Georgia
Seventh and Eighth Reviews Under the Stand-By Arrangement, and Requests for Waivers of Nonobservance of Performance Criteria and Rephasing of Purchases—Staff Report; Staff Statement; Press Release on the Executive Board Discussion; and Statement by the Executive Director for Georgia
Author:
International Monetary Fund
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Publication Date:
28 Jan 2011
eISBN:
9781455213887
Language:
English
Keywords:
ISCR; CR; purchases informational annex; requests for waivers of nonobservance of performance criteria; nonobservance; waiver; balance of payments; debt service; GDP growth; long-term loan; state enterprise
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Real GDP growth for 2010 has been revised upward to 6.3 percent, and annual CPI inflation has increased to about 10 percent. End-December performance criteria (PC) are expected to be met, with the exception of the fiscal deficit and general government expenditure targets owing to the late disbursement of budget grants and disbursements under a project loan on-lent by the government, which came in earlier than the authorities anticipated. Policies are on track and have broadly delivered on program objectives.

Abstract

Real GDP growth for 2010 has been revised upward to 6.3 percent, and annual CPI inflation has increased to about 10 percent. End-December performance criteria (PC) are expected to be met, with the exception of the fiscal deficit and general government expenditure targets owing to the late disbursement of budget grants and disbursements under a project loan on-lent by the government, which came in earlier than the authorities anticipated. Policies are on track and have broadly delivered on program objectives.

I. Program Performance

Georgia: Quantitative Performance Criteria (PC) and Indicative Targets, 2010

article image
Sources: Georgian authorities; and Fund staff estimates.

Actual figures and quantitative targets are based on program exchange rates.

The continuous performance criterion for external arrears is defined in paragraph 21 of the TMU.

1. All end-September PCs were met and end-December PCs are expected to be met, with the exception of the fiscal deficit and general government expenditure targets:

  • The end-December PCs on NIR and NDA are expected to be observed by wide margins, owing to lower-than-programmed foreign exchange intervention since June, and lower reserve money growth in the case of NDA; their status will be reported separately by January 6.

  • The end-December PCs on the government deficit and general government expenditures are expected to be missed, owing to a delay (from 2010 to 2011) in the disbursement of budget grants amounting to GEL 56 million (0.3 percent of GDP) and disbursements by KfW-EBRD-EIB of a GEL100 million loan (0.5 percent of GDP), which came in earlier than the authorities anticipated.1 These disbursements relate to a power project loan, which is on-lent by the government to a state enterprise. Waivers of nonobservance are requested (LOI ¶ 29) on account of these two developments, although the authorities consider that higher other revenues might compensate for the shortfall in grant disbursements.

  • No offsetting action is deemed necessary to offset the increase in net lending in 2010, since the lending operation simply rephases disbursements under an existing loan agreement, which benefits a state enterprise under commercial terms. Furthermore, the timing of disbursements is not controlled by the government. In essence, government on-lending is equivalent to guaranteeing the external loan to the state enterprise, but, because it is channeled through the budget, it affects the deficit as measured under the program. The power project involves the construction of a high-voltage power transmission line that would enable Georgia to sell electricity to Turkey, and the commercial return from the project is expected to enable full repayment by the state enterprise.

  • The end-December indicative target on the contracting and guaranteeing of external debt is expected to be met.

2. Structural benchmarks under the program have been completed.

Georgia: Structural Benchmarks for 2010

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II. Recent Developments

3. Parliament approved a change in the constitution that redistributes powers from the presidency to parliament and the prime minister, effective in 2013. Parliamentary and presidential elections are scheduled for 2012 and 2013, respectively.

4. Real GDP growth for 2010 has been revised up to 6.3 percent, on the back of very strong growth in the first half of the year, moderating somewhat in the second half. While there are no reliable measures of capacity utilization, the authorities consider that the economy may be operating near capacity in some sectors, when taking into account the lack of new investment during the last two years.

uA01fig01

Georgia: Seasonally-adjusted Real GDP, 2004-15

(In millions of 2003 lari)

Citation: IMF Staff Country Reports 2011, 031; 10.5089/9781455213887.002.A001

1/ Trend is calculated using the Hodrick-Prescott filter applied to 2004-2015 data.
uA01fig02

Georgia: Indicators of Economic Activity, 2008-10

(3-month moving average, y-o-y change in percent)

Citation: IMF Staff Country Reports 2011, 031; 10.5089/9781455213887.002.A001

Sources: Georgian authorities; and Fund staff estimates.

5. Annual CPI inflation has surged to around 10 percent, owing to rising food prices. This large increase in inflation reflects the heavy weight of food in the CPI basket (43 percent). Evidence of inflation in other sectors is mixed: nonfood price inflation remains very low, consistent with regional trends, while the industrial PPI has risen sharply. There is no reliable information on wages to gauge labor market pressures, but unemployment remains high (15 percent).

6. Deposit and lending rates have declined further, but the growth of monetary and credit aggregates has slowed. The authorities have continued to tighten monetary policy in response to higher inflation—the policy (refinancing) rate has been raised by 250 bps since June. The disconnect between the (rising) policy rate and the (declining) deposit and lending rates has reflected the lack of traction of the policy rate in a context of ample liquidity and high dollarization.

7. The overall deficit in the 2010 balance of payments has been revised down (by $159 million) relative to the Sixth Review. The trade deficit is wider than expected, but the current account deficit is projected to be marginally lower on the heels of buoyant tourism receipts (up 18 percent since 2009). Foreign exchange market developments since June (see below) point to a strong rebound of private capital inflows in the second half of the year, following a disappointing first half. The rebound of private capital inflows includes a $250 million Georgian Railway Eurobond issue in July, but is also likely to reflect a recovery of FDI inflows—projected at around $600 million for the year. These inflows should more than offset banking sector net flows, which are now estimated to be strongly negative in 2010, owing to substantial debt prepayments and the impact of central bank liquidity injections in the first half of the year.

uA01fig03

Georgia: CPI and PPI Inflation, 2005 - 10

(Year-on-year change, in percent)

Citation: IMF Staff Country Reports 2011, 031; 10.5089/9781455213887.002.A001

uA01fig04

Georgia: External Flows, 2007-10

(3-month moving average, y-o-y growth in percent)

Citation: IMF Staff Country Reports 2011, 031; 10.5089/9781455213887.002.A001

uA01fig05

Georgia: Real and Nominal Effective Exchange Rates, 2006-10

(Index, 2000 = 100)

Citation: IMF Staff Country Reports 2011, 031; 10.5089/9781455213887.002.A001

Sources: Georgian authorities; and Fund staff estimates.

8. The lari has appreciated relative to the U.S. dollar by 6.5 percent since mid-June. Since the turnaround in foreign exchange market conditions after June, the central bank has only intervened to purchase dollars in the face of occasionally strong appreciation pressures vis-à-vis the U.S. dollar, linked in part to the weakness of the latter vis-à-vis other currencies. The projected overperformance of NIR relative to the end-December target reflects this change in the direction of intervention.

9. Banks’ balance sheets continue to strengthen, but high NPLs and exposure to currency-induced credit risk remain as vulnerabilities. Banks’ reliance on wholesale external funding has declined significantly since mid-2009, but the decline has been offset in part by increases of nonresident deposits, which now account for about 10 percent of total deposits. Although still high, NPLs have been declining since May owing to an improved environment, write-offs, and repossessed assets.

uA01fig06

Georgia: Foreign Exchange Intervention and Exchange Rate, 2008-10

Citation: IMF Staff Country Reports 2011, 031; 10.5089/9781455213887.002.A001

uA01fig07

Georgia: Sources of Bank Funding, 2006-10

(In percent)

Citation: IMF Staff Country Reports 2011, 031; 10.5089/9781455213887.002.A001

Sources: Georgian authorities; and Fund staff estimates.

Georgia: Selected Monetary and Financial Soundness Indicators, 2008-10

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Sources: National Bank of Georgia; and Fund staff estimates.

National definition. Risk weight to forex loans was reduced from 200 to 175 percent in September 2008, and to 150 percent in August 2009.

