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© 2011 International Monetary Fund

April 2011

IMF Country Report No. 11/87

Georgia: 2011 Article IV Consultation—Staff Report; Staff Supplements; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director for Georgia

Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. In the context of the 2011 Article IV consultation with Georgia, the following documents have been released and are included in this package:

  • The staff report for the 2011 Article IV consultation, prepared by a staff team of the IMF, following discussions that ended on February 17, 2011, 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 March 7, 2011. 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.

  • Two staff supplements completed on March 7, 2011: an Informational Annex; and an Ex Post Assessment of Longer-Term Program Engagement—An Update.

  • A Public Information Notice (PIN) summarizing the views of the Executive Board as expressed during its March 23, 2011 discussion of the staff report that concluded the Article IV consultation.

  • A statement by the Executive Director for Georgia.

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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Staff Report for the 2011 Article IV Consultation

Prepared by the Staff Representatives for the 2011 Consultation with Georgia

Approved by David Owen and Dominique Desruelle

March 7, 2011

  • Discussions for the 2011 Article IV consultation with Georgia took place in Tbilisi from February 2–17, 2011. The staff team comprised E. Gardner (head and Senior Resident Representative), E. Martin, A. Luca (all MCD), L. Eyraud (FAD), I. Halikias (SPR), and N. Sharashidze (Resident Representative Office). The mission met with the Prime Minister, the Ministers of Finance, Agriculture, Health and Social Affairs, and Infrastructure and Regional Development, the Governor of the National Bank of Georgia (NBG), and other senior government officials. It also met with representatives of the commercial banks, the private sector, and the donor community. The mission held a press conference and issued a concluding statement.

  • Georgia is on the 24-month consultation cycle. The last Article IV consultation was concluded on March 23, 2009. On that occasion, Executive Directors observed that the Georgian economy had been seriously affected by the August 2008 armed conflict and the global downturn. They supported the authorities’ plans to contain the economic slowdown through a donor-financed fiscal stimulus and a reorientation of expenditures. Directors took note of the staff assessment that the real effective exchange rate was overvalued and observed that the authorities’ commitment to exchange rate flexibility and structural reforms to enhance competitiveness should help correct the overvaluation. Directors recommended that all instruments of monetary policy be deployed in support of the authorities’ adjustment strategy to preserve external stability.

  • Georgia accepted the obligations of Article VIII, Sections 2, 3, and 4, effective December 20, 1996. Georgia’s exchange rate regime is classified as “floating.” Georgia maintains a multiple currency practice (MCP), which preceded the program, arising from the fact that the official exchange rate used by the government may differ by more than 2 percent from freely determined market rates. In practice, the official and market rates have never differed by more than 2 percent since the introduction of foreign exchange auctions in March 2009, when the market rate became more flexible. Staff does not recommend approval of this MCP.

  • Economic data are broadly adequate for surveillance and program monitoring. Georgia participates in the GDDS and subscribed to the SDDS in May 2010.

  • The authorities indicated that they would consent to the publication of the staff report.


  • Executive Summary

  • I. The Policy Response to the Twin Crises and Recent Developments

  • II. Strengthening the Exit Strategy and the Foundations for Sustained Growth

    • A. Sustaining Growth and a Viable External Position

    • B. Restoring a Sound Fiscal Position

    • C. Maintaining Price Stability

    • D. Preventing the Emergence of New Private Sector Imbalances

    • E. Relations with the Fund

  • III. Staff Appraisal

  • Tables

  • 1. Selected Macroeconomic Indicators, 2008–16

  • 2. Annual General Government Operations, 2009–16

  • 3. Summary Balance of Payments, 2008–16

  • 4. Accounts of the National Bank of Georgia, 2009–16

  • 5. Monetary Survey, 2009–16

  • 6. Selected Monetary and Financial Soundness Indicators, 2008–11

  • 7. External Vulnerability Indicators, 2008–16

  • 8. External Financing Requirements and Sources, 2008–16

  • 9. External Debt Sustainability Framework, 2006–16

  • 10. Public Sector Debt Sustainability Framework, 2006–16

  • Figures

  • 1. Direct Impact of the Crisis

  • 2. Policy Response and Outcome

  • 3. External Debt Sustainability: Bound Tests

  • 4. Public Debt Sustainability: Bound Tests

  • Boxes

  • 1. Medium-term Scenario: Assumptions and Underlying Policies

  • 2. Alternative Financing Scenario

  • 3. Social Programs in Georgia

  • 4. Staff Suggestions on a Possible Escape Clause to the Referendum Requirement for Tax Increases

