impaired by high dollarization, the authorities’ response to the downturn relies mostly on fiscal stimulus. The reduction of policy interest rates and ample liquidity injections have not led to a resumption of bank lending, owing to balance sheet weaknesses and higher credit risk. The authorities have thus decided to accommodate tax revenue losses in a higher deficit in 2009. The authorities have requested an augmentation of access and an extension of the arrangement through mid-2011.
The Executive Board of the International Monetary Fund (IMF) today completed the third review of Georgia’s performance under an 18-month Stand-By Arrangement (SBA) totaling SDR 477.1 million (about US$748.3 million). The completion of the review allows for the immediate disbursement of an amount equivalent to SDR 94.6 million (about US$148.4 million).
The Board also approved an augmentation under the SBA in the amount of SDR 270 million (about US$423.5 million), equivalent to 180 percent of quota, and the SBA’s extension to June 14, 2011. The SBA was approved on September 15, 2008 (see Press Release No. 08/208) to support the Georgian authorities’ macroeconomic policies, rebuild gross international reserves, and bolster investor confidence. In view of the weaker economic and external financing prospects, the augmentation and extension of the SBA aims at facilitating an orderly exit from high public and external deficits, and the associated dependence on official financial support.
After the Executive Board’s discussion, Mr. Murilo Portugal Deputy Managing Director and Acting Chair, said:
“The economic and financial impact of the crisis on Georgia will stretch into 2010, despite some signs that the economy may have reached its trough. Risks remain elevated due to uncertainties about the international economic environment and the strength of the recovery of private capital inflows and bank credit.
“Against this background, the authorities’ economic strategy aims to support the incipient recovery by maintaining an expansionary fiscal stance in 2009, specifically by allowing revenue shortfalls to be fully accommodated in a widening of the fiscal deficit.
“Starting in 2010, the authorities intend to move to a path of strong fiscal adjustment. While the withdrawal of fiscal stimulus in 2010 may dampen demand, it is key to preserving investor confidence and to restoring access to international capital markets. The emphasis placed by the authorities on expenditure reduction as the primary instrument of adjustment—while safeguarding social spending—is appropriate, but revenue measures should not be excluded if necessary. Structural fiscal reforms aimed at enhancing monitoring, planning, execution, and auditing of public expenditure will strengthen the efficiency of fiscal policy.
“In the foreign exchange market, the authorities have made a successful transition from the daily fixing session to foreign exchange auctions, which should set the stage for more exchange rate flexibility in response to market conditions, thereby protecting international reserves.
“Monetary policy options are limited by high dollarization and constraints in banks’ balance sheets. As traditional monetary policy tools regain traction and the economy recovers, the authorities intend to adjust the monetary policy stance to preserve the gains made in terms of disinflation.
“The banking sector has weathered pressures so far, but the worsening quality of the loan portfolio and profitability warrant continued close monitoring and preparedness. The authorities have prepared a Financial Stability Plan, which outlines policy options for public intervention in the event of additional stress. With IMF technical assistance, they have also strengthened stress testing capacity. The supervisory authority, which is to be merged with the National Bank, is encouraged to develop more fully bank-by-bank risk assessments drawing from stress test results and discussions with foreign shareholders and parent companies of local banks. “