Basel I definition.

Ratio of liquid assets to 6-month and shorter maturity liabilities.

National definition: NPLs are defined as loans in substandard, doubtful, and loss loan categories.

IMF definition.

Pre tax.

uA01fig08
Sources: National Bank of Georgia; and Fund staff estimates.
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Sources: National Bank of Georgia; and Fund staff estimates.

III. Policies for 2011 and the Exit Strategy

Based on the strength of the economic recovery, discussions focused on:

  • The pace of fiscal adjustment;

  • the stance of monetary policy, following its recent tightening;

  • NIR buildup and exchange rate policy; and

  • financial regulation in the post-crisis environment.

A. Outlook for 2011

10. Real GDP is projected to grow by 4.5 percent in 2011, based on the expectation that private sector demand will strengthen as the fiscal stimulus is withdrawn. The transition from public to private-led growth is not yet firmly established, however, and the recovery of private investment in particular will depend on continued credit growth and private capital inflows, including FDI.

11. Risks to short-term growth, which were previously perceived to lie mostly on the downside, are now more evenly balanced around the central scenario. A failure of private capital inflows to pick up as projected, or inadequate credit growth, could still cause growth to falter. On the upside, growth could exceed 5 percent, particularly if fueled by stronger capital inflows.

12. Inflation is projected to decline (to around 6 percent) by end-2011, with risks mostly on the upside. The projected decline in inflation is based on monetary and fiscal policies remaining sufficiently restrained. The upside risk reflects the narrowing of the output gap and the possible emergence of capacity constraints. The projection is subject to considerable uncertainty given observed volatility in inflation and the unknown impact of recent price hikes on expected inflation and wages.

uA01fig10

Georgia: Current Account Balance and its Financing, 2006-15

(In percent of GDP)

Citation: IMF Staff Country Reports 2011, 031; 10.5089/9781455213887.002.A001

uA01fig11

Georgia: Saving-Investment Balances, 2003-15

(In percent of GDP)

Citation: IMF Staff Country Reports 2011, 031; 10.5089/9781455213887.002.A001

Source: Georgian authorities; and Fund staff estimates.

13. The balance of payments is projected to improve in 2011 (from an overall deficit of $113 million in 2010 to an overall surplus of $213 million), owing essentially to the expected recovery of private capital inflows, which also remains the main risk factor. The current account deficit (in percent of GDP) is projected to widen temporarily owing to a worsening transfer and income balance, but would still be lower than expected at the time of the Sixth Review. On current trends, the deficit should decline steadily over the medium term, reflecting parallel improvements in the fiscal balance and in the private saving-investment balance.

B. Fiscal Policy

14. Riding on higher-than-expected economic growth, the authorities target a lower 2011 fiscal deficit (4.3 percent of GDP) than projected at the time of the Sixth Review. However, the structural adjustment from 2009 to 2011 would be somewhat lower, owing to tax revenue shortfalls. Still, two-thirds of the structural adjustment envisioned from 2009 to 2013 will be achieved in the first two years of the consolidation period.

uA01fig12

Georgia: Fiscal Balances, 2006-11

(In percent of GDP)

Citation: IMF Staff Country Reports 2011, 031; 10.5089/9781455213887.002.A001

Sources: Georgian authorities; and Fund staff estimates.

Georgia: Overall and Structural Deficits, 2009-11

(In percent of GDP)

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Sources: Ministry of Finance; and Fund staff estimates.

Based on identical potential GDPs for the sixth and seventh reviews.

15. Adjustment in 2011 is based essentially on expenditure containment. The authorities are committed to capping expenditure in order to allocate possible gains on the revenue front toward deficit reduction. Staff discussed with the authorities various revenue and expenditure measures consistent with the envisaged fiscal consolidation. The authorities consider that focusing their consolidation efforts on curbing current spending is more growth-enhancing and thereby ultimately more favorable to improving social conditions. Expenditure containment will reduce social spending in real terms, but the authorities argued that the impact was mitigated by the economic recovery and that social coverage of the most vulnerable was already quite extensive and has been improved through efficiency gains in the health insurance sector. The revenue measures that were supposed to be introduced in 2010 were taken as expected. However, the tax-to-GDP ratio (for both 2010 and 2011) is lower than anticipated at the time of the Sixth Review. In large part, this reflects a lower yield of all taxes (including new ones),1 one-off factors, but also the withdrawal of the VAT measures on private health and private education that were to be introduced in 2011—VAT on public health services will, however, come into effect in 2011. In light of the already significant adjustment being targeted, the authorities considered that taking additional compensatory revenue measures would threaten the recovery. They also stressed that the tax-to-GDP ratio, corrected for one-offs,2 is still expected to increase by 0.3 percent in 2010 and 0.5 percent in 2011.

uA01fig13

Georgia: Government Revenues and Expenditures, 2003-15

(In percent of GDP)

Citation: IMF Staff Country Reports 2011, 031; 10.5089/9781455213887.002.A001

Sources: Georgian authorities; and Fund staff estimates.

Georgia: 2011 Budget

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Sources: Ministry of Finance; and Fund staff estimates.

16. The medium-term fiscal framework adopted by the government in July 2010 targets a reduction of the deficit to 2-3 percent of GDP by 2013. The debt-to-GDP ratio is expected to peak at 43.6 percent of GDP in 2011, declining to 35.9 percent of GDP by 2015. The mission questioned the sustainability of expenditure containment over the medium term, noting in particular that the spending cuts implemented in 2010 and envisaged in 2011 entail a significant real revenue reduction for public wage-earners and social system beneficiaries. The authorities deemed that, if pressures to reverse these cuts were to emerge, there would be sufficient room to decrease the capital budget further. The World Bank has begun exploring ways in which social spending, half of which is accounted for by pensions, could be better targeted to enhance the effectiveness of social safety nets through the consolidation process. The constitutional amendment requiring that tax increases be subject to referendums was adopted on December 15, 2010. Recognizing the need to preserve adequate policy flexibility in the event of adverse economic developments, the authorities have introduced an escape clause in the referendum requirement. The specific circumstances under which the referendum requirement would be suspended will be specified separately in the Economic Freedom Act, which will also set deficit and debt limits.

uA01fig14

Georgia: Government Net External Financing, Grants, and Privatization Receipts, 2003-15

(In percent of GDP)

Citation: IMF Staff Country Reports 2011, 031; 10.5089/9781455213887.002.A001

uA01fig15

Georgia: Public Debt, 2004-15

(In percent of GDP)

Citation: IMF Staff Country Reports 2011, 031; 10.5089/9781455213887.002.A001

Sources: Georgian authorities; and Fund staff estimates.

Georgia: Social Expenditures (General Government), 2008-11

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Sources: Ministry of Finance; and Fund staff estimates.

Includes assistance to internally displaced persons (IDPs).

17. The authorities plan to move to program budgeting by 2012. Next steps include conducting training for the ministry of finance and pilot ministries and designing measurable indicators.

C. Monetary and Exchange Rate Policy

18. Monetary policy in 2011 will be guided by three objectives:

  • Supporting gradual disinflation back toward 6 percent by end-2011;

  • increasing the level of NIR to reinforce the exit strategy; and

  • raising the credibility of the local currency to promote dedollarization.

19. Calibrating monetary policy in pursuit of these objectives is difficult owing to weaknesses in the transmission mechanism, stemming from:

  • The high degree of dollarization, and the limited leverage the authorities have over the on-shore dollar interest rate. The authorities are concerned that an excessive increase in local currency interest rates would cause banks to shift to cheaper dollar lending, sourced from abroad.

  • The uncertain transmission of policy interest rate changes. The policy rate is expected to regain traction on market rates (including longer-term rates) following the normalization of liquidity and credit conditions, and the April reforms of the central bank refinancing window and standing facilities. Evidence of that can be seen in the parallel movements of the policy rate and the lari deposit rate in the last few months. The extension of the yield curve should also facilitate stronger transmission of policy rates to lending rates.

  • Uncertainty about the inflation process and the impact of monetary policy on economic activity. With technical assistance from the Fund, the National Bank of Georgia (NBG) is building up its modeling capacity with a view to better inform policy decisions.