Executive Summary

The policy response to the crisis has succeeded in stabilizing the economy and restoring confidence. The economy is recovering at a solid pace, with real GDP growth expected to have exceeded 6 percent in 2010 and projected at 5½ percent in 2011. Supported by the cyclical upturn, the fiscal position has improved sizably and the 2011 budget implies substantial additional adjustment, with the deficit projected to decline from 9.2 percent of GDP in 2009 to 3.9 percent of GDP in 2011. Inflation has risen to 12 percent on the back of rising commodity prices, but core inflation remains subdued. While the recovery of FDI has been slower than initially anticipated, the overall external position has continued to improve, as reflected in stable foreign exchange rate market conditions.

In the short term, the authorities’ main challenge is to limit the impact of the recent commodity-price shock on the most vulnerable and to contain inflationary risks. To alleviate the social impact of higher food and energy prices, the authorities have issued transferable electricity vouchers and are considering increases in social spending. With regard to inflation, the monetary tightening to date should help stabilize inflation expectations. Staff and the authorities agreed that further tightening should be contingent on evidence that inflation is not abating as projected or credit is growing too fast.

Turning to the medium term, the main challenge is to transition from recovery to durable growth by addressing remaining adjustment needs—both fiscal and external—against an external environment that remains unsettled. The authorities have taken a more proactive approach to economic growth, with emphasis on structural reforms in agriculture and targeted public investment to improve productivity and attract private investment. Staff stressed the need to ensure that the new strategy is consistent with fiscal policy’s goal of bringing the deficit to a sustainable position over the medium term (1½ percent of GDP by 2016). Despite the significant external adjustment already achieved since 2008, the current account deficit remains, by most measures, unsustainably high. The cyclical recovery in partner countries and, as noted by the authorities, productivity gains from structural reforms should help narrow the deficit over the medium term. The authorities agreed with staff that exchange rate flexibility should also remain a central instrument of adjustment. In the event of continued instability in international financial markets, balance-of-payments gaps could reemerge in 2012–14 on account of debt rollover needs.

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Staff Report for the 2011 Article IV Consultation Informational Annex

Prepared by the Middle East and Central Asia Department

March 7, 2011


  • I. Relations with the Fund

  • II. Relations with the World Bank

  • III. Relations with the EBRD

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Ex Post Assessment of Longer-Term Program Engagement—An Update

Prepared by an interdepartmental staff team1

Authorized for distribution by the Middle East and Central Asia and the Strategy, Policy, and Review Departments

March 7, 2011

Key Issues

  • During 2004-07, Georgia experienced an impressive economic transformation owing to enhanced macroeconomic policies and structural reforms supported by a Poverty Reduction and Growth Facility-arrangement.

  • The double shock (the armed conflict and the global crisis) in 2008-09 put pressure on the capital account, which the country was able to counteract with a strong domestic policy response supported by a Stand-By Arrangement and donors’ aid.

  • Though Georgia navigated relatively well through the storm, risks remain—fiscal consolidation, greater exchange rate flexibility, and enhanced effectiveness of monetary policy should be central to the authorities’ policy strategy.

  • A successor arrangement with the Fund could help the country mitigate the risks ahead and facilitate access to international capital markets.


  • I. Introduction

  • II. Macroeconomic and Structural Developments Since 2004

    • A. Macroeconomic Developments: From Fast Growth to Recession

    • B. Structural Reforms: From a Transition to a Market-Based Economy

  • III. Assessment of Recent Fund Involvement

    • A. The 2004–07 PRGF—Program Objectives, Design, and Performance

    • B. The 2008–11 SBA— Program Objectives, Design, and Performance

  • IV. Challenges and Risks Ahead and Future Fund Engagement

  • Boxes

  • 1. Exchange Rate Flexibility

  • 2. Significant Progress Has Been Made in Fighting Corruption

  • Appendixes

  • I. Status of Key Recommendations from the 2003 Ex Post Assessment

  • II. Structural Reforms During 2004–10

  • Annex

  • I. The Authorities’ Reaction

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Public Information Notice (PIN) No. 11/40


March 28, 2011

International Monetary Fund

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Washington, D. C. 20431 USA

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March 23, 2011