20. Subject to these constraints, the authorities stand ready to tighten monetary policy further to meet their objectives. They indicated that they are considering complementing the recent increase in the policy rate, which contributed to a significant increase in CD and T-bill rates, with an increase in reserve requirements on foreign exchange deposits. Prudential measures recently adopted and planned (see next section) are also effectively tightening the monetary stance. The NBG’s current inflation forecast model suggests that the monetary program is consistent with the projected disinflation. Monetary policy decisions will continue to be informed by changes in projected inflation, and developments in monetary aggregates and the exchange rate. The authorities will in particular monitor closely price developments to avoid the emergence of second round effects.

21. The 2011 monetary program’s credit and deposit growth projections are in line with projected economic growth and resumption of financial deepening. The authorities and staff agreed that credit growth in the 15–20 percent range, which would raise the credit-to-GDP ratio to the pre-crisis level of 30 percent, would not be inflationary.

22. Consistent with the exit strategy, the authorities are targeting an increase in NIRin 2011. This increase would begin to reverse the decline observed since 2007, which financed part of the balance of payments gap opened by the war and subsequent financial crisis.

D. Financial Sector Policies

23. Stability concerns have abated, and the authorities are in the process of adjusting the regulatory framework following the normalization of credit market conditions. The central bank has raised the liquidity ratio back to 30 percent (pre-crisis level) from 20 percent, effective October 1. It is also considering raising the risk weights on foreign exchange loans to unhedged borrowers, which were lowered in the wake of the crisis.3 Some bankers consider that the combination of monetary and regulatory tightening is premature and could thwart the desired growth in credit, but the NBG projects that the recapitalization needs created by an increase in the capital risk weight of foreign exchange loans would be limited.4 The relatively large intermediation margins of the Georgian banking sector reflect, in part, the cost of carrying high capital and liquidity buffers. To address this problem, the authorities are preparing for a gradual move to differentiated risk-based prudential requirements, which would make supervision more efficient and less costly.

24. The authorities are considering alternative schemes for distressed asset management (DAM), but lack of demand and urgency from banks to sell assets at depressed prices are major impediments. The authorities consider that specialized firms would manage distressed assets more efficiently than banks, and are evaluating, jointly with IFIs, alternative DAM schemes and regulatory changes. Apart from the lack of interest from banks, however, this initiative is constrained by limited domestic capacity to absorb these assets, and limited interest from foreign investors owing to the small size of the distressed assets pool.

E. The Exit Strategy and Risks

25. Balance of payments risks remain elevated over the medium term. The program was built on the expectation that a steady recovery of private capital inflows (mainly FDI) would enable Georgia to return to a path of privately financed high economic growth, and that, as of 2012, external financing needs would be covered entirely by private sector inflows and regular official financing. While the improvement in the overall balance of payments since June 2010 is consistent with this scenario, there are risks that balance of payments gaps could reemerge, in which case the adjustment process may have to be prolonged. Such an outcome could be triggered by:

  • A failure of FDI to rebound as projected. The strength of the balance of payments since the summer would be consistent with increased private capital inflows. However, these flows have proven to be volatile. A shortfall in FDI would not only open a balance of payments gap, but could also adversely affect GDP growth and widen the fiscal deficit, as illustrated in the downside scenario (Box 1).

  • An inadequate supply response to the recovery of demand growth. The resulting overheating and loss of competitiveness would create new external imbalances down the road.

  • Debt rollover. The Debt Sustainability Analysis (DSA) points to low solvency risks, but high rollover risks in 2013 linked to high Fund and Eurobond repayment obligations. Recent rating upgrades should facilitate market rollover, but the amounts involved still pose risks. Although the resilience of the Georgian sovereign bond yield to the recent turbulence in the European markets is encouraging, contagion risks remain.

Georgia: Alternative Scenario with Lower FDI

The scenario illustrates the risks associated with a failure of FDI to rebound as projected. The alternative scenario assumes a stabilization of FDI at 5 percent of GDP, slightly below the 2010 level. Assuming an unchanged productivity of capital, but a loss of export competitiveness, real GDP growth would decline to about 3½ percent on average over the next 5 years. The current account deficit would narrow quite sizably, but the balance of payments would deteriorate (relative to the baseline scenario) by the equivalent of 0.9 percent of GDP on average over the period 2011–15, and to 1.1 percent of GDP in 2015; the associated loss of international reserves would come to US$625 million by 2015.

An imbalance would also appear in the fiscal accounts. Based on the same fiscal policy of the baseline scenario (same level of real expenditure and same tax-to-GDP ratio), the deficit would begin to rise again and reach 3.8 percent of GDP by 2015. The primary fiscal balance would exceed the debt-stabilizing level by 1.1 percentage point of GDP.

Georgia: Alternative Medium-Term Scenarios

(2011–15)

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Sources: Georgian authorities; and Fund staff estimates.

Investment is measured on a net basis (acquisitions minus disposals of nonfinancial assets).

Cumulative 2011–15.

uA01fig16
Sources: Georgian authorities; and Fund staff estimates and projections.

26. To mitigate these risks, the authorities have expressed interest in a successor Fund arrangement. Discussions could begin in April, based on the conclusions of the Article IV consultation (scheduled for March) and the Ex-Post Assessment Update (under preparation).

uA01fig17

Georgia and Comparator Countries: Sovereign Eurobond Spreads, 2010

(In basis points, over comparable U.S. treasuries)

Citation: IMF Staff Country Reports 2011, 031; 10.5089/9781455213887.002.A001

Sources: Bloomberg; and Fund staff estimates.

27. Meanwhile, the authorities stand ready to tighten policies should foreign exchange depreciation pressures reemerge, beyond seasonal factors. While continuing to rely on exchange rate adjustment, the authorities also indicated that they could aim for a lower fiscal deficit.

IV. Program Issues

28. Rephasing of purchases by combining the final two purchases into one purchase upon completion of the Ninth and final Review is requested owing to the delay in completing the Seventh and Eighth Reviews. The delay stems from the additional time needed to assess exchange rate developments in November-December prior to setting NIR targets for 2011. The rephasing would combine the last two purchases under the program into a single purchase of SDR 70 million, which would become available upon completion of the last review scheduled for early June.

V. Staff Appraisal

29. Policies are on track and have broadly delivered on program objectives. The economic recovery appears to be on a relatively solid footing, substantial progress has been made toward reestablishing fiscal sustainability, and banking sector indicators have improved markedly. However, net international reserves are still relatively low, which, together with remaining external risks, creates vulnerabilities for the exit strategy.

30. Fiscal adjustment is largely in line with program objectives, but could have been accelerated in 2011 in view of the favorable cyclical conditions and remaining risks. The commitment to cap expenditure in 2011 is welcome and provides reassurances that fiscal policy will be countercyclical, and that the deficit would decline further under an upside growth scenario. Faster fiscal adjustment in 2011, ahead of two election years, could have strengthened the exit strategy against external risks without undermining the recovery. Over the medium term, the relatively high share of capital spending in total government spending creates room for additional expenditure compression. However, revenue measures should also be considered if necessary to achieve the medium-term deficit objectives. In this regard, the introduction of an escape clause in the constitutional amendment subjecting tax increases to a referendum is welcome as it increases policy flexibility.

31. While a pause in monetary tightening through the policy rate is appropriate at this juncture, the authorities should remain ready to tighten monetary policy should inflationary pressures persist. The gap between the policy rate and the deposit rate has narrowed significantly. This should contribute to strengthen the traction of monetary policy going forward, as evidenced by the recent increase in local currency deposit rates in response to the earlier hikes in the policy rate. Given the uncertain lags in the transmission mechanism of monetary policy, further rate increases should be conditioned on evidence that inflation is not abating as expected. At the same time, reserve requirements on dollar deposits and foreign loans should be increased to complement the increase in domestic interest rates.

32. Exchange rate flexibility should remain an essential instrument of adjustment in the event of less favorable external developments; moreover, the need to rebuild international reserves will limit considerably the room for intervention. The program’s international reserve target for 2011 also calls for more aggressive purchases of foreign exchange in the market, as those recently conducted by the NBG, when opportunities present themselves. Looking ahead, and consistent with preserving exchange rate flexibility, foreign exchange purchases could be undertaken on a pre-established calendar.

33. An adjustment in financial regulations, which were loosened during the crisis, is warranted. Given the impact of higher capital buffers on intermediation margins, ongoing capacity building toward risk-based supervision is welcome, as it will increase the efficiency of the banking system.

34. In light of the authorities’ commitment to reduce the 2011 fiscal deficit by more than envisaged at the time of the Sixth Review, staff supports the authorities’ requests for completing the Seventh and Eighth Reviews, for waivers of nonobservance of performance criteria, the establishment of end-March 2011 PCs, and rephasing of purchases as specified in the LOI (¶ 29).

Table 1.

Georgia: Selected Macroeconomic Indicators, 2008–15

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Sources: Georgian authorities; and Fund staff estimates.

Excludes Abkhazia residents.

Investment is measured on a net basis (acquisitions minus disposals of nonfinancial assets).

Includes grants.

The proceeds of the Georgian Railway eurobond issuance from July 2010, which were deposited in accounts with Georgian commercial banks that placed them abroad are not included in broad money.

Table 2.

Georgia: Annual General Government Operations, 2009-15 1/

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Sources: Ministry of Finance; and Fund staff estimates.

General government includes central and local governments and the Sovereign Wealth Funds.

Excluding arrears clearance, provisions and T-bill repayment.

Including net lending.

Table 3.

Georgia: Quarterly General Government Operations, 2009-11 1/

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Sources: Ministry of Finance; and Fund staff estimates.

General government includes central and local governments and the Sovereign Wealth Funds.

Excluding arrears clearance, provisions and T-bill repayment.

Including net lending.

Table 4.

Georgia: Summary Balance of Payments, 2008–15

(In millions of U.S. dollars)

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Sources: National Bank of Georgia, Ministry of Finance, and Fund staff estimates.

SDR allocation included under monetary authorities’ long-term liabilities.

Following the Low Income Countries (LIC) reforms, effective January 7 2010, the PRGF arrangements were renamed Extended Credit Facility (ECF) arrangements.

Table 5.

Georgia: Accounts of the National Bank of Georgia, 2009–11

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Sources: National Bank of Georgia; and Fund staff estimates.

Comprises required and excess reserves on lari-denominated deposits.

Based on program definition as defined in the TMU.

Table 6.

Georgia: Monetary Survey, 2009–11

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Sources: National Bank of Georgia; and Fund staff estimates.

The proceeds of the Georgian Railway eurobond issuance from July 2010, which were deposited in accounts with Georgian commercial banks that placed them abroad, are subtracted from commercial banks’ foreign assets and domestic fx deposits.

Comprises required and excess reserves on lari-denominated deposits (excess reserves include overnight deposits with NBG).

Table 7.

Georgia: External Vulnerability Indicators, 2008-15

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Source: Fund staff estimates and projections.
Table 8.

Georgia: Indicators of Fund Credit, 2008-17

(In millions of SDR)

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Source: Fund staff estimates and projections.

End of period.

Following the Low Income Countries (LIC) reforms, effective January 7 2010, the PRGF arrangements were renamed Extended Credit Facility (ECF) arrangements.

Repayment schedule based on repurchase obligations and GRA charges.

Table 9.

Georgia: Schedule of Prospective Reviews and Purchases 1/

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Reflects the augmentation of access by SDR270 million and the extended arrangement through June 2011.

As the authorities did not draw the purchase that became available at the time of the first review, SDR 126.2 million were available and purchased at the second review.

Table 10.

Georgia: External Financing Requirements and Sources, 2008–15

(In millions of U.S. dollars)

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Sources: Georgian Statistics Department; National Bank of Georgia; and Fund staff estimates.

Including the receipts and the repayment of the Eurobond-2013.

Including errors and omissions.

ECF (formerly known as PRGF) disbursements in 2006 and 2007, SBA purchases from 2008 on, including augmentation in 2010-11.

Table 11.

Georgia: Public External Debt, 2008-09

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Source: Ministry of Finance of Georgia.
Table 12.

Georgia: Private External Debt, 2008-09

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Source: National Bank of Georgia.

Excluding intercompany debt from foreign direct investors.

In line with the recommendations of the Debt Statistics Manual that all currency and deposits be included in the short-term category unless detailed information is available to make short-term/long-term attribution.

Table 13a.

Georgia: External Debt Sustainability Framework, Baseline Scenario, 2007-2030 1/

(In percent of GDP, unless otherwise indicated)

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Sources: Country authorities; and staff estimates and projections.

Includes both public and private sector external debt.

Derived as [r - g - ρ(1+g)]/(1+g+ρ+gρ) times previous period debt ratio, with r = nominal interest rate; g = real GDP growth rate, and ρ = growth rate of GDP deflator in U.S. dollar terms.

Includes exceptional financing (i.e., changes in arrears and debt relief); changes in gross foreign assets; and valuation adjustments. For projections also includes contribution from price and exchange rate changes.

Assumes that PV of private sector debt is equivalent to its face value.

Current-year interest payments divided by previous period debt stock.

Historical averages and standard deviations are generally derived over the past 10 years, subject to data availability.

Defined as grants, concessional loans, and debt relief.

Grant-equivalent financing includes grants provided directly to the government and through new borrowing (difference between the face value and the PV of new debt).

Table 13b.

Georgia: Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed External Debt, 2010-2030

(In percent)

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Sources: Country authorities; and staff estimates and projections.

Variables include real GDP growth, growth of GDP deflator (in U.S. dollar terms), non-interest current account in percent of GDP, and non-debt creating flows.

Assumes that the interest rate on new borrowing is by 2 percentage points higher than in the baseline., while grace and maturity periods are the same as in the baseline.

Exports values are assumed to remain permanently at the lower level, but the current account as a share of GDP is assumed to return to its baseline level after the shock (implicitly an offsetting adjustment in import levels).

Includes official and private transfers and FDI.

Depreciation is defined as percentage decline in dollar/local currency rate, such that it never exceeds 100 percent.

Applies to all stress scenarios except for A2 (less favorable financing) in which the terms on all new financing are as specified in footnote 2.

Table 14a.

Georgia: Public Sector Debt Sustainability Framework, Baseline Scenario, 2007-2030

(In percent of GDP, unless otherwise indicated)

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Sources: Country authorities; and staff estimates and projections.

[Indicate coverage of public sector, e.g., general government or nonfinancial public sector. Also whether net or gross debt is used.]

Gross financing need is defined as the primary deficit plus debt service plus the stock of short-term debt at the end of the last period.

Revenues excluding grants.

Debt service is defined as the sum of interest and amortization of medium and long-term debt.

Historical averages and standard deviations are generally derived over the past 10 years, subject to data availability.

Table 14b.

Georgia: Sensitivity Analysis for Key Indicators of Public Debt 2010-2030

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Sources: Country authorities; and staff estimates and projections.

Assumes that real GDP growth is at baseline minus one standard deviation divided by the square root of the length of the projection period.

Revenues are defined inclusive of grants.

Figure 1a.
Figure 1a.

Georgia: Indicators of Public and Publicly Guaranteed External Debt under Alternatives Scenarios, 2010-2030 1/

Citation: IMF Staff Country Reports 2011, 031; 10.5089/9781455213887.002.A001

Sources: Country authorities; and staff estimates and projections.1/ The most extreme stress test is the test that yields the highest ratio in 2020. In figure b. it corresponds to a Non-debt flows shock; in c. to a Non-debt flows shock; in d to a Non-debt flows shock; in e. to a Non-debt flows shock and in figure f. to a Non-debt flows shock
Figure 1b.
Figure 1b.

Georgia: Indicators of Public Debt Under Alternative Scenarios, 2010-2030

Citation: IMF Staff Country Reports 2011, 031; 10.5089/9781455213887.002.A001

Sources: Country authorities; and staff estimates and projections.1/ The most extreme stress test is the test that yields the highest ratio in 2020.2/ Revenues are defined inclusive of grants.
1

While these disbursements were in line with contractual obligations, the authorities had anticipated some delays, which did not fully materialize, in meeting all the conditions attached to these loans.

1

Lower-than-anticipated tax yields reflect mainly low personal income tax receipts resulting from the lagged response of wages to higher GDP, and lower-than-expected proceeds from the new telecommunication turnover tax, owing to a one-month implementation delay and the lowering of the tax base as private operators cut telecommunication prices.

2

In particular, 2009 taxes are inflated by the arrears clearance paid by a line ministry, equivalent to 0.9 percent of GDP.

3

The risk weight to foreign exchange loans was reduced from 200 to 175 percent in September 2008, and to 150 percent in August 2009.

4

If the risk weights on foreign exchange loans are raised to 175 from 150 percent, recapitalization needs stemming from satisfying the CAR requirement, assuming a 15 percent credit growth and a constant credit dollarization ratio, would amount to GEL 15 million (about $8 million), i.e., an increase in regulatory capital of less than 1 percent. The increase would be even less if taking into account potential capital increases from retained profits going forward.

Attachment I. Georgia: Letter of Intent

December 22, 2010

Mr. Dominique Strauss-Kahn

Managing Director

International Monetary Fund

Washington, D.C.

Dear Mr. Strauss-Kahn:

1. In September 2008, the International Monetary Fund (IMF) approved a Stand-By Arrangement (SBA) for Georgia, which was further augmented in August 2009. On July 9, 2010 the IMF’s Executive Board completed the sixth review of the SBA allowing for an immediate purchase of an amount equivalent to SDR 50 million. We are grateful for the assistance which the IMF provides to Georgia.

2. This letter of intent describes the economic policies that we plan to implement during 2010 and 2011. As always, we are committed to policies that will maintain macroeconomic stability, protect the economy from shocks associated with the global economic crisis and facilitate the process of macroeconomic adjustment. We, of course, remain committed to implementing the measures contained in previous letters of intent, i.e. those dated September 9, 2008, November 28, 2008, March 10, 2009, July 30, 2009, November 25, 2009, February 25, 2010, and June 24, 2010.

Recent Economic Developments

Macroeconomic developments

3. From the beginning of 2010 economy started to recover. In the first half of 2010 real growth of the economy reached 6.5 percent. Significant growth was achieved in manufacturing (19.6%), transport (14.6%), trade (12.9%), and construction (12.5%).

4. Balance of payments data for the first half of 2010 show that exports of goods and services increased year-on-year by 25.3 percent and imports of goods and services increased by 13.7 percent; FDI inflows declined by 6.9 percent year-on-year. The current account deficit dropped to 9.5 percent of GDP in the first half of 2010, showing significant improvement relative to the same period of the previous years. In 2009, the current account deficit was 11.3 percent of GDP and 22.7 percent in 2008. In the second quarter of 2010, FDI increased compared to Q1, 2010.

5. As a result of recent developments in global commodity markets, particularly soaring wheat prices, prices of several key CPI basket components have also increased, which pushed inflation rate up to 10.5% year-to-year in November, 2010. Higher inflation figure, especially for food products lead to the increased inflation expectations. In order to bring inflation back to target NBG has tightened monetary policy for the last four Monetary Policy Committee (MPC) meetings, increasing the refinancing rate from 5 to 7.5 percent. As part of the tightening policy, NBG also extended the coverage of reserve requirements to external borrowing of commercial banks.

6. Fiscal performance in the first three quarters of 2010 has been stronger than anticipated. Tax collection in Q1-3 2010 increased by 17.0 percent y-o-y in nominal terms (excluding one-off payments). Expenditures in the first three quarters of 2010 were contained at GEL 4988.0 million (general government, including capital expenditures), or 3 percent higher than in the same period of 2009 and in line with the program target. In all, the Q1-3 fiscal deficit reached 3.8 percent of the projected annual GDP, which is consistent with the program target.

7. Consistent with our commitment to increase exchange rate flexibility, starting from May 25, 2009, the NBG foreign exchange interventions are conducted only through the foreign exchange auctions. Less frequent interventions have increased flexibility of the Lari. During the first half of the year, the Lari currency depreciated against the U.S. dollar by 11.5%, and has since appreciated by 6.4%.

8. In order to cover part of the FX financing gap of the private sector, in the first half of the year NBG sold at the FX market $321 million. Since June demand for FX has weakened and NBG has intervened occasionally to buy foreign exchange in the market. Since September exchange rate started to appreciate mainly due to mix of factors, including increase in non-resident FX deposits and market expectation. The depreciation of US Dollar vis-à-vis other major currencies contributed to its depreciation against Lari as well.

9. The banking sector continued its positive performance in the third quarter of 2010. Commercial banks’ net profits in the third quarter equaled GEL 58 million. In October Commercial banks’ net profits increased by GEL 26 million. Starting from May 2009, the volume of deposits has been growing steadily, posting a 44.9 percent annual growth in lari terms by end-October 2010. Bank lending to the economy has picked up, and credit to the economy has increased by 10.8 percent (6.5 percent excluding FX valuation effects) annually as of end-October. The major part of the increase in credit is attributed to lending in domestic currency. Banking sector remains highly capitalized; with the average capital adequacy ratio of 18.5 at end-October 2010. Since October NBG increased minimum liquidity ratio from 20% to 30%, to the level that existed before the crisis.

Structural reforms

10. To increase efficiency of monetary policy NBG has made a number of reforms, that include raising reserve requirements in local currency, activation of standing facilities, more active use of refinancing instrument and widening the base for reserve requirement by including borrowed funds by commercial banks in FX. NBG started to provide commercial banks with guaranteed access to refinancing loans against collateral at the interest linked to the NBG’s key policy rate. The collateral base for refinancing loans is extended to include international bank guarantees and long term local currency loans.

11. We continue to improve the efficiency and effectiveness of public finances. The Ministry of Finance is broadly on track in implementing the Public Finance Management Reform Policy Vision 2009–2013, which we view as an important prerequisite to ensuring transparency, discipline, efficiency and accountability in the public finance area. The Reform Action Plan for 2010 is being successfully implemented. Consistently with the new budget code, by end-July 2010 cabinet endorsed the medium-term expenditure framework (Basic Data and Directions) that included expenditure ceilings applicable to the 2011 budget (structural benchmark under the program). Also, in October 2010 the cabinet endorsed guidelines for pilot Ministries to introduce a programmatic approach to budgeting, in line with the recommendations of the technical assistance from the IMF’s Fiscal Affairs Department (structural benchmark).

12. In pursuance of our reforms aimed at fostering a culture of compliance and streamlining tax and customs administration procedures, we seek achievement of further cost-efficiency and effectiveness gains within the Revenue Service of the Ministry of Finance, with a view to enhance business-friendliness of tax and customs processes and legislation and thus to promote private sector-led growth. In 2010, we have progressed significantly in establishing electronic information exchange system between banks and the Revenues Service, establishing a customs post-clearance audit, integrating all taxes into the e-filing system, introducing advance ruling in the customs and tax field, establishing the commodity expertise within the Revenue Service and the institute of personal tax agent, introducing electronic VAT invoices and one stop shop at the land customs crossing point for commercial vehicles, elaborating procedures manuals for Revenue Service officers, introducing web-based e-services, web applications, video help and centralized consultative correspondence via e-mails. The implementation of these reforms has enhanced efficiency and effectiveness in the use of public financial resources and shall contribute to the overall resilience of the economy both now and over the medium term.

Macroeconomic Outlook and Policies for the remainder of 2010 and for 2011

Macroeconomic outlook and risks

13. Our major macroeconomic challenge continues to be further increase in the pace of economic growth while promoting balance of payments adjustment. This will, of course, require increase of private capital inflows and domestic lending in support of investment projects. Our efforts to enhance macroeconomic stability concentrate on intensifying economic reforms, and achieving a sustainable fiscal and external balance as quickly as possible.

14. Economic growth remains strong, in the first two quarters of 2010 economy increased by 3.9 and 8.7 percent respectively. Overall in the 2010 real GDP growth is projected at 5.5–6.0 percent per annum. Growth is expected to be strong in 2011, at 4.5 percent.

15. The current account deficit for 2010 is expected to be around 11.6 percent of GDP. Exports and imports of goods and services are projected to increase by 18.5 percent and 14.3 percent, respectively. Worker remittances are expected to increase by around 26.9 percent for the year. We expect the recovery in private capital inflows to accelerate in the second half of 2010. Conservatively, we project FDI inflows of about US$603 million in 2010, slightly less than in 2009. Overall, gross reserves in 2010 are expected to increase by about US$92 million. In 2011, the current account deficit would increase to 12.6 percent of GDP, as the slowdown in export growth (which would grow by 11.5 percent) would be more marked than that of imports (which would grow by 9.2 percent). Capital flows would increase substantially, contributing to a further increase in gross international reserves of about $413 million.

16. There are substantial risks to this outlook, notably related to the uncertainty surrounding future capital inflows. In particular, a failure of FDI to resume could lower growth and reopen an external financing gap. On the upside, based on recent inflation and appreciation pressures, there are also risks of overheating, which could be further fueled in the future by stronger-than-expected capital inflows.

Policies

17. We consider that sound fiscal position is critical for the sustainability of the recovery and also to preserve the stability of Georgia’s external accounts. We are therefore committed to the deficit reduction. Based on further expenditure containment, an expected recovery of tax revenues owing to sustained GDP growth as well as the revenue measures taken in 2010 and 2011, we are committed to steady reductions in the deficit to 2-3 percent of GDP by 2013. Moreover, in order to increase policy flexibility in the event of adverse economic developments, we have introduced an escape clause in the constitutional amendment requiring that tax increases be subject to referendums. The conditions under which the referendum requirement would be suspended will be defined by the Economic Freedom Act, which will be resubmitted to parliament in 2011. The constitutional amendment, which was adopted on December 15, 2010, will only come into effect once the Economic Freedom Act is also approved.

18. In 2010, spending is expected to be in line with what was agreed at the time of the sixth review, except for the on-lending operation which is described below, in ¶28. Revenues are likely to be lower than projected, reflecting a shortfall in budget-support grants of GEL 56 million. The shortfall is due to the late disbursement of budget grants, which we now expect to come in 2011. Tax revenue projections remain unchanged, but other domestic revenues could make up for the shortfall in budget grants. As a result of these two factors (on-lending operation and shortfall in budget grants), the deficit is anticipated to be at most GEL 156 million higher than envisaged at the time of the sixth review (GEL 1,397 million, compared with GEL 1,241 million). However, the deficit would decline significantly in 2010, to 6.8 percent of GDP from 9.2 percent of GDP in 2009.

19. In 2011, we will pursue our fiscal consolidation efforts so as to reduce demand pressures in the economy, while facilitating the return to international capital markets through strengthening medium-term fiscal sustainability. Consistent with these objectives, the fiscal deficit will be reduced further to 4.3 percent of GDP. This reduction would reflect measures aimed at curbing spending, such as restraining public sector wage bill in nominal terms, reduction of defense budget, stable education spending in nominal terms, no increase in pensions and no change in thresholds of social assistance schemes. The tax-to-GDP ratio is projected to increase relative to 2010 owing to the full year effect of the measures taken in 2010 (excises on telecommunications and certain beverages), as well as the new measures coming into effect in 2011(harmonization of personal income tax rates and VAT on public health services).

20. Monetary policy will aim at bringing back year-on-year inflation towards our 6-percent target by end-2011, while fostering investors’ confidence through increases in gross and net international reserves. More specifically, we consider that credit growth of 15 to 20 percent is consistent with noninflationary growth. To meet these objectives, the NBG has already raised the policy rates and considers increasing reserve requirements on foreign exchange deposits and external borrowing. The latter should also contribute to strengthening the ongoing dedollarization process. The need for additional tightening will be assessed based on inflation, credit, and foreign exchange market developments.

21. The exchange rate policy will remain flexible. Within the aforementioned limit, the NBG will intervene only to smooth extreme volatility, to counter speculative pressures and if too fast and too large depreciation threatens financial stability. Intervention will also be constrained by our objective to increase net international reserves in 2011 to around $885 million by end-2011. Should persistent appreciation pressures materialize, we will address them through a tightening of the fiscal stance. Should external developments prove more favorable than currently projected, we stand ready to raise the NIR targets for future reviews, so as to strengthen our exit strategy from official balance of payments support.

22. To further strengthen regulatory disincentive for lending in foreign currency and taking into account recent rapid recovery, the NBG is considering increasing the weight for loans denominated in foreign currency in risk-weighted assets from 1.5 to 1.75. In line with changes in legislation, which enable the supervisor to conduct risk-based supervision, a reorganization process is under way to enable the NBG to use more effectively its resources for risk based supervision. The move toward a risk based framework is done gradually, to minimize regulatory risk for the industry and enable smooth transition towards the new regulatory framework.

23. To facilitate reduction of information costs and promote the cross product and cross bank comparability of the financial products NBG plans to implement consumer financial protection framework in 2011. In line with short term objectives, Georgian banks will be obliged to standardize retail contracts in more understandable way, disclosing all necessary information with new features like effective annual percentage rate and other vital information for informed decision making. A special unit is planned to be created inside NBG that will be in charge of monitoring and strengthening consumer protection.

Structural reforms

24. In order to enhance the safety and efficiency of the international reserves management process, the NBG is implementing a new portfolio management system. The system will cover front-middle-back office and accounting functionality based on Straight Through Processing (STP) principles. The system will be IFRS compliant and will allow NBG to introduce new, more sophisticated financial instruments and investment techniques in its reserves management process. The new system will help NBG bring its reserves management procedures in line with international best practices. NBG has signed the contract on system supply and implementation with WallstreetSystems, leading portfolio management system supplier who has over 30 central banks clients around the world. The system is expected to become fully operational by end of April 2011.

25. To bring our official statistics in line with international standards, we improved legal framework and reorganized the former State Department of Statistics (new title—Geostat). New Law on State Statistics strengthens the independence of the Geostat and ensures the sustainable production of official statistics. On May 17, 2010, we subscribed to the IMF’s Special Data Dissemination Standard (SDDS), with a view to enhancing the availability of timely and comprehensive statistics provided to the public.

26. Based on the higher than projected budget support disbursements from IFIs in 2010, we reduced the Government’s use of IMF financing for the budget. Accordingly, the purchase that was made upon completion of the sixth review was the last purchase for budget support in 2010.

27. We have implemented the recommendations provided in the recent update of the Safeguards Assessment Report. In particular:

  • The new Audit Committee Charter was elaborated based on the best international practice.

  • The Audit Committee composition was modified and includes only non-executive members of the Board.

  • The oversight function of the Audit Committee was strengthened.

  • The assessment of internal audit activities for compliance with the International Standards for Professional Practice of Internal Auditing and The IIA’s Code of Ethics was conducted.

  • The Internal Audit Service reviewed operations of the newly implemented core banking system.

The internal audit of the new RTGS and reserve management systems will be carried out following their deployment.

Program Monitoring

28. We expect all end-December performance criteria under the Stand-By Arrangement to be met, with the exception of the general government deficit and total expenditure targets, owing to the delayed disbursement of budget grants in the amount of GEL 56 million, which we expect to receive in 2011, and the early disbursement by KfW-EBRD-EIB (and on-lending by the government) of a GEL 100-million amount under the high voltage power transmission project loan. These will cause deficit and spending overruns of about GEL 156 million (or 0.75 percent of GDP) and GEL 100 million (or 0.5 percent of GDP), respectively, relative to the program targets. Even though the delay in the disbursement of budget grants does not affect the underlying fiscal adjustment commitment, we expect that other revenues will compensate in large part for this shortfall in 2010. Similarly, we do not consider that the overruns related to the early disbursement of KfW-EBRD-EIB’s project loan, and related on-lending by the government, affect the underlying fiscal adjustment. Moreover this operation has a zero net expected impact on public finances, since it is equivalent to guaranteeing a loan to a commercially viable public enterprise. As such we do not consider it necessary or appropriate to adjust the government’s fiscal position in response to changes in the disbursement schedule of this loan. To avoid such problems going forward, we request that the fiscal deficit and general government expenditure targets be adjusted for any changes in the timing of disbursements under this loan relative to our expectations as reflected in the program deficit and expenditure ceilings.

29. Therefore, based on our performance under the program, we request waivers of nonobservance of the end-December 2010 PCs on the cash deficit of the general government and on the general government expenditures, a rephasing of purchases, the establishment of end-March 2011 PCs, and the completion of the seventh and eighth Reviews. We will maintain our usual close policy dialogue with the Fund and are ready to take additional measures as appropriate to ensure that we meet program objectives.

30. The attached Table 1 establishes end-March 2011 PCs on the fiscal deficit, NIR, NDA, and total government expenditures, as well as an end-March 2011 indicative target on external public debt. We request that the ninth review be based on end-March 2011 performance criteria and be scheduled for completion by June 14, 2011.

Table 1.

Georgia: Quantitative Performance Criteria (PC) and Indicative Targets, 2010-11

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Sources: Georgian authorities; and Fund staff estimates.

Actual figures and quantitative targets are based on program exchange rates.

The continuous performance criterion for external arrears is defined in paragraph 21 of the TMU.

31. We authorize the IMF to publish this Letter of Intent and its attachments as well as the accompanying staff report.

Sincerely yours,

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Table 2.

Georgia: Structural Benchmarks

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Attachment II. Georgia: Revised Technical Memorandum of Understanding

December 22, 2010

1. This memorandum sets out the understandings between the Georgian authorities and the IMF staff regarding the definitions of quantitative performance criteria and indicative targets, as well as respective reporting requirements for the Stand-By Arrangement (SBA). It replaces the technical memorandum of understanding dated June 24, 2010.

2. These performance criteria and indicative targets are reported in Tables 1 attached to the Letter of Intent dated December 22, 2010. The exchange rate for the purposes of the program of the Georgian lari to the U.S. dollar is set at GEL 1.67 = $1. The corresponding cross exchange rates are provided in Table 1.

Table 1.

Program Exchange Rates

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I. General Government and the Public Sector

3. Definition: The general government is defined as the central government, local governments, and extra-budgetary funds. The public sector consists of the general government and the National Bank of Georgia (NBG).

4. Supporting material: The Treasury Department of the Ministry of Finance (MOF) will provide to the IMF detailed information on monthly revenues of the general government within two weeks of the end of each month, and monthly expenditures and arrears of the central government within four weeks of the end of each month. In addition, the Treasury will provide, on a daily basis, the cash balances in the accounts of the general government as of the previous business day.

II. Quantitative Performance Criteria, Indicative Targets, and Continuous Performance Criteria: Definitions and Reporting Standards

A. Quantitative Performance Criteria and Indicative Targets

5. The quantitative performance criteria and indicative targets specified in Table 1 attached to the Letter of Intent are:

  • a performance criterion (ceiling) on the cash deficit of the general government;

  • a performance criterion (ceiling) on the general government expenditures;

  • a performance criterion (floor) on net international reserves (NIR) of the NBG;

  • a performance criterion (ceiling) on net domestic assets (NDA) of the NBG;

  • a continuous performance criterion (zero ceiling) on the accumulation of external arrears; and

  • an indicative target (ceiling) on the contracting and guaranteeing of new total external debt by the public sector.

The performance criteria and the indicative target are monitored quarterly on a cumulative basis from the beginning of the calendar year (with the exception of the NIR and NDA targets, which are monitored in terms of stock), while the continuous performance criterion is monitored on a continuous basis.

B. Ceiling on the Cash Deficit of the General Government

6. Definition: The cash deficit of the general government will be measured from the financing side at current exchange rates, and will be defined as equal to total financing. Total financing will be defined as the sum of (i) net domestic financing from banks and nonbanks, (ii) net external financing, and (iii) privatization receipts.

  • Net domestic financing consists of bank and nonbank net financing to the general government which will be defined as follows:

    • (i) Net lending (borrowing net of repayments) provided by commercial banks to the general government plus the use of deposits held by the general government at commercial banks. Monitoring of net lending and government accounts will be based on the NBG’s monetary survey and Treasury data. The change in cash balances of the local government at commercial banks for budget financing purposes will be monitored based on the “budget of territorial unit” account data provided by the Treasury Department. Any securities issued by the general government and purchased by commercial banks (for example, T-Bills) are also included in domestic financing.

    • (ii) Net lending (borrowing net of repayments) provided by the NBG to the general government plus the use of deposits of the general government held at the NBG. Monitoring of net lending and government accounts will be based on the Central Bank survey and Treasury data. The change in cash balances of the central government at the NBG for budget financing purposes will be monitored based on the “GEL TSA state budget” account data provided by the Treasury Department. Any securities issued by the general government and purchased by the NBG (for example, T-Bills) are also included in domestic financing.

    • (iii) Any securities issued by the general government and purchased by the nonbanks (for example, T-Bills or securitized claims on the government sold by the NBG) are also included in domestic financing.

  • Net external financing is defined as the total of loans disbursed to the general government for budget support (including from the IMF), and project financing (capital expenditure and net lending), net change in external arrears, change in the accounts of the general government abroad, minus amortization. Amortization includes all external debt-related payments of principal by the general government.

  • Privatization receipts consist of all transfers of monies received by the central and local governments in connection with the sale of central or local government assets. This includes receipts from the sale of shares, the sale of non-financial assets as well as leases and the sale of licenses with duration of 10 years and longer.

7. Adjustor:

  • The end-March 2011 ceiling on the cash deficit of the general government will be adjusted upward/downward by 100 percent for any excess/shortfall in on-lending by the government of the disbursements of the Black Sea Transmission Network project loans relative to the projected GEL 40 million.

8. Supporting material:

  • Data on domestic bank and nonbank financing will be provided to the IMF by the NBG and the Treasury Department of the MOF within four weeks after the end of the month.

  • Data on external project financing as well as other external borrowing will be provided to the IMF monthly by the Debt Unit at the MOF (specifying projects by creditor) within two weeks of the end of each month.

  • Data will be provided at the actual exchange rates.

  • Data on privatization receipts of the general government will be provided by the Treasury Department of the MOF to the IMF on a monthly basis within two weeks of the end of each month.

  • Data on securitized debt sold by the NBG, including the securities that have been purchased by nonbanks, will be reported by the NBG on a monthly basis within two weeks of the end of each month.

C. Ceiling on the General Government Expenditures

9. Definition: General government expenditures comprise all current and capital expenditures as well as net lending: (i) current expenditures comprise compensation of employees, use of goods and services, subsidies, grants, social expenses, other expenses, other account payables and domestic and external interest payments; (ii) capital expenditures include projects financed by foreign loans and grants; (iii) net lending is defined as lending by, minus repayments to, the general government.

10. Adjustor:

  • The end-March 2011 ceiling on the general government expenditures will be adjusted upward/downward by 100 percent for any excess/shortfall in on-lending by the government of the disbursements of the Black Sea Transmission Network project loans relative to the projected GEL 40 million.

11. Supporting material: Data for monitoring expenditures will be derived from the accounts of the general government covered under the ceiling (based on state, local authority, and autonomous republics budgets). The ministry of finance is responsible for such reporting according to the above definition. Data on general government expenditures should be reported within four weeks after the end of the quarter.

D. Floor on the Net International Reserves of the NBG

12. Definition: Net international reserves (NIR) of the NBG in U.S. dollars are defined as foreign assets of the NBG minus the sum of foreign liabilities of the NBG. Foreign assets of the NBG include gold, gross foreign exchange reserves, Georgia’s SDR holdings, and the reserve position in the IMF. Gross foreign exchange reserves of the NBG are defined as liquid, convertible currency claims of the NBG on nonresidents, including cash holdings of foreign exchange that are readily available. Pledged or otherwise encumbered assets, including (but not limited to) assets used as collateral (or guarantee for third party external liabilities) are excluded from foreign assets. Foreign liabilities of the NBG shall be defined as the sum of Georgia’s outstanding liabilities to the IMF, Georgia’s SDR allocation, and any other liabilities of the NBG, excluding the foreign exchange balances in the government’s account with the NBG. Thus defined, the definition of NIR excludes foreign assets stemming from foreign currency deposits of financial institutions at the NBG and foreign assets arising from the currency swaps with financial institutions. For program monitoring purposes, the stock of foreign assets and foreign liabilities of the NBG shall be valued at program exchange rates as described in paragraph 2 above.

13. Adjustors:

  • The floor on the NIR of the NBG will be adjusted:

  • (a) upward/downward by 50 percent for any excess/shortfall in the balance-of-payments support loans and balance-of-payments support grants relative to the projected amounts presented in Table 2.

  • (b) upward/downward by 50 percent for any excess/shortfall in the disbursements of the project loans and project grants to the Treasury Single account at the NBG relative to the projected amounts presented in Table 2.

  • (c) upward by 100 percent for any shortfall in the amount of conversion for government imports relative to the projected amounts presented in Table 2.

  • (d) upward by 100 percent for the amount of any Eurobond issuance, net of cost of redemption of previously issued Eurobonds.

Table 2.

Projected Balance-of-Payments Support Financing 1/

(In millions of U.S. dollars)

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Cumulative from the beginning of the calendar year.

14. Supporting material: Data on net international reserves (both at actual and program exchange rates); net foreign financing (balance of payments support loans, cash grants to the general government, amortization (excluding repayments to the IMF), interest payments on external debt by the MOF and the NBG); conversions for government imports and transfers of receipts from the Sovereign Wealth Funds will be provided to the IMF in a foreign exchange cash flow table (which include details of inflows, outflows, and net international reserves) on a weekly basis within three working days following the end of the week.

E. Ceiling on Net Domestic Assets of the NBG

15. Definition: Net domestic assets of the NBG are defined as the difference between reserve money and NIR as defined above in paragraph 10. Therefore, the ceiling on NDA is defined as projected reserve money (as defined in Table 3) minus the target NIR.

Table 3.

Projected Reserve Money

(End-of-period stock in millions of lari)

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16. Adjustors:

  • The ceiling on the NDA of the NBG will be adjusted:

  • (a) upward/downward by 50 percent for any shortfall/excess in the balance-of-payments support loans and balance-of-payments support grants relative to the projected amounts presented in Table 2.

  • (b) upward/downward by 50 percent for any shortfall/excess in the disbursements of the project loans and project grants to the Treasury Single account at the NBG relative to the projected amounts presented in Table 2.

  • (c) downward by 100 percent for any shortfall in the amount of conversion for government imports relative to the projected amounts presented in Table 2.

  • (d) downward by 100 percent for the amount of any Eurobond issuance, net of cost of redemption of previously issued Eurobonds.

17. Supporting material: The NBG will provide to the IMF its balance sheet, which includes data on reserve money and net domestic assets on a weekly basis within three working days following the end of the week. Data will be provided using both actual and program exchange rates.

F. Ceiling on Contracting or Guaranteeing of New External Debt by the Public Sector

18. Definition: External debt is defined as set forth in point No. 9 of the Executive Board Decision No. 6230-(79/140), as revised on August 31, 2009 (Decision No. 14416-(09/91)).1 External debt is defined as debt contracted by the public sector with nonresidents other than the IMF. Previously disbursed external debt that has been rescheduled will be excluded from the definition of “new debt” for the purposes of this performance criterion.

19. Adjustor:

  • The end-March 2011 ceiling on contracting or guaranteeing of new external debt by the public sector will be adjusted upward by 100 percent for the amount of any Eurobond issuance.

20. Supporting material: Details of all new contracted debt and government guarantees for external borrowing, with detailed explanations, will be provided by the MOF to the IMF on a quarterly basis within thirty days of the end of each quarter. Data will be provided using actual exchange rates.

G. Continuous Performance Criterion on Accumulation of External Arrears

21. Definition: External arrears are defined as unpaid debt service by the public sector to official creditors beyond 30 days after the due date.

22. Supporting material: Details of official arrears accumulated on interest and principal payments to creditors will be reported to the IMF within one week from the date of the missed payment. Data will be provided using actual exchange rates.
1

Point No. 9 of the IMF’s guidelines reads as follows: “(a) For the purpose of this guideline, the term “debt” will be understood to mean a current, i.e., not contingent, liability, created under a contractual arrangement through the provision of value in the form of assets (including currency) or services, and which requires the obligor to make one or more payments in the form of assets (including currency) or services, at some future point(s) in time; these payments will discharge the principal and/or interest liabilities incurred under the contract. Debts can take a number of forms, the primary ones being as follows: (i) loans, i.e., advances of money to obligor by the lender made on the basis of an undertaking that the obligor will repay the funds in the future (including deposits, bonds, debentures, commercial loans and buyers’ credits) and temporary exchanges of assets that are equivalent to fully collateralized loans under which the obligor is required to repay the funds, and usually pay interest, by repurchasing the collateral from the buyer in the future (such as repurchase agreements and official swap arrangements); (ii) suppliers’ credits, i.e., contracts where the supplier permits the obligor to defer payments until sometime after the date on which the goods are delivered or services are provided; and (iii) leases, i.e., arrangements under which property is provided which the lessee has the right to use for one or more specified period(s) of time that are usually shorter than the total expected service life of the property, while the leaser retains the title to the property. For the purpose of the Guideline, the debt is the present value (at the inception of the lease) of all lease payments expected to be made during the period of the agreement excluding those payments that cover the operation, repair, or maintenance of the property. (b) Under the definition of debt set out in point 9(a) above, arrears, penalties, and judicially awarded damages arising from the failure to make payment under a contractual obligation that constitutes debt are debt. Failure to make payment on an obligation that is not considered debt under this definition (e.g., payment on delivery) will not give rise to debt.”

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Cover IMF Staff Country Reports
Georgia: Seventh and Eighth Reviews Under the Stand-By Arrangement, and Requests for Waivers of Nonobservance of Performance Criteria and Rephasing of Purchases—Staff Report; Staff Statement; Press Release on the Executive Board Discussion; and Statement by the Executive Director for Georgia
Author:
International Monetary Fund
Volume/Issue:
Volume 2011: Issue 031
Publisher:
International Monetary Fund
ISBN:
9781455213887
ISSN:
1934-7685
Pages:
75
DOI:
https://doi.org/10.5089/9781455213887.002

Georgia: Seasonally-adjusted Real GDP, 2004-15

(In millions of 2003 lari)

Georgia: Indicators of Economic Activity, 2008-10

(3-month moving average, y-o-y change in percent)

Georgia: CPI and PPI Inflation, 2005 - 10

(Year-on-year change, in percent)

Georgia: External Flows, 2007-10

(3-month moving average, y-o-y growth in percent)

Georgia: Real and Nominal Effective Exchange Rates, 2006-10

(Index, 2000 = 100)

Georgia: Foreign Exchange Intervention and Exchange Rate, 2008-10

Georgia: Sources of Bank Funding, 2006-10

(In percent)

Georgia: Current Account Balance and its Financing, 2006-15

(In percent of GDP)

Georgia: Saving-Investment Balances, 2003-15

(In percent of GDP)

Georgia: Fiscal Balances, 2006-11

(In percent of GDP)

Georgia: Government Revenues and Expenditures, 2003-15

(In percent of GDP)

Georgia: Government Net External Financing, Grants, and Privatization Receipts, 2003-15

(In percent of GDP)

Georgia: Public Debt, 2004-15

(In percent of GDP)

Georgia and Comparator Countries: Sovereign Eurobond Spreads, 2010

(In basis points, over comparable U.S. treasuries)
Figure 1a.

Georgia: Indicators of Public and Publicly Guaranteed External Debt under Alternatives Scenarios, 2010-2030 1/
Figure 1b.

Georgia: Indicators of Public Debt Under Alternative Scenarios, 2010-